Security Deposits, Key Money, and Guarantee Deposits in Japanese Real Estate Leases: Legal Nature and Practical Implications

Entering into a real estate lease in Japan, whether for residential or commercial purposes, often involves upfront payments beyond the first month's rent. These can include a shikikin (敷金 – security deposit), reikin (礼金 – key money or gift money), and sometimes a hoshōkin (保証金 – guarantee deposit). For businesses and individuals, especially those from jurisdictions with different leasing customs, understanding the legal nature, purpose, and practical handling of these payments is crucial. They can significantly impact the initial costs of leasing and the amount recoverable at the end of the lease term. This article explores these common Japanese leasing payments.

I. Shikikin (敷金 - Security Deposit)

The shikikin is perhaps the most universally understood of these payments, bearing some resemblance to security deposits in other countries, but with distinct Japanese legal characteristics.

A. Definition and Primary Purpose

A shikikin is a sum of money paid by the lessee (tenant) to the lessor (landlord) at the commencement of a real estate lease. Its fundamental purpose is to secure the lessee's monetary obligations arising from the lease agreement. These obligations are not limited to unpaid rent but can encompass a broader range of potential liabilities. This typically includes:

• Unpaid rent and late fees.
• Damages caused to the leased property by the lessee beyond ordinary wear and tear.
• Costs associated with restoring the property to its original condition at the end of the lease if the lessee fails to do so as required.
• Other debts owed by the lessee to the lessor arising from the lease relationship.

The payment and receipt of shikikin are usually based on a shikikin settei keiyaku (security deposit agreement), which, while separate, is ancillary or accessory to the main lease agreement. Traditionally, this ancillary agreement has been viewed as a "real contract" (yōbutsu keiyaku), meaning it is perfected by the actual payment of the money, not just by the agreement to pay it.

B. Scope of Obligations Secured: The "Time of Vacating" Rule (Akewatashi-ji Setsu)

A key principle established by Japanese case law is that the shikikin secures all of the lessee's monetary obligations that exist up until the point the lessee completely vacates and returns the leased property to the lessor. This is often referred to as the "time of vacating rule" (akewatashi-ji setsu).

This means the shikikin can cover not only liabilities accrued during the lease term but also those arising from the process of ending the tenancy, such as:

• Rent arrears accumulated up to the vacation date.
• Damages equivalent to rent for any period of holding over after the lease has lawfully terminated but before the tenant vacates.
• The cost of repairing damage to the premises caused by the tenant's intentional acts or negligence (beyond normal wear and tear).
• Costs for cleaning or restoring the property if the tenant leaves it in a condition contrary to their contractual obligations.

The Supreme Court judgment of February 2, 1973 (Minshū Vol. 27, No. 1, p. 80) is a leading case affirming this broad scope of security for building leases.

C. Return of the Shikikin

The lessor's obligation to return the shikikin to the lessee (after deducting any amounts legitimately owed by the lessee) arises only after the lessee has fully vacated the property and all outstanding obligations have been settled or accounted for.

1. No Simultaneous Performance with Vacating the Premises:
   Crucially, Japanese courts have consistently held that the lessee's obligation to vacate the premises and the lessor's obligation to return the security deposit are not in a relationship of simultaneous performance (meaning they don't have to happen at the exact same time, with one conditional on the other in that moment). The lessee is generally required to vacate the property first. Only then does the lessor's obligation to calculate and return the net shikikin fully mature. This was clearly established by the Supreme Court in its judgment of September 2, 1974 (Minshū Vol. 28, No. 6, p. 1152). The rationale provided by the courts includes:
   • The shikikin's nature as security covering all potential liabilities up to the final moment of the tenant's departure and return of possession.
   • The fact that the obligations to vacate and to return a deposit do not arise from a single, reciprocal exchange in the same way primary lease obligations (like use of premises for rent) do.
   • The potential for significant disparity in value between the act of vacating and the amount of the deposit, making a strict simultaneous exchange inappropriate.
     While this rule has faced some academic criticism for potentially disadvantaging tenants (who must give up possession before knowing the exact return amount), it remains the established legal position.
2. Automatic Set-Off (Sōsai) upon Vacating:
   Once the lessee vacates the property, any outstanding monetary obligations owed by the lessee to the lessor under the lease are automatically set off against the shikikin. This set-off occurs by operation of law, without the need for a formal declaration of set-off by either party. The amount of shikikin to be returned is thus the original sum less these automatically deducted amounts (Supreme Court judgment, March 28, 2002, Minshū Vol. 56, No. 3, p. 689).

