Refund of Rent Deposit for an Unfinished Rental Unit in the Philippines

A comprehensive legal primer (updated to May 2025)

Disclaimer: This article is for educational purposes only and does not create a lawyer-client relationship. Always consult a Philippine lawyer for advice on your specific facts.

1. Key Concepts and Terminology

Term	Practical Meaning	Typical Amount / Timing
Advance Rent	Pre-paid rent that will be applied to the first (or occasionally last) month of occupancy.	1 month (RA 9653 §7)
Security Deposit	A sum held by the lessor to answer for unpaid rent, utilities, or physical damage. It must be returned after lawful termination, minus lawful deductions.	Up to 2 months (RA 9653 §7)
Reservation Fee / Holding Deposit	Paid before signing the lease to “block” the unit. Not regulated; usually fully refundable unless expressly agreed otherwise.	Negotiable
Unfinished Unit	A dwelling handed over without the agreed-upon fit-out, utilities, occupancy permit, or habitability standards.	—

2. Governing Statutes & Regulations

Civil Code of the Philippines
- Art. 1654(1) – Lessor must “deliver the thing in such a condition as to render it fit for the use for which it is intended.”
- Art. 1657 – If the lessor breaches, the lessee may choose either rescission or fulfilment, in both cases with damages.
- Art. 1655 – Lessee may suspend payment of rent if the lessor fails to make indispensable repairs or keep the premises fit.
Rent Control Act (RA 9653, as amended by RA 11571 and extended by DHSUD/HUDCC resolutions)
- Caps deposits at 2 months and advance rent at 1 month (§7).
- Requires the security deposit to be returned within one month from lease termination (§7, 2nd par.).
- Imposes penalties (fine + imprisonment) for violations.
- Important: RA 9653 applies only to residential units whose monthly rent does not exceed ₱15,000 in NCR or ₱12,000 elsewhere (figures current through 31 Dec 2027 under the latest extension). For higher-rent units, the Civil Code still governs deposits, but the Act’s refund principles are widely followed in practice.
Consumer Act of the Philippines (RA 7394) – Declares deceptive sales practices unlawful; an unfinished unit marketed as “ready for occupancy” may fall under this.
National Building Code (PD 1096) & Fire Code (RA 9514) – Require an Occupancy Permit before the unit may be lawfully used.
Barangay Justice System (RA 7160, ch. VII) – Most landlord-tenant disputes must first undergo barangay conciliation before filing civil suit, unless an exemption applies (e.g., corporations as parties).
Rules on Summary Procedure / Small Claims (A.M. 08-8-7-SC) – If the total claim (deposit + damages) is ≤ ₱1 million, the lessee may file a verified small-claims case; no lawyer required.

3. Obligations of the Landlord When a Unit Is Unfinished

Obligation	Legal Source	Practical Benchmark
Finish agreed fit-out, provide utilities, secure occupancy permit	Civil Code 1654; Building Code; contract	Before move-in date
Keep common areas passable and safe	Civil Code 1654; PD 1096	Continuous
Return security deposit on lawful termination	RA 9653 §7; Civil Code 1654–1657	Within 30 days
Pay interest ‡ if deposit is contractually described as “earnest money” or “loan”	Art. 1956; CB circulars	6 % p.a. by default (Bangko Sentral circulars)

‡ Interest is not automatic. It is due only if (a) agreed, (b) the deposit is converted into a loan, or (c) the lessor is in delay after a demand for refund (Art. 1169, 2209).

4. Rights and Remedies of the Tenant

Rescission of the Lease Demand the immediate cancellation of the contract and the return of all deposits and advances, with damages.
- Basis: Art. 1657 in relation to Art. 1191 (reciprocal obligations).
- Trigger: Any “substantial breach” – e.g., unit lacks water, electricity, flooring, or occupancy permit on move-in date.
Proportional Rent Reduction or Rent‐Free Period If the tenant opts to stay and wait for completion.
- Basis: Art. 1654 & 1655 (lessor in default).
- Mechanics: Compute usable floor area vs. promised area, or days uninhabitable vs. total lease days.
Suspension of Rent Payments Permissible until the lessor makes the unit fit or returns the deposit.
- Best practice: Give a written notice invoking Arts. 1655 & 1657.
Demand for Refund of Deposit and Advance Rent Automatic once the lease is validly rescinded or never commenced.
Damages
- Actual/Compensatory – Cost of alternative lodging, movers’ fees, interest on money tied up, etc. (Art. 2199).
- Moral – Anxiety, inconvenience (Art. 2219[10])—requires proof.
- Exemplary – If lessor acted in a wanton or fraudulent manner (Art. 2232).
Administrative & Penal Remedies Report to the DHSUD Enforcement Office for violations of RA 9653 or deceptive marketing. File a complaint with the DTI-Consumer Protection Group if misrepresentation is involved. *Violations of RA 9653 may lead to ₱25,000–₱50,000 fine and/or imprisonment of 1 month + 1 day to 6 months (§13).

