Introduction

In Philippine leasing practice, “security deposits” and “unfinished” or unsigned lease contracts are common flashpoints. Tenants often assume that if the contract was never signed—or the lease never “pushed through”—the landlord must return everything. Landlords, on the other hand, may assume they can automatically keep the deposit (or even charge more) because they “reserved” the unit or “lost time.”

The truth is more nuanced: a landlord may be able to apply or retain a deposit and/or claim damages in some situations, but not automatically and not without legal basis and proof. The enforceability depends on (1) whether a binding lease (or binding reservation to lease) existed, (2) what the deposit was legally meant to secure, (3) what the parties agreed to (even orally), and (4) what damages can be proven.

This article explains the key rules, typical scenarios, and practical guidance—grounded in Philippine civil law principles—without assuming any one fact pattern.

Important note (general information): This is an overview of Philippine legal principles and common practice, not legal advice. Outcomes depend heavily on the facts, the documents, and local ordinances/regulations.

Core Concepts and Vocabulary (Because Words Matter)

1) Lease can exist even without a signed contract

Under Philippine civil law, contracts are generally perfected by consent—a “meeting of minds” on essential terms (usually: the property, the rent, and the duration). A signature is strong evidence, but not always required to prove a lease exists.

However, certain contracts must be in writing to be enforceable under the Statute of Frauds, including leases for a period longer than one year. Even then, if the agreement was partly executed (e.g., tenant paid and took possession), the writing requirement is typically not a shield to escape obligations.

Practical takeaway: An “unfinished” lease document does not automatically mean “no contract.”

2) Security deposit is not automatically a penalty

A security deposit is commonly intended as security for performance: unpaid rent, utilities, and damage beyond ordinary wear and tear, and other obligations expressly covered by the lease.

It is not automatically:

“earnest money” (more common in sales), or
a “forfeiture fee” for simply changing one’s mind—unless the parties clearly agreed to that function (and even then, it can be challenged if unconscionable or treated as an excessive penalty).

3) Damages are not automatic; they must be justified

Under Philippine law, damages are generally categorized as:

Actual/compensatory damages (real, proven loss)
Liquidated damages (pre-agreed amount in a contract)
Moral/exemplary damages (rare in pure contract disputes unless bad faith/abuse)
Attorney’s fees (allowed only in specific circumstances or if stipulated, and still scrutinized)

Key principle: You can’t just “charge damages” because you’re upset; you must have a legal basis and evidence.

The Legal Backbone (High-Level)

Philippine landlord-tenant disputes generally revolve around:

Civil Code provisions on leases (rights and obligations of lessor/lessee)
General contract law principles (consent, obligation, breach, rescission)
Rules on damages and penalty clauses
Rules against unjust enrichment
Good faith and abuse of rights (important when parties act oppressively)
Special rental regulations (e.g., rent control rules may apply to covered units; applicability depends on current thresholds and legislative extensions)

What a Security Deposit Legally Does (and Doesn’t Do)

Typical legitimate uses (if properly agreed and documented)

A landlord may generally apply the deposit to:

Unpaid rent (including prorated rent, if due)
Unpaid utilities that the tenant is obligated to pay (if billed/settled)
Repair costs for damage attributable to tenant fault or negligence, beyond ordinary wear and tear
Cleaning costs only if:
- the lease makes it chargeable, and
- the condition is beyond reasonable “ordinary use”
Other specific obligations clearly listed in the lease (e.g., replacement of missing items in an inventory list)

What landlords usually cannot do (without a clear legal basis)

A landlord generally cannot automatically:

keep the deposit as a “windfall” with no accounting,
charge refurbishment or improvements that are not linked to tenant fault,
charge normal wear and tear as “damage,”
deduct arbitrary amounts without receipts/estimates and explanation,
apply the deposit to penalties that are excessive or not clearly agreed.

Return and accounting

Even when deductions are valid, good practice—and often the practical expectation in disputes—is:

itemized deductions
supporting receipts/quotations
return of the balance within a reasonable time after turnover and final utility computation

Failure to account can expose the landlord to claims for refund and, in extreme cases, damages for bad faith.

“Unfinished” Lease Contracts: Common Scenarios and Who Owes What

Below are the most frequent Philippine fact patterns.

Scenario A: Tenant paid a “deposit,” but never moved in and nothing else happened

Issue: Was there a binding lease or at least a binding reservation contract?

If the parties never agreed on essential terms (rent, duration, move-in date, key conditions), the tenant may argue there was no perfected lease—just negotiations.
If the landlord calls the payment a “security deposit,” but the tenant never occupied the unit and no lease began, the tenant can argue the deposit must be returned, unless the landlord proves a different agreed purpose (like a non-refundable reservation fee).
If there was a clear agreement like: “Pay X to reserve the unit; if you back out, it’s forfeited,” the landlord may try to keep it as liquidated damages/penalty—but the amount can still be challenged if excessive.

