Here’s a practical, everything-you-need guide to Security Deposit Deductions in Lease Contracts (Philippine context)—covering what a deposit legally is, what a lessor may (and may not) deduct, “ordinary wear and tear,” timelines, documentation, tax wrinkles, and remedies for both sides. It applies to residential and commercial leases unless the contract or special rules say otherwise.

1) What the security deposit actually is (and isn’t)

It’s tenant money held in trust to secure the faithful performance of lease obligations (rent, care of the premises, utilities/dues, surrender in good condition, etc.).
It is not advance rent (unless the contract expressly says the deposit or a portion will be applied to the last month’s rent). Keep “advance” and “deposit” in separate clauses to avoid confusion.
By default, it’s returnable at lease end minus lawful deductions. A blanket “non-refundable deposit” for no reason is suspect and often struck down or re-characterized as a penalty (which courts may reduce if unconscionable).

Tip (drafting): Name the purposes: “to cover unpaid rent, utilities/association dues, key fob replacements, cleaning beyond reasonable wear, and repair of tenant-caused damage.”

2) What landlords may deduct (if provable)

Think: actual loss the lease makes the tenant responsible for.

Unpaid rent (and contractual late charges) up to the end of the term.
- For early termination, the lessor may deduct liquidated damages or break fees only if the lease stipulates them; otherwise, the lessor must prove actual loss and has a duty to mitigate.
Unpaid utilities and pass-throughs attributable to the tenant (electricity, water, internet, cable, association dues, common-area charges) incurred during the tenancy and billed to the unit; attach the final bills.
Repair of damage beyond ordinary wear and tear, including:
- Holes, broken tiles/glass, burns, pet-caused damage, large stains, water damage due to negligence, dismantled fixtures, missing hardware, deliberate paint defacement.
- Pest extermination if infestation is proven to stem from tenant’s misuse (evidence helps: notices, photos, reports).
Cleaning and hauling beyond ordinary move-out: heavy grease, foul odor remediation, junk hauling due to abandoned items, professional deep cleaning after misuse.
Loss/non-return of keys, access cards, remotes (re-keying, re-programming, replacements).
Government charges/penalties caused by the tenant’s acts (e.g., fines for improper disposal if chargeable to the unit).
Documented move-out repairs to restore the unit to its move-in condition (normal age-related depreciation excluded).

Burden of proof: The lessor must substantiate deductions with the contract, final statements, receipts/quotations, and move-in vs. move-out evidence.

3) What landlords generally may NOT deduct

Ordinary wear and tear (see §4).
Upgrades/improvements the owner chooses (e.g., replacing functioning standard fixtures with premium ones).
Repainting or general cleaning that’s customary after a normal tenancy without abuse.
Future, speculative, or preventive works (“we might replace the roof next year”).
Costs due to the lessor’s own breach, building defects, force majeure, or association-mandated retrofits unrelated to tenant fault.
Charges outside the lease (e.g., miscellaneous association penalties not shown to be caused by the tenant).
A penalty labeled ‘forfeiture of deposit’ when no actual breach occurred (courts may reduce or deny under Civil Code penalty/abuse-of-rights principles).

4) “Ordinary wear and tear” vs. “damage” (practical matrix)

Ordinary wear and tear (non-deductible):

Minor nail holes; light scuffs; faded paint; hairline tile grout cracks; small carpet wear paths; slight hard-water scaling; appliance wear from normal use.

Damage (deductible if proven):

Large wall holes; broken window panes; cracked tiles from impact; burns; pet urine-soaked carpet; deep scratches/gouges; unapproved paint/wallpaper requiring corrective work; mold from tenant’s neglect (e.g., disabling ventilation); missing fixtures.

Rule of thumb: If it inevitably occurs with normal, careful use over time, it’s wear. If it stems from misuse, neglect, or abuse, it’s damage.

5) The end-of-lease process that avoids fights

Move-in baseline: Inventory + photo/video inspection at hand-over signed by both.
Pre-termination/notice: Tenant gives written notice per lease; request a pre-move-out inspection so issues can be cured before turnover.
Move-out inspection: Prefer a joint walk-through; note variances against the move-in checklist. Take date-stamped photos.
Itemized deductions: Lessor prepares a written statement of account (SOA) listing each deduction (what/why/how much) with supporting bills/receipts/quotes.
Return balance: Pay the net deposit back by bank transfer or check, with the SOA attached.
Release: Tenant signs a Receipt and Release after receiving funds and reviewing the SOA (not before).

Timeline: If the lease is silent, return the net deposit within a reasonable time after turnover and receipt of final bills (commonly 30 days in practice, sometimes up to 60 if utilities/association settle later). Unjustified delay can trigger interest as damages.

6) Interest on the deposit—when does it earn?

By default, the Civil Code doesn’t automatically impose interest while lawfully held.
It can earn interest if:
- The lease stipulates interest; or
- The lessor is in delay (unjustified non-return after a reasonable period), in which case legal interest as damages may be awarded from the time of demand.
Some developments or CBAs voluntarily credit interest; that’s policy-based, not statutory.

7) Special residential notes (rent-controlled settings)

Periodic rent-control issuances often cap the number/amount of deposits/advances (e.g., a typical pattern is “not more than two months’ deposit” and a limited advance). These issuances are time-bound and updated from time to time.
Regardless of caps, deduction logic is the same: only actual, provable tenant liabilities may be charged.