D. Lessee's Inability to Demand Set-Off During Tenancy

If a lessee falls into rent arrears during the lease term, they cannot generally demand that the lessor apply the shikikin to cover the unpaid rent. The shikikin serves as security for the entirety of the lessee's obligations throughout the lease and up to its final settlement. Allowing the lessee to unilaterally draw down on the security deposit during the tenancy would undermine its purpose as comprehensive security for the lessor. The lessor, however, may (but is not obliged to) choose to apply the shikikin to arrears if they wish.
Consequently, a lessor can typically initiate proceedings to terminate the lease for non-payment of rent even if the amount of shikikin held is sufficient to cover the outstanding arrears. The existence of the deposit does not, by itself, prevent a finding that the non-payment constitutes a breach serious enough to destroy the trust relationship (shingai kankei hakai) underpinning the lease.

E. Transfer of Shikikin upon Sale of Leased Property

If the leased property is sold and the landlord's status validly transfers to the new owner (as discussed in a previous article), the rights and obligations concerning the shikikin also generally transfer. Specifically, the obligation to return the shikikin (net of any amounts properly deducted by the former landlord for obligations accrued up to the point of transfer of landlord status) passes to the new landlord. The tenant will then look to the new landlord for the return of the remaining deposit at the end of the lease term. This principle was recognized by the Supreme Court (e.g., judgment of July 17, 1969, Minshū Vol. 23, No. 8, p. 1610). This transfer is often justified by viewing the shikikin agreement as ancillary to the primary lease and thus following the transfer of the landlord's status.

F. Transfer of Shikikin upon Assignment of Lease by Tenant

Conversely, if the leasehold right itself is assigned by the original lessee to a new lessee (with the landlord's necessary consent), the shikikin relationship between the original lessee and the landlord does not automatically transfer to bind the new lessee or benefit them regarding the original deposit. The original lessee remains entitled to the return of their shikikin from the landlord once their own obligations are settled. The new lessee would typically need to provide their own, separate shikikin to the landlord. Any other arrangement, such as the new lessee taking over the original lessee's rights to the initial shikikin, would require a specific agreement among all three parties (original lessee, new lessee, and landlord), as confirmed by the Supreme Court in its judgment of December 22, 1978 (Minshū Vol. 32, No. 9, p. 1768). The rationale is that the original shikikin was provided to secure the original lessee's obligations, and the landlord cannot be assumed to accept it as security for a new, potentially different, lessee without a new agreement.

II. Reikin (礼金 - Key Money / Gift Money)

Reikin, often translated as "key money," "gift money," or "gratuity payment," is another type of upfront payment commonly encountered in Japanese real estate leasing, particularly for residential properties in certain urban areas.

A. Definition and Nature

Unlike shikikin, reikin is generally non-refundable. It is not a security deposit intended to cover defaults or damages. Its precise legal nature has been a subject of some debate, but it is often understood in one or more of the following ways:

• A premium paid for the right to obtain the lease.
• A form of deferred rent or a payment to the landlord to compensate for the opportunity cost of leasing the property to this particular tenant or for a certain period.
• A customary gratuity or "thank you" payment to the landlord, reflecting historical leasing practices.
• Compensation to the landlord for the diminished economic value of the property due to strong tenant protection laws that make it difficult for landlords to terminate leases or easily raise rents.

B. Enforceability and Reasonableness

The practice of charging reikin has faced social criticism, especially from a consumer protection perspective, as it increases the initial financial burden on tenants without offering a direct return. However, as a contractual matter, the agreement to pay reikin is generally considered legally permissible, provided it is clearly stipulated in the lease agreement.

There are no statutory caps on reikin amounts under the Civil Code or the Act on Land and Building Leases. However, an extraordinarily high reikin amount, especially in a consumer contract, could potentially be challenged as contrary to public order and good morals (Civil Code Article 90) or as an unfair term under the Consumer Contract Act (specifically Article 10, which voids clauses that unilaterally prejudice consumer interests in violation of good faith). Such challenges, though, can be difficult to sustain unless the amount is truly exorbitant and unconscionable in the specific circumstances. The prevalence and typical amounts of reikin (often expressed as a multiple of monthly rent, e.g., 1-2 months' rent) vary significantly by region, property type, and prevailing market conditions.