What landlords can claim: Only losses they can justify (e.g., they held the unit off the market due to a clear reservation deal). What tenants can claim: Refund if no contract or if forfeiture is unsupported/unreasonable.

Scenario B: Lease terms were agreed (even orally), tenant paid, but contract wasn’t signed yet

Here, a landlord has a stronger argument that a lease (or at least a binding commitment) existed if essential terms were settled and the tenant’s payment shows consent.

If the tenant backs out, the landlord may claim:

actual damages (e.g., lost rent for a reasonable period while re-leasing, advertising costs, brokerage fees actually paid) if proven, and/or
liquidated damages if a written agreement (even a reservation agreement) sets it.

But courts generally scrutinize “lost rent” claims:

Did the landlord try to mitigate by advertising and re-leasing promptly?
Is the claimed period reasonable (e.g., 1 month vs. 6 months)?
Was the unit truly held exclusively for the tenant?

Scenario C: Tenant moved in / took possession, then backs out early (pre-termination)

Once possession begins, the lease is clearly in effect (even if paperwork is imperfect). If the tenant leaves before the lease term ends, the landlord may claim:

unpaid rent up to the date of surrender/turnover,
reasonable damages (like rent for the remaining term) subject to mitigation and the contract’s stipulations,
forfeiture of deposit if the lease clearly allows applying it to unpaid rent/damages,
agreed penalties or liquidated damages, subject to judicial reduction if excessive.

Key nuance: A clause that demands the entire remaining rent as “damages” can be attacked as an excessive penalty if it functions as one and results in unjust enrichment—especially if the unit is re-leased quickly.

Scenario D: Landlord fails to deliver the unit (or delivers a defective unit), tenant cancels

If the landlord cannot deliver possession at the agreed time, or the premises are not as represented/fit for the agreed use, the tenant may have grounds to:

demand return of the deposit,
cancel/rescind the agreement,
claim actual damages (e.g., cost of temporary lodging) if causally linked and proven.

Bad-faith misrepresentation can raise the risk of additional liability (though moral/exemplary damages require a higher showing and are not automatic).

Scenario E: Lease is for more than 1 year and there’s no written contract

This can trigger Statute of Frauds enforceability issues. But if parties acted on it (payments, possession, acceptance), it can become enforceable as a partly performed agreement.

Practical result: Neither side should assume “no signature = no obligations.”

Can a Landlord “Still Charge Damages” Without a Final Contract?

The short rule

Yes, sometimes—but only if the landlord can show a valid legal basis (contract or quasi-contract) and prove loss.

Two main pathways landlords use

Pathway 1: Contract-based damages (breach of lease or reservation agreement)

If there was:

a perfected lease (even oral, depending on term and performance), or
a written reservation agreement or documented acceptance of terms,

then backing out can be treated as breach. The landlord may pursue:

actual damages, and/or
liquidated damages/penalty if stipulated.

Pathway 2: Quasi-contract / unjust enrichment

If the situation is messy (no clear contract), a landlord might argue the tenant should not be unjustly enriched by getting money back when the landlord incurred costs solely because of the tenant’s commitment.

But unjust enrichment claims still require:

a clear benefit to one party,
a corresponding loss to the other,
absence of a lawful cause to retain the benefit.

This principle cuts both ways: it can also support a tenant’s refund claim when the landlord keeps money without basis.

Liquidated Damages, Forfeiture Clauses, and Judicial Reduction

Many leases/reservation forms include:

“Deposit is non-refundable if tenant backs out,” or
“Tenant forfeits deposit upon pre-termination,” or
“Penalty of X months’ rent for early termination.”

In Philippine law, penalty clauses and liquidated damages are generally allowed, but courts can reduce them if they are iniquitous or unconscionable or if there has been partial performance. In other words:

A forfeiture might be enforceable in principle,
but the amount may be reduced if it’s excessive relative to the actual harm.

Practical benchmark (not a strict rule): If the landlord re-leases quickly, retaining multiple months’ rent as “penalty” becomes harder to justify.

Actual Damages: What Landlords Must Prove

If a landlord sues (or withholds a deposit) for actual damages, they should be prepared to show:

Causation: Loss was caused by tenant’s breach.
Proof of amount: Receipts, contracts, official statements, repair quotations, photos, inventory lists, utility bills.
Reasonableness: Costs and time claimed are reasonable.
Mitigation efforts: Steps taken to re-lease or reduce loss.

