Landlord’s Right to Terminate Lease and Forfeit Security Deposit in the Philippines
(A comprehensive doctrinal and practical guide – updated to June 25 2025)
Disclaimer: This article is for educational purposes only and does not constitute legal advice. If you face a specific dispute, consult a Philippine lawyer.
1. Governing Sources of Law
| Layer | Key Instruments | Salient Points |
|---|---|---|
| Civil Code of the Philippines (Arts. 1642 – 1688) | General law on leases; governs in all cases unless a special law or stipulation validly overrides it. | |
| Special legislation on residential leases | B.P. 25 (1981) → R.A. 9161 (2002) → R.A. 9653 (Rent Control Act of 2009, repeatedly extended, most recently by R.A. 11571 through 2027). Applies only to residential units whose monthly rent does not exceed ₱ 10,000 in NCR & highly urbanized cities (₱ 5,000 elsewhere). | |
| Contract (Lease Agreement) | Within the bounds of law and public policy, the parties may refine grounds, notice periods, and remedies—including forfeiture clauses. | |
| Jurisprudence | Supreme Court decisions flesh out: (a) when termination is valid, (b) how security deposits may be applied, (c) moderation of penalty/forfeiture clauses. | |
| Procedural statutes & rules | a) Katarungang Pambarangay Law for barangay conciliation; b) Rule 70 of the Rules of Court for ejectment (unlawful detainer/forcible entry). |
2. Landlord’s Substantive Right to Terminate
Expiration of the agreed term Civil Code Art. 1673 lets the lessor eject the lessee upon term expiry even without a demand if the contract fixes a period.
- Tacit renewal (tácita reconducción): If the lessee stays 15 days (now interpreted as one month in residential leases) with no objection, the lease renews month-to-month under Art. 1670.
Non-payment of rent or failure to tender rent on time
- Art. 1657(1) (lessee’s duty), Art. 1654(3) (lessor’s right to maintain peaceful enjoyment by collecting rent).
- Under R.A. 9653, the landlord must serve written demand to pay or vacate giving the tenant at least 3 days.
Breach of other contractual stipulations
- E.g., subleasing without consent, using premises for a different or unlawful purpose (Art. 1655 & 1659).
- A valid “automatic termination” clause is enforceable only after judicial process; self-help eviction remains illegal (Art. 536).
Serious damage rendering the premises uninhabitable
- Either party may rescind (Art. 1660) if premises can’t be made fit.
Owner’s legitimate need to repossess (Rent-controlled residential units only)
- Limited to owner-occupancy by the landlord, spouse, ascendants, or descendants; requires one-month notice, good faith, and prohibition on re-leasing to another party for at least one year (R.A. 9653, §5).
3. Procedural Steps Before Ejectment
Serve Proper Notice
- Content: specific ground, date, and demand (pay, comply, or vacate).
- Period: No statutory minimum for commercial leases; 3-day rule for residential rent arrears; contract may provide longer.
Barangay Conciliation (if parties reside in same city/municipality and property is there)
- Wait for Certificate to File Action if settlement fails (§412 LGC).
File Unlawful Detainer Case (Rule 70)
- Jurisdiction: Metropolitan or Municipal Trial Court where property lies.
- Remedies: ejectment, back rent, damages, and application of security deposit.
- Execution is immediately available upon judgment unless the tenant perfects an appeal and files a supersedeas bond.
4. Security Deposit: Nature and Legal Treatment
| Topic | Rule | Authority |
|---|---|---|
| Purpose | Guarantee payment of rent, utilities, and repair of damage beyond ordinary wear & tear. | Civil Code Art. 1654(3), jurisprudence. |
| Cap on amount (rent-controlled units) | ≤ 2 months’ rent (deposit) + ≤ 1 month advance rent. | R.A. 9653, §7 |
| Separate bank account? | Not mandatory, but best practice; interest accrues in favor of tenant unless stipulated otherwise. | Art. 1953 (loan for consumption analogy). |
| May the landlord apply it during tenancy? | No, unless expressly allowed in the contract and the tenant is in default. Otherwise, application may itself constitute breach. | SC: Spouses Carbonell v. Sangalang (G.R. 205879, Jun 15 2016). |
| Return timeframe | Within 1 month from turnover of premises, less lawful deductions. | R.A. 9653, §7 |
| Forfeiture | Allowed only to the extent of (a) unpaid rent; (b) cost of repairs for abnormal damage; or (c) other liquidated amounts expressly chargeable to the tenant. Blanket forfeiture clauses are treated as penalty clauses subject to judicial reduction under Art. 1229. | SC: Goodyear Tires v. Marina Square (G.R. 185449, Apr 23 2014) – penalty reduced; Santos v. Mojica (G.R. 159000, Jan 22 2014). |
5. How Courts Handle Forfeiture Clauses
Penalty v. Liquidated Damages
- If the clause is plainly punitive (“deposit shall automatically be forfeited”), courts deem it a penal clause. Under Art. 1229, judges may reduce penalties that are “iniquitous or unconscionable”.
