日本語 · English · 简体中文 · 繁體中文 · Português · Tiếng Việt

2026-09-09

Earnest money and contract cancellation ― what happens when you want to back out of a real estate sale

What is the earnest money (手付金) paid at the contract for? Cancellation by forfeiting the earnest money or by returning double, the "commencement of performance" that ends that option, unwinding the contract under the loan clause, penalties, and when cooling-off applies. This article sets out what happens when someone wants to back out of a real estate sale, from the practical viewpoint of a licensed real estate agent.

About this translation ― This page is an English translation of an article originally written in Japanese by KuraLab's operator, a licensed real-estate transaction specialist (宅地建物取引士) and administrative scrivener (行政書士) in Japan. The Japanese original is the authoritative text; where the two differ, the Japanese version prevails. The article explains Japanese law and procedure in general terms as of the date shown. It is not legal, tax or immigration advice for your situation ― please confirm with a licensed professional in Japan. Japanese terms are kept in parentheses so you can search for them. Read the Japanese original

"Tomorrow is the deadline for the loan clause, but the bank's decision still has not come." A man in his thirties who was about to buy a house telephoned in the evening. Price 32,000,000 yen, earnest money 1,600,000 yen. The clause deadline was the next day. The bank said it would take "two or three more days." "If the review fails after the deadline, I don't get the 1,600,000 yen back, do I?" You do not. This article is about what we did that night.

In a real estate sale contract, the buyer pays the seller "earnest money" (手付金) at the same time as the contract. It is money that goes towards the price, but that is not all. The main role of earnest money is to set "the rules for backing out of the contract." If you do not understand this, you can suffer an unexpected loss when you want to withdraw.

Under the Civil Code, earnest money is in principle treated as "cancellation earnest money" (解約手付). The buyer can cancel the contract for any reason by forfeiting the earnest money (手付放棄), and the seller by returning double the amount received (手付倍返し). With a price of 30,000,000 yen and earnest money of 3,000,000 yen, the buyer can walk away by giving up 3,000,000 yen, the seller by paying 6,000,000 yen. That mechanism is cancellation earnest money.

But it is not available indefinitely. Once the other party has "commenced performance" (履行の着手), cancellation by earnest money is no longer possible. Commencement of performance means concrete steps towards carrying out the contract: the seller has begun preparing the ownership transfer registration or vacated the building for handover, the buyer has paid an interim payment, and so on. Standard practice is to write a deadline into the contract, "cancellation by earnest money is possible until such-and-such a date"; after that date, backing out becomes a matter of the penalty described below.

Returning double has one more condition. Article 557 of the Civil Code says the seller may cancel by "actually tendering" double the amount. Simply telling the buyer by phone or letter "I am cancelling by returning double" is not enough; the seller must actually have the double amount ready and offer it so the buyer can receive it. This provision was also rewritten in the amendment in force from April 2020 to read "this does not apply after the other party has commenced performance of the contract." Cancellation becomes impossible when the other party has commenced; if you yourself started preparing first but the other party has not yet, you can still cancel. Where the seller is a licensed real estate business, Article 39, paragraph 2 of the Real Estate Brokerage Act treats earnest money under any name as cancellation earnest money, and any special clause less favourable to the buyer is void.

In the example in this article, the money that moves when you back out changes at each deadline between contract and closing. On the contract date, the buyer pays earnest money of 1,600,000 yen. Until the earnest-money cancellation deadline, the buyer can walk away by forfeiting 1,600,000 yen, or the seller by returning double. Until the loan clause deadline, if the loan is refused, the contract is unwound and the full earnest money is returned. After those deadlines, backing out means a penalty, which in this contract was 10% of the price, 3,200,000 yen. The order of the two deadlines differs from contract to contract, and cancellation by earnest money is not possible, even before the deadline, once the other party has commenced performance.

There is no legal ceiling on the amount of earnest money, but where the seller is a licensed real estate business, the Real Estate Brokerage Act caps it at 20 per cent of the price. Also, where the business is the seller and the earnest money exceeds 10 per cent of the price (5 per cent for an uncompleted property) or exceeds 10,000,000 yen, the business must take measures to protect it (a bank guarantee or insurance). There is no such regulation for sales between individuals, where 5 to 10 per cent seems most common.

An "application fee" (申込金, or application deposit) paid before the contract is different from earnest money. You may deposit money when you apply to buy, but this is a deposit before the contract is formed and is returned if no contract results. Article 16-11 of the Regulation for Enforcement of the Real Estate Brokerage Act prohibits a business from refusing to return a deposit to someone who withdraws an application, and from refusing without good reason someone who tries to cancel by forfeiting earnest money. If you are told "the application fee is non-refundable," check: that should not be earnest money.

If you back out after the earnest-money cancellation deadline, or if the other party does not keep the contract, it becomes "cancellation for breach" and a question of damages. Most contracts set a penalty in advance at 10 to 20 per cent of the price. Where the seller is a business, the Real Estate Brokerage Act provides that the penalty and damages together may not exceed 20 per cent of the price. Where forfeiting earnest money is "a safety valve that lets you withdraw for any reason," the penalty is "the price of breaking a promise." The same act of backing out has a completely different character before and after the deadline.

To set out the kinds of "backing out" and the money that moves: if the buyer wants out for any reason, forfeit the earnest money and lose it, available until the other party commences performance (the deadline in the contract). If the seller wants out for any reason, return double, and the buyer receives twice the earnest money, same deadline. If the loan is refused, cancel under the loan clause and the earnest money is returned in full, available until the clause deadline by written notice. If you back out after the deadline, or the other party breaks the contract, it is cancellation for breach with a penalty (on a price of 32,000,000 yen, 3,200,000 yen at 10% or 6,400,000 yen at 20%). If the seller is a business and the contract was signed somewhere other than its office, cooling-off returns the earnest money in full, within eight days of being notified in writing.