5. Procedural Roadmap

Step	Timeframe	Notes
A. Demand Letter	ASAP	State facts, cite Arts. 1654 & 1657, give 5- to 15-day period to refund.
B. Barangay Conciliation	Within 60 days of cause of action	Required if parties are natural persons in the same city/municipality.
C. Filing in Court or Small Claims	After Certificate to File Action is issued (or barangay exemption)	Attach lease, pictures, receipts, demand letter, and barangay certificate.
D. Execution	After judgment or settlement	Garnish deposit from bank, levy property, or enforce compromise agreement.

Tip: When the lease expressly designates the DHSUD Adjudication Commission (formerly HLURB) as the forum, you may file there; its summary process is often faster than the regular courts.

6. Common Contract Clauses & Their Validity

Clause Drafted by Lessor	Validity	Why
“Deposit automatically forfeited if tenant backs out for any reason.”	Void insofar as it forfeits the deposit when landlord is in breach. It violates Arts. 1306 & 1409 (contrary to law and morals).
“Unit deemed delivered upon signing even if unfinished.”	Void; contravenes Art. 1654(1).
“Tenant waives right to file suit.”	Void under Art. 6; public policy.
“No interest on deposit even in case of delay.”	Partly void; interest becomes due by operation of law from date of demand (Art. 2209).
“Exclusive venue Malolos, Bulacan courts.”	Valid if clearly, unambiguously agreed and the parties’ residences are in Bulacan; otherwise may be deemed onerous and struck down.

7. Selected Jurisprudence

Case	G.R. No.	Key Take-away
Fernandez v. Gómez, 92 Phil 603 (1953)	Delivery fit for intended use is a fundamental lessor duty; defects let tenant rescind & recover payments.
Padilla v. Pp, G.R. 189619 (15 Apr 2015)	Failure to refund deposits after due demand may amount to estafa if intent to defraud is proved.
Daoas v. Court of Appeals, G.R. 95880 (10 Aug 1993)	“Advance rent” paid before possession is recoverable if lessor later fails to deliver.
Cruz v. LC Land, HLURB Case No. REM-020915-2158 (2019)	HLURB awarded double the security deposit as exemplary damages for willful refusal to refund.

8. Practical Tips for Tenants

Document Everything – Photos of the unfinished unit, time-stamped e-mails, and text messages strengthen your claim.
Insist on Official Receipts – Even if the landlord issues only provisional receipts, keep screenshots of transfers.
Check the Occupancy Permit – Ask to see the Building Official’s Form Certificate of Completion (Form No. Bldg-10).
Use Registered Mail / Courier for demand letters – Proof of mailing matters in court.
Compute Refund Clearly – List each deposit and advance separately; indicate proposed deductions (if any) to show reasonableness.
Leverage Small Claims – Filing fee is only ₱2,000–₱7,000; decision is due within 30 days of hearing.
Consider Settling – Many landlords refund faster once they know the Rent Control Act imposes criminal liability.

9. Template: Demand for Refund & Rescission

(On plain bond paper; adjust details)

Date: 28 May 2025

Mr./Ms. [Lessor’s Name]  
[Address]

Re: Refund of Advance Rent & Security Deposit – Unit 5C, Sunshine Tower

Dear Mr./Ms. [Surname]:

On 1 March 2025 we executed a Lease Contract for the above unit, with effectivity on 1 May 2025. I paid one (1) month advance rent (₱25,000) and two (2) months security deposit (₱50,000).

Despite repeated assurances, the unit remains unfinished—lacking electrical fixtures, water service, and a certificate of occupancy. Pursuant to Articles 1654 and 1657 of the Civil Code, I hereby **rescind** the lease and demand the **full refund** of ₱75,000 within **five (5) days** from receipt of this letter, plus 6 % legal interest per annum until paid.

Failure to comply will compel me to file the appropriate barangay and court actions, including claims for damages and penalties under Republic Act 9653.

Very truly yours,

[Signature]  
[Tenant’s Name, address, phone, e-mail]

10. Frequently Asked Questions

Q 1: The landlord says the “deposit is non-refundable.” Is that legal?

No. Even if the lease says so, Civil Code Art. 6 invalidates stipulations contrary to law or morals. Deposits are held in trust and must be returned when the lessor, not the tenant, is at fault.

Q 2: Can I walk away without a formal rescission notice?

To avoid being sued for abandonment, always send written notice. Rescission is not automatic; one party must communicate it (Art. 1191).

Q 3: May I deduct the deposit from future rent while repairs are pending?

You may suspend rent under Art. 1655, but keep the funds in reserve. Using the deposit unilaterally is risky unless expressly agreed in writing.

Q 4: What if the landlord already spent the deposit?

That is a breach of trust. After formal demand, you can sue for sum of money or even estafa (Art. 315 par. 1-[b] Revised Penal Code) if deceit is proved.

11. Conclusion

The Philippine legal framework strongly protects tenants who paid deposits for units that turn out to be unfinished or uninhabitable. Articles 1654, 1655, and 1657 of the Civil Code give you a clear path to rescind the lease, suspend rent, and recover your money—with interest and damages where warranted. RA 9653 (Rent Control Act) further compels landlords to return deposits within 30 days and penalizes non-compliance.

Prompt, well-documented action—starting with a demand letter, followed by barangay conciliation and, if needed, small-claims litigation—usually results in a speedy refund. Armed with the above principles, Filipino tenants can assert their rights confidently and lawfully when confronted with an unfinished rental unit.