- If the clause specifies determinable amounts tied to actual loss (e.g., cost of repainting ₱ 30/m²), courts respect the parties’ freedom of contract.
Burden of Proof
- Landlord must itemize and substantiate deductions (receipts, photos, inspection report). Unsubstantiated items are disallowed and must be refunded with legal interest.
Interest on Unreturned Deposit
- Legal interest (currently 6 % p.a.) runs from the date of extrajudicial demand for refund until full payment (see Nacar v. Gallery Frames, G.R. 189871, Aug 13 2013).
6. Common Pitfalls for Landlords
| Pitfall | Why It Backfires |
|---|---|
| “Self-help” eviction (changing locks, shutting off water/light) | Criminal trespass under Art. 280 RPC and liable for damages; de-energizing utilities violates Anti-Pilferage of Electricity & Theft of Power Transmission Lines Act (R.A. 7832). |
| Not issuing official receipts or ORs | Violates BIR rules; weakens proof of non-payment in court. |
| Inadequate notice | Case may be dismissed for lack of jurisdiction (condition precedent). |
| Forfeiting deposit without accounting | Tenant may file action for sum of money plus moral damages; courts usually award 6 % interest. |
| Invoking owner’s need in bad faith | Double rent or penalty plus criminal liability for perjury if false affidavit was used (R.A. 9653). |
7. Special Rules for Commercial Leases (above ₱ 10,000 rent)
Freedom of contract predominates.**
- Parties may legally agree to larger deposits, longer notice periods, or automatic forfeiture provided the clause isn’t contrary to morals, good customs, or public policy.
- Courts apply Art. 1306 liberally but still moderate iniquitous penalties.
VAT & EWT Compliance.
- For lessors engaged in trade, VAT invoices/ORs are required. Non-compliance can undermine a damages claim.
8. Early Termination or “Pre-termination” Clauses
Without a clause – Lessee who leaves early remains liable for rent until the end of the term, subject to landlord’s duty to mitigate by re-letting.
With a clause – Common formulations:
- Fixed “pre-termination fee” (e.g., two months’ rent).
- Automatic forfeiture of entire deposit.
- Hybrid (fee + prorated deposit).
Judicial Review – Courts will enforce reasonable liquidated damages. If plainly oppressive (e.g., forfeiting one-year deposit for three-month balance), expect reduction.
9. Flowchart — From Breach to Repossession & Deposit Forfeiture
- Ground arises → 2. Serve written demand/notice (observe contract or Rent Control deadlines) → 3. Wait/conciliate at barangay → 4. File Rule 70 case → 5. Prove breach & quantify arrears/damages → 6. Court orders ejectment + allows offsetting security deposit → 7. Return balance (if any) with interest.
10. Frequently Asked Questions
| Question | Short Answer |
|---|---|
| Can I deduct unpaid utilities from the deposit? | Yes, if evidenced by bills in the tenant’s name or contract says tenant bears them. |
| Must I issue a “final statement of account”? | Statutory duty under good-faith requirement; not issuing invites penalties & interest. |
| If the tenant refuses post-inspection, may I still apply the deposit? | Yes, but keep detailed documentation; be prepared for possible small-claims suit. |
| Does COVID-19 justify automatic non-payment? | No blanket rule; parties may invoke force majeure but rent relief required proof of impossibility to pay (SC: RCBC Leasing v. Uni-Micro Business, G.R. 252649, May 11 2023). |
11. Practical Tips for Drafting Lease Clauses
- Define “damages beyond ordinary wear and tear.”
- State acceptable uses of deposit (rent arrears, utilities, repairs, legal fees).
- Set an inspection protocol (prior notice, joint walk-through, photographic record).
- Include a moderation clause (“Any forfeiture deemed unconscionable by a court shall be reduced to the extent allowed by law.”)
- Choose venue & governing law (Philippine law; exclusive venue where property is).
12. Key Takeaways
Terminating a lease and pocketing the security deposit are not landlord self-help rights; they are remedies that crystallize only after statutory notice and, usually, judicial confirmation.
- Grounds must be valid, procedure strictly followed, and deposit deductions substantiated.
- Blanket forfeiture clauses run the risk of judicial reduction or outright nullity for being punitive.
- Residential tenants under rent control enjoy additional safeguards on both termination grounds and deposit limits.
A well-drafted lease, diligent record-keeping, and adherence to notice and conciliation requirements remain the landlord’s safest path to lawful repossession and recovery of legitimate losses – nothing more, nothing less.