8) Commercial lease notes

Fit-outs and reinstatement: If the lease requires reinstatement to base build, those costs are deductible when the tenant returns the space without reinstating. Attach the reinstatement clause and cost estimates/invoices.
Common area charges (CAM) and utilities true-ups can be offset from the deposit if the lease says so.
Liquidated damages for early exit are enforceable if reasonable; courts may reduce iniquitous penalties.

9) Taxes & accounting (quick, non-exhaustive)

A security deposit is not income to the lessor when received if refundable.
When applied to rent or forfeited to cover tenant breach, the applied amount becomes income (and may be subject to VAT/percentage tax where applicable).
For tenants who withhold tax on rent, only amounts applied to rent are subject to withholding; pure “security” held and later returned is not. Keep a clean paper trail (SOAs, ORs).

(Coordinate with your accountant for the specific tax profile and thresholds.)

10) Model clauses (tight and fair)

A. Security Deposit Clause (Residential/SME)

The Lessee shall remit a Security Deposit of ₱____, to secure faithful compliance with this Lease. The Deposit may be applied by Lessor to unpaid rent, utilities/dues attributable to the Premises, replacement of access devices, cleaning and repair of damage beyond reasonable wear and tear, and reinstatement where contractually required. Within 30 days from surrender of the Premises and receipt of final bills, Lessor shall provide an itemized statement and return any balance. The Deposit is not advance rent unless expressly applied to the last month herein. Interest shall not accrue except as provided by law in case of delay. The parties shall conduct joint move-in and move-out inspections and sign checklists with photo documentation.

B. Reinstatement & Fit-Out (Commercial)

Upon expiry/termination, Lessee shall reinstate the Premises to base build per Exhibit __. If Lessee fails to reinstate, Lessor may do so and deduct the reasonable, documented cost from the Security Deposit, accounting to Lessee within 45 days.

C. Early Termination Liquidated Damages (Reasonable cap)

If Lessee terminates early without cause, Lessee shall pay liquidated damages equal to __ months’ base rent, less any mitigation (replacement tenant rent) collected during the remaining term. Any shortfall may be charged against the Security Deposit.

11) Common disputes & how to win them

Lessor playbook (to justify deductions):

Paper everything: move-in/out checklists, photos, contractor quotes, receipts, utility finals.
Tie each peso to a lease clause and evidence.
Account promptly and return the balance; delay breeds interest claims and penalties.

Lessee playbook (to recover your money):

Photos on day 1 and day out; keep all utility receipts and dues clearances.
Demand in writing for itemization and return; give a clear bank account and deadline.
Challenge “wear and tear” deductions with your move-in photos and neutral guidelines.
Offer to cure (e.g., repainting) before move-out when feasible; get acceptance in writing.

12) Remedies if talks fail

Barangay conciliation (if both parties are natural persons in the same city/municipality): mandatory first step for small disputes.
SEnA (DOLE) is not the forum; this is civil/lease, not labor.
Small Claims (amount within the current cap): fast track, no lawyers at hearing; bring the lease, SOAs, photos, receipts, demand letters.
Regular civil action for bigger, complex cases (reinstatement costs, commercial build-outs).
Interest and damages may be awarded for unjustified withholding or abuse of rights.

Prescription (time limits): claims based on written leases typically fall within longer civil periods; don’t sit on your rights—file soon while evidence is fresh.

13) Quick checklists

Move-in kit (both sides):

Signed inventory & condition report + photos/video (walls, floors, ceilings, appliances, meter readings).
List of keys/cards/remotes and costs to replace.
Clear rules on pets, paint, drilling, and alterations.

Move-out kit (lessor):

Joint inspection notes, dated photos.
Final utility bills, association dues statement.
Quotes/receipts for repairs/cleaning.
Itemized SOA + net refund and OR.

Move-out kit (lessee):

Demand letter with bank details and forwarding address.
Copies of receipts proving you settled utilities/dues.
Your move-in vs. move-out photo set.

14) FAQs

Can the landlord insist the deposit will automatically pay the last month’s rent? Only if the lease says so (or the landlord agrees in writing). Otherwise, the deposit remains security, not rent.

The unit was freshly painted before move-in—do I have to repaint before moving out? Not by default. Repainting is chargeable only if you caused unusual damage or unapproved colors that require corrective work.

How long can the landlord hold the deposit? If the lease is silent, return the net within a reasonable time after turnover and final bills—~30 days is common practice. Longer holds require valid reasons (e.g., pending association true-ups) and partial refunds should be released when known.

What if the landlord refuses to itemize? Send a written demand. Lack of itemization and proof often leads courts to order full refund plus interest.

Can the deposit be forfeited because I ended early? Only to the extent the lease validly sets liquidated damages or the lessor proves actual loss (after mitigation). A blanket forfeiture with no breach or loss is vulnerable.

15) Bottom line

A security deposit is not a windfall; it’s a trust-type holdback for specific, provable liabilities.
Lessor: deduct only what the lease and evidence support; itemize and return the balance promptly.
Lessee: document from day 1, clear your utilities/dues, fix minor issues before turnover, and demand in writing.
When in doubt, courts default to refund + interest for vague, unsupported, or punitive deductions—and they can trim excessive penalties.

This is general information for the Philippine setting and not legal advice. For high-value commercial fit-outs, association disputes, or cross-border owners/tenants, get counsel to tailor your clauses, turnover protocols, and evidence strategy.