In the Philippines, a very large percentage of residential rental agreements—especially for bedspaces, apartments, and low- to middle-cost units—are verbal. No written contract is signed, only payment of advance and deposit, turnover of keys, and a verbal understanding of the monthly rent and the supposed lease term. When the tenant decides to leave before the verbally agreed period (usually “one year”), the most common dispute that arises is whether the landlord can forfeit or refuse to return the security deposit.

This article exhaustively explains the legal position under current Philippine law (Civil Code, Rent Control Act as amended and extended, and Supreme Court jurisprudence as of December 2025).

1. Verbal Lease Contracts Are Fully Valid and Enforceable

Article 1403 of the Civil Code does NOT require a lease of real property to be in writing to be valid, regardless of duration or amount (unlike sale of real property above ₱500).
Articles 1654 and 1668 of the Civil Code expressly recognize oral leases.
Therefore, the absence of a written contract does not make the lease void. It simply means that the terms (duration, conditions for pre-termination, forfeiture clauses, etc.) must be proven by oral or circumstantial evidence.

2. When There Is No Written Duration, the Lease Is Month-to-Month

Article 1687, Civil Code (as interpreted in countless Supreme Court decisions such as Rivera v. Trinidad, G.R. No. 213181, February 9, 2015, and subsequent cases):

“If the period for the lease has not been fixed, it is understood to be from month to month when the rent is monthly.”

This is the default rule for urban residential leases (which is almost all cases in practice).

Consequence:
In a purely verbal lease with no clear proof of a fixed one-year term, the law presumes it is month-to-month.
The tenant may terminate at the end of any month by giving at least 30 days written notice (or even just verbal notice in practice, though written is safer).
Upon proper termination, the landlord has absolutely no legal basis to withhold or forfeit the security deposit simply because the tenant did not complete “one year.”

3. Even If There Was a Verbal One-Year Agreement, Forfeiture of Deposit Is Not Automatic

If the landlord can prove (through text messages, witnesses, payment history, etc.) that both parties clearly agreed on a one-year fixed term, then:

The tenant who leaves early is, in principle, liable for the rent for the unexpired portion of the lease (Article 1659, Civil Code).

However, the landlord has a duty to mitigate damages by looking for a new tenant (jurisprudence: Integrated Packing Corp. v. CA, G.R. No. 122889, July 31, 2000; Duenas v. Santos, G.R. No. 202969, June 5, 2017).

Critically: The security deposit cannot be automatically forfeited as “liquidated damages” unless there was an express agreement to that effect.

Supreme Court ruling that is repeatedly cited in deposit cases:

“Deposits are in the nature of a trust fund. They cannot be applied to unpaid rents or treated as liquidated damages unless there is a clear stipulation to that effect.”
(Chua Tee Dee v. CA, G.R. No. 135721, May 27, 2004; Spouses Bautista v. Sarmiento, G.R. No. 211273, July 26, 2016; Spouses Tecklo v. Rural Bank of Pamplona, G.R. No. 216131, September 19, 2018)

Since there is no written contract, there is no stipulation allowing forfeiture. Therefore, the landlord can only deduct actual damages (unpaid rent until the unit is re-rented, cost of repairs beyond ordinary wear and tear, unpaid utilities).

Any amount in excess must be returned.

4. Security Deposit vs. Advance Rent – The Perpetual Confusion

Philippine landlords almost always collect “2 months deposit + 1 month advance.”

Legal distinction (consistently upheld by the Supreme Court):

Advance rent – applied to the first month(s) of occupancy or sometimes to the last month(s). It is not refundable if the tenant leaves early (because it is pre-payment of rent).
Security deposit – a guarantee for damages and cleaning. It is fully refundable at the end of the lease, regardless of early termination, subject only to valid deductions.

If the landlord labels everything as “deposit” but in practice treats the last two months as advance rent, the tenant can argue they are all security deposit, especially if there was no written agreement specifying otherwise.

In numerous small claims cases (which are the usual venue for deposit disputes), courts routinely order the return of the full two months when the landlord fails to prove actual damages.

5. Landlord’s Valid Deductions from the Security Deposit

The landlord may lawfully deduct only:

Unpaid utilities (electricity, water, association dues) that are for the tenant’s account.
Cost of repair of damages beyond ordinary wear and tear (with proof: photos, receipts).
Unpaid rent from the date the tenant stopped paying until the unit is actually re-rented or until the original lease term ends, whichever is earlier (because of duty to mitigate).

The landlord cannot deduct:

“Lost income” for the full remaining term if he did not exert effort to re-rent.
Repainting (unless the tenant deliberately damaged the paint).
General cleaning (unless the unit was left extraordinarily dirty).
Forfeiture as penalty for early termination (absent written clause).

6. Timeline for Return of Deposit

There is no specific period prescribed by the Civil Code or Rent Control Act for return of deposit.
However, Supreme Court and HUDCC opinions consistently say “within a reasonable time” (usually 15–30 days) to allow inspection and turnover.

If the landlord delays beyond 45–60 days without justification, courts usually award:

Legal interest of 6% per annum on the deposit from date of vacation until fully paid.
In small claims cases, sometimes moral/exemplary damages of ₱5,000–₱20,000 if bad faith is shown.

7. Remedies Available to the Tenant (Very Tenant-Friendly in Practice)

Send a formal demand letter (through email, text with read receipt, or registered mail) giving the landlord 7–15 days to return the deposit with itemized deductions.
File barangay conciliation (mandatory for money claims up to ₱1,000,000 in Metro Manila as of 2025).
If no settlement, file in Small Claims Court (for claims up to ₱1,000,000 as of 2025 amendments).
- No lawyer needed.
- Hearing usually within 30 days.
- Success rate for tenants is extremely high when there is no written contract allowing forfeiture.
If amount exceeds small claims limit, file regular collection case in MTC/RTC.

Evidence that almost always wins for the tenant:

Proof of payment of the deposit (GCash receipts, bank transfers, post-dated checks).
Photos of the unit upon turnover showing it was left in good condition.
Proof that the landlord has already re-rented the unit (social media posts, new tenant’s payments, etc.).

8. Current Status of the Proposed “Rental Reform Act” (as of December 2025)

Several versions of a comprehensive rental law have been pending in Congress since 2019. The latest consolidated bill (as passed on third reading in the House in 2024 and pending in the Senate) explicitly provides:

Maximum security deposit: 1 month only.
Deposit must be returned within 15 days after turnover, with itemized deductions.
Automatic forfeiture clauses are void as against public policy.
Penalty of 12% interest per annum for delayed return.

The bill has not yet been signed into law as of December 2025, so the Civil Code rules above still fully apply. Once enacted, it will dramatically strengthen tenant rights even further.

Conclusion

Under present Philippine law, when there is no written contract:

A purely verbal month-to-month lease (the default) allows the tenant to leave with 30 days notice and get the full security deposit back (minus only proven damages).
Even if a one-year term was verbally agreed upon, the security deposit cannot be forfeited as penalty. The landlord must prove actual damages and mitigate by re-renting promptly.
Forfeiture or withholding of deposit solely because the tenant “broke the one-year contract” is illegal without a written stipulation to that effect.

Tenants in verbal leases therefore enjoy very strong protection regarding refund of their security deposit upon early termination. Landlords who refuse to return it almost always lose in barangay conciliation or small claims court.