How a sale contract can be cancelled

Real estate contracts in Japan are legally binding, and as a buyer or seller it is extremely important to understand what can happen after you sign a sale contract. As we will explain below, it’s not always a done deal until settlement. But it can be costly to walk away after signing the paperwork.

1. Deposit cancellation

At contract signing, the buyer will pay a deposit to the seller. The amount varies, but can typically be 5 ~ 10% of the purchase price. If the buyer changes their mind and decides to back out of the deal and cancel the contract, the buyer loses this deposit. If the seller decides to cancel, the seller must return the deposit and pay the buyer a penalty equal to the deposit amount. 

Set a low deposit and it’s very easy for either party to walk away from the deal with little financial consequence. This is not preferred by either buyer or seller. 

Deadline: This cancellation clause usually only applies up until the point where either party has started to fulfill their obligations of the contract. The wording is vague and open to court interpretation but can mean the point where the buyer is paying the remaining sale amount to the seller, or when the seller is preparing to transfer ownership. If you cancel beyond this point, you cannot use this clause and can run into higher penalties, depending on the contract terms. The general advice here is don’t leave it to the last minute. 

2. Loan cancellation

If you are buying a home with a mortgage, this is a common clause that allows the buyer to cancel the contract and receive their deposit back in full if their home loan was not approved by the deadline indicated. This clause may not be automatically included in the sale contract, so please check before signing! 

To avoid buyers abusing this clause, it does not apply if the buyer submitted falsified documents to the bank, failed to submit documents in a timely manner, or did any other intentional act in order to have the bank reject the loan.

Deadline: It should be indicated in the sale contract.

3. Cancellation due to contract breach

This applies if either party fails to fulfill their obligations under the contract. Eg. if the buyer fails to pay the remainder of the sale price at settlement, or if the seller fails to deliver the property to the buyer. It’s not an immediate cancellation. The other party must provide notice requesting that the obligation be met by a certain date. If that deadline passes, the contract can be cancelled and the offending party is now liable to pay a penalty. The penalty amount is whatever is written in the contract (eg. it may be 20% of the sale price). If it is not written in the contract, then it is whatever damages have been incurred to the other party. Eg. if the buyer fails to pay the final amount, and the seller ends up selling the property to someone else at a lower price, the difference in price may be the damage that the original buyer has to pay. As a buyer, you do not want to find yourself in this situation.

4. Cancellation if the property is damaged or destroyed prior to delivery

There is often a stretch of time between signing the contract and the settlement and delivery of the property. Sometimes it can be a month or two, but longer in other cases. What happens if there is a typhoon, fire or earthquake that destroys the home you signed a contract on? 

Check if the sale contract has a clause for this situation. Normally the seller may be responsible to repair the damage prior to delivery, but there may be a clause that allows cancellation if the damage is severe enough that repairs are not possible, or are too costly. Cancellation under this clause incurs no penalty. The seller returns the deposit to the buyer.

5. Cancellation due to non-conformance

If the delivered property does not meet the category, quality or size indicated in the contract, the buyer may seek subsequent fulfillment of these conditions by the seller. If they cannot be fulfilled, the buyer may seek a reduction in the sale price, damages or contract cancellation if all else fails. This used to be the warranty against defects clause, but was altered in an April 2020 revision to the Civil Code. The seller can exempt themselves from this warranty if they wish to, which is common for older homes. If the seller is a real estate company, they cannot legally excuse themselves from this clause.

Deadline: Whatever is written in the contract. Or, a minimum of 2 years from delivery of the property if the seller is a real estate company. If there is no deadline in the contract, then the Civil Code says the buyer must inform the seller within 1 year of becoming aware of the issue.

THE ABOVE DOES NOT CONSTITUTE LEGAL ADVICE. IF YOU FIND YOURSELF IN A SITUATION WHERE YOU NEED ADVICE ON CONTRACT CANCELLATION, PLEASE TALK TO YOUR REAL ESTATE BROKER IMMEDIATELY OR CONTACT THE CONSUMER AFFAIRS HELPLINE OR A LAWYER.

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