III. Hoshōkin (保証金 - Guarantee Deposit)

Hoshōkin, or guarantee deposit, is another form of upfront payment that may be required, particularly in commercial lease agreements. Its nature can be more varied and complex than either shikikin or reikin.

A. Definition and Variable Nature

The term hoshōkin itself does not have a fixed legal definition with uniform characteristics. Instead, its specific purpose and terms of refundability are primarily determined by the individual lease contract. A hoshōkin in a commercial lease can encompass, or be a hybrid of, several financial functions:

1. Security Deposit Function: It may serve a purpose similar to shikikin, securing the commercial tenant's obligations under the lease, including rent payments, restoration costs, and damages. In this capacity, some or all of it might be refundable at the end of the lease, after deductions for any outstanding liabilities.
2. Deferred Rent or Premium: Part of the hoshōkin might effectively be a non-refundable premium for securing a commercially advantageous lease or a form of pre-paid or deferred rent.
3. Contribution to Construction Costs (Kensetsu Kyōryokukin - 建設協力金): In some large-scale commercial leases, especially for new developments or build-to-suit arrangements, a substantial upfront payment termed kensetsu kyōryokukin (construction cooperation money) may be required from anchor tenants. This is often structured as a long-term, low-interest or no-interest loan from the tenant to the landlord/developer, intended to help finance the construction or fit-out of the premises. The terms for its repayment or offsetting against future rent are highly specific to the agreement and differ from a standard security deposit. These are legally distinct from shikikin and their transfer upon sale of the property follows the terms of the loan aspect rather than general shikikin rules (Supreme Court judgment, March 4, 1976, Minshū Vol. 30, No. 2, p. 25).

B. Refundability and Contractual Terms: The Importance of Shōkyaku

The critical issue with hoshōkin is its refundability, which is dictated by the explicit terms of the commercial lease agreement. It is very common for commercial leases in Japan to include a clause for amortization (shōkyaku - 償却) of a portion of the hoshōkin. This means that a certain percentage or amount of the hoshōkin is declared non-refundable and is effectively retained by the landlord upon termination of the lease, or amortized (deducted) annually over the lease term.

• The shōkyaku portion is often rationalized as covering property depreciation beyond normal wear and tear expected in a commercial setting, as a fee for lease renewal rights, or simply as a non-refundable component of the overall financial package for the lease.
• Commercial tenants must meticulously review and negotiate clauses related to hoshōkin, paying close attention to:
  • The total amount of the hoshōkin.
  • The specific purpose(s) it is intended to secure.
  • The terms and rate of any shōkyaku (amortization).
  • The conditions under which deductions can be made from the refundable portion.
  • The timing and method for the return of any refundable balance.

IV. Practical Implications and Due Diligence

For any party entering into a real estate lease in Japan, several practical considerations arise concerning these upfront payments:

• Clarity in Lease Agreements: The lease agreement is paramount. It should clearly and unambiguously define the nature, purpose, amount, and conditions for the return or forfeiture of any shikikin, reikin, or hoshōkin. Ambiguity is a primary source of disputes.
• Negotiation: While reikin and certain aspects of shikikin handling are deeply entrenched customs, especially in the residential sector, commercial leases often provide more scope for negotiation. This is particularly true for the amount and amortization terms of hoshōkin.
• Restoration Obligations: Tenants should have a clear understanding of their obligations regarding the condition of the premises upon vacating. The scope of "restoration to original condition" versus "ordinary wear and tear" directly impacts potential deductions from the shikikin or the refundable part of a hoshōkin.
• Regional and Market Variations: The prevalence, typical amounts, and specific customs associated with these payments (especially reikin) can vary significantly across different regions of Japan and according to property type and prevailing market conditions.

V. Conclusion

Upfront payments such as shikikin (security deposit), reikin (key money), and hoshōkin (guarantee deposit) are integral and often substantial components of the Japanese real estate leasing landscape. While shikikin primarily serves as a comprehensive security for the tenant's obligations until the property is fully vacated and returned, reikin is typically a non-refundable payment reflecting local customs and market dynamics, particularly in certain residential markets. Hoshōkin, most common in commercial leases, is a more versatile payment whose characteristics and refundability are heavily dictated by the specific contractual terms, often involving non-refundable amortized portions.

For any business or individual engaging in leasing in Japan, a thorough review and clear understanding of the contractual stipulations regarding these payments are indispensable. This will clarify financial obligations at the outset and manage expectations regarding the amounts, if any, that will be refundable at the conclusion of the lease term.