Examples of potentially valid actual damages

Unpaid rent for a reasonable period until re-leased
Advertising/listing fees actually paid
Broker’s commission if actually paid due to the failed lease (and contract ties it to tenant’s breach)
Repairs for tenant-caused damage (with proof)

Weak or commonly rejected claims (without strong proof)

“Opportunity cost” without evidence
Blanket “inconvenience” charges
Full remaining term rent when the unit was re-leased soon
Renovations/improvements not tied to tenant-caused damage

Tenant Rights: How to Challenge Improper Withholding

A tenant disputing deductions/forfeiture typically argues:

No perfected contract / no binding reservation → refund is due.
Deposit is security, not a penalty → may only cover proven obligations.
Forfeiture clause is excessive/unconscionable → should be reduced or invalidated.
No proof of damage/cost → deductions are improper.
Bad faith / abuse of rights if landlord withholds money oppressively, threatens, or makes baseless charges.

Tenants should preserve:

chats/emails showing negotiations and agreed terms,
receipts and transfer proofs,
move-in/move-out photos and inspection checklists,
demand letters and responses.

Practical Dispute Roadmap (Philippines)

1) Start with a written demand and accounting

Whether landlord or tenant, a clear letter helps:

timeline of events
what amount is held/claimed
itemization and supporting documents
deadline to comply

2) Barangay conciliation (often required)

Many disputes between individuals in the same city/municipality are routed through barangay mediation first, subject to jurisdictional rules and exceptions.

3) Small Claims (for money claims within the limit)

If the dispute is primarily about refund of deposit or payment of a specific sum, small claims may be an efficient venue (procedural rules apply and the court will require documentary proof).

4) Regular civil case (if complex)

If there are complicated issues (rescission, substantial damages, injunction, multiple parties), it may go beyond small claims.

Common Clauses and How to Make Them More Enforceable (and Fair)

For landlords

Use a separate reservation agreement if you accept money before move-in.
- Define whether it is refundable.
- Define conditions for forfeiture.
- Keep the amount proportionate (to reduce risk of judicial reduction).
Clearly distinguish:
- advance rent (applied to rent),
- security deposit (security for obligations),
- reservation fee (to hold the unit).
Provide inspection checklist and photo documentation at turnover and return.
Commit to an accounting timeline for deposit return.

For tenants

Ask for a written acknowledgment stating what the payment is for.
If it’s a security deposit, request the clause on return and deductions.
Avoid paying “non-refundable” sums unless you accept the risk and the amount is reasonable.
Before move-out, request a joint inspection and written assessment.

Quick Issue Spotter: Who Usually Has the Stronger Position?

Tenant tends to be stronger when:

there was no clear agreement on essential lease terms,
the landlord cannot show a binding reservation deal,
the landlord provides no itemized accounting,
forfeiture is large and looks like a windfall,
the landlord re-leased quickly but still claims huge “lost rent.”

Landlord tends to be stronger when:

there is a clear written lease/reservation agreement,
essential terms were agreed and evidenced by messages/receipts,
the landlord can document real loss and mitigation efforts,
the tenant took possession and then pre-terminated without contractual basis.

Frequently Asked Questions

“If we didn’t sign, can the landlord keep my deposit?”

Not automatically. The landlord needs a legal basis: either (a) a binding agreement that the amount is forfeitable upon backing out, or (b) proof that the deposit covers specific losses caused by the tenant.

“Can a landlord charge damages beyond the deposit?”

Yes, in principle, if damages exceed the deposit and are legally recoverable. But the landlord must prove the basis and amount.

“Is a ‘non-refundable deposit’ always valid?”

Not always. Even if agreed, courts can scrutinize it as a penalty and reduce it if unconscionable, especially when it’s disproportionate to actual harm.

“Can the deposit automatically cover repainting and deep cleaning?”

Only if justified by tenant-caused condition beyond ordinary wear and tear and supported by proof—and ideally authorized by contract terms.

Practical Checklists

If you’re a landlord holding a deposit after a failed/unfinished lease

Identify: security deposit vs advance rent vs reservation fee
Gather proof: agreement/messages, receipts, marketing/broker invoices
Compute actual loss reasonably (and show mitigation)
Provide itemized accounting and return any excess
Avoid overreaching penalties likely to be reduced in court

If you’re a tenant seeking a refund

Collect proof of payment and what it was for
Gather negotiation records (rent, term, move-in date, conditions)
Demand itemized accounting and supporting documents
Document the unit condition if you took possession
Consider barangay mediation / small claims for a clean money claim

Bottom Line

Can landlords still charge damages when the lease contract is unfinished or unsