Can You Cancel After Paying a Deposit? Japan's 'Tetsuke' Earnest-Money Rules
When buying property in Japan, it's standard practice to pay an earnest-money deposit (tetsuke-kin) at the same time as signing the sale contract. Beyond serving as proof that a contract was formed, this deposit is generally treated as a 'cancellation deposit' that lets either party walk away from the deal under certain conditions.
That right isn't unlimited, though — forfeiting the deposit doesn't let you cancel at any time you like. This article looks at how long deposit-based cancellation stays available, what cap applies when the seller is a licensed real estate business, and how it differs from a breach-of-contract penalty.
What is the earnest-money deposit actually for?
The deposit is money the buyer pays the seller when the contract is signed. In practice it's often set around 5–10% of the purchase price, though the exact amount is agreed between the parties rather than fixed by law.
Under the Civil Code, unless the parties specify otherwise, a deposit is treated as a 'cancellation deposit.' That means the buyer can cancel by forfeiting the deposit, or the seller can cancel by actually tendering double the deposit back to the buyer — in either case, without needing a specific reason.
How long does deposit-based cancellation stay open?
Article 557 of the Civil Code provides that, once a deposit has been paid, either party can cancel — the buyer by forfeiting the deposit, the seller by tendering double its amount — for as long as the other party has not yet 'commenced performance' of the contract. The key question is whether the other side has started performing, not whether you yourself have.
What counts as 'commencing performance' can include things like starting to prepare for handover or arranging to receive the remaining balance, and the specifics can vary by case. In practice, contracts commonly set an explicit 'deposit cancellation deadline,' letting either side cancel freely up to that date.
Typical deposit and cancellation benchmarks
- Typical deposit size
- 5–10%
- Cap for a business seller's deposit
- 20%
- Typical cancellation deadline
- 1–3weeks
- Typical penalty cap
- 20%
As a share of the purchase price
Real Estate Brokerage Act, Art. 39
Set by contract, not by law
For a business seller, Art. 38
Business sellers face a cap on the deposit (Art. 39)
When the seller is a licensed real estate business, Article 39 of the Real Estate Brokerage Act caps the deposit at 20% of the purchase price. Any special clause that would limit the buyer's cancellation-deposit rights to the buyer's disadvantage is treated as invalid.
This cap doesn't apply to a private, individual seller. If an unusually large deposit is requested in that case, it's worth confirming why, and how the cancellation terms are structured, before signing.
Legal basis
- Civil Code, Article 557
- Once a deposit is paid, either party may cancel — buyer by forfeiture, seller by tendering double — as long as the other side has not commenced performance.
- Real Estate Brokerage Act, Article 39
- When the seller is a licensed business, the deposit may not exceed 20% of the price, and disadvantageous special terms are invalid.
- Real Estate Brokerage Act, Article 38
- When the seller is a licensed business, liquidated damages and penalty combined may not exceed 20% of the price.
How is this different from a breach-of-contract penalty?
Deposit-based cancellation is a right either party can exercise for any reason, as long as the other hasn't started performing. A breach-of-contract penalty, by contrast, is a settlement mechanism the contract sets out for when one party actually violates the agreement — a different concept entirely. Once the cancellation deadline has passed, forfeiting the deposit alone may no longer be enough; you could be liable for the penalty or actual damages instead.
A separate 'mortgage contingency clause,' which lets a buyer cancel if their final loan approval is denied, is also distinct from deposit-based cancellation. Under a mortgage contingency, the deposit is typically refunded if the conditions are met, but the conditions and deadlines vary by contract, so check both clauses separately.
Three routes to cancellation, compared
| Route | When available | Typical cost | Legal basis |
|---|---|---|---|
| Deposit cancellation | Before the other party commences performance | Forfeit deposit / pay double | Civil Code Art. 557 |
| Mortgage contingency cancellation | Within the contract deadline, if final loan approval is denied | Deposit typically refunded | Contract special clause |
| Breach cancellation | When a party breaches the contract | Penalty / damages (capped at 20% for a business seller) | Brokerage Act Art. 38 / contract |
Common mistakes and how to avoid them
✕Assuming the deposit can be forfeited to cancel at any time, then trying to cancel after the other side had already started preparing — leading to a dispute.
→Check the contract's deposit cancellation deadline and decide early whether to cancel within it.
✕Offering an unusually low deposit on the theory that 'smaller is safer,' only to have a business seller refuse it.
→Budget around the typical 5–10% range, keeping in mind that a business seller's deposit is normally capped at 20%.
✕Confusing the mortgage contingency clause with deposit cancellation, and assuming the deposit must still be forfeited even when the loan is denied.
→Understand that mortgage contingency cancellation and deposit cancellation are separate mechanisms, and check both sets of conditions in the contract.
✕Signing a private-sale contract where the cancellation terms weren't spelled out, leading to disputes over the amount and method.
→Have the contract spell out the cancellation deadline, amount, and method — including that a seller's double repayment must be actually tendered.
Pre-contract checklist
- Confirmed the contract states a deposit cancellation deadline
- Worked out what percentage of the price the deposit represents
- For a business seller, confirmed the deposit doesn't exceed 20% of the price
- Checked the mortgage contingency conditions and deadline separately from deposit cancellation
- Confirmed the penalty/damages cap that applies after the deadline
- Confirmed the payment method for the deposit and kept the receipt
Frequently asked questions
- Q. How much is a typical deposit?
- A. In practice, 5–10% of the purchase price is common, though it varies by contract. When the seller is a licensed business, it's capped at 20%.
- Q. Can I cancel by forfeiting the deposit at any time?
- A. It's possible as long as the other party hasn't commenced performance, but it may become harder once the contract's cancellation deadline has passed.
- Q. What if the seller cancels instead?
- A. If the seller cancels, they generally need to actually tender double the deposit back to the buyer.
- Q. How does deposit cancellation differ from a penalty?
- A. Deposit cancellation is a right available before performance begins; a penalty is a settlement for an actual breach of contract — the two serve different purposes.
In the SUMIMOTO Hub app, a 24-hour AI advisor explains contract terms like the deposit, penalty clauses, and mortgage contingency in multiple languages. For final confirmation of amounts and legal provisions, we recommend consulting a licensed real estate transaction agent or lawyer before signing.
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