For the buyer, the most important thing is the "loan clause" (ローン特約). It is a clause that lets you unwind the contract and recover the full earnest money if the home loan is not approved, and almost every housing sale contract has one. Three things to look at: the clause deadline (until such-and-such a date), whether the financial institution and loan amount are specified, and the cancellation procedure (whether written notice within the deadline is required). Saying "the loan was refused" after the deadline does not bring the clause into play; it becomes forfeiture or a penalty. As I wrote in another article on this site on the explanation of important matters, I see people lose their earnest money by missing this every year.

Loan clauses are drafted in two ways. One is that the contract automatically loses effect if the loan is refused (the condition subsequent type). The other is that if the loan is refused, the buyer unwinds the contract by giving notice of cancellation by the deadline (the reserved right of cancellation type). Under the latter, if you do not give written notice within the deadline, you may be unable to use the clause even though the loan was refused. You can tell which type by whether the clause ends with "shall lose effect" or "may cancel." Also, where the buyer caused the refusal, by not submitting required documents or by increasing the loan amount on their own, cancellation under the clause may not be allowed.

Let me also note when cooling-off applies. Where the seller is a licensed real estate business and the contract was signed somewhere other than the business's office (your home, a cafe, a site that is not a model room, and so on), you can cancel unconditionally without giving a reason within eight days of being notified in writing, and the earnest money is returned in full. It does not apply to transactions where an individual is the seller, or where the contract was signed at the office.

What we did on the ground was one thing: that same night, we had the brokering real estate company put in writing, with the seller, an agreement to "extend the loan clause deadline by one week." The clause deadline is a date written in the contract, and the parties can change it by agreement. The broker contacted the seller, the seller agreed, "if it is only waiting for the review," and the next morning all three signed a memorandum of amendment. Three days later the loan was approved and the contract went ahead as planned. Without the memorandum, if the review had been refused two days after the deadline, the choice would have been to forfeit 1,600,000 yen or to continue the contract and take on a loan he could not pay.

Using the figures of this contract, here is the money involved in each way of backing out. Price 32,000,000 yen, earnest money 1,600,000 yen (5% of the price), penalty fixed in the contract at 10% of the price, 3,200,000 yen, with the earnest money applied towards the penalty. If the loan clause is used within the deadline, the buyer's cost is 0 yen and the full 1,600,000 yen is returned. If the buyer withdraws by forfeiting earnest money within the cancellation deadline, the loss is 1,600,000 yen. If the seller withdraws by returning double, the seller pays 3,200,000 yen to the buyer, of which 1,600,000 is the return of the earnest money held, so the seller's outlay is 1,600,000 yen. If the buyer withdraws for their own reasons after the deadline, the penalty is 3,200,000 yen: the 1,600,000 yen earnest money is applied and a further 1,600,000 yen is paid. The same act of backing out ranges from 0 to 3,200,000 yen.

As a table for this contract (price 32,000,000 yen, earnest money 1,600,000 yen, penalty 10%): unwinding under the loan clause within the deadline, nobody pays, 0 yen, earnest money returned in full. Buyer's forfeiture within the cancellation deadline, the buyer pays 1,600,000 yen, the earnest money is lost and that is all. Seller's return of double within the same deadline, the seller pays 3,200,000 yen (outlay 1,600,000 yen), of which 1,600,000 is the return of the earnest money. Buyer backing out after the deadline, the buyer pays a penalty of 3,200,000 yen, applying the 1,600,000 yen earnest money and paying a further 1,600,000 yen.

The opposite case, from the seller's side. After the contract, another buyer applied at 3,000,000 yen more. The seller came for advice having heard "if I return double to the current buyer I can cancel." Paying double the 1,500,000 yen earnest money, 3,000,000 yen, would indeed allow cancellation. But only before the buyer "commences performance." The buyer had already contracted with a removal company, obtained renovation quotations and completed the formal loan application. Whether these amount to commencement of performance is material for a dispute, and if they were held to do so, cancellation by earnest money would be impossible and it would become a question of the penalty (20% of the price, 6,000,000 yen). For an offer 3,000,000 yen higher, the seller would be taking on a penalty of up to 6,000,000 yen and the risk of litigation, and the seller dropped the idea.

One cooling-off example. A person who signed a contract in the salesperson's car at the site of a new development came the next day saying "I want out." The seller was a business, and the place of contract was neither an office nor a model room. It was a cooling-off case, within eight days of written notification, so the person gave written notice, cancelled unconditionally, and the earnest money was returned in full. Had the contract been signed at the office, this route would not have existed.

A practical summary. Before the contract, put your finger on four things in the contract: the amount of the earnest money, the earnest-money cancellation deadline, the loan clause deadline and conditions, and the amount of the penalty. Sign when you can answer "if I want out, by when, for how much, and how." That is the best way to prevent losses over earnest money.

The man who telephoned that evening said later, "I did not know the deadline could be extended." Of course he did not; the contract does not say "can be extended." It only states the deadline. That is why I wrote at the end that you should "put your finger on" the four things: the amount of the earnest money, the cancellation deadline, the loan clause deadline and conditions, the penalty amount. If you know where your finger is, there is still a move left on the evening before the deadline.

Written by: 長澤 湊（licensed real-estate transaction specialist, administrative scrivener, assistant surveyor）　Content checked on: 2026-10-14

This article is a general explanation of Japanese rules and procedures, not advice on an individual case. Figures and rules are as of the date shown. For your own situation, consult a lawyer, judicial scrivener, tax accountant or administrative scrivener in Japan.

Official sources

The rules and figures in this article can be checked against the following official pages (in Japanese).

All translated articles · Read the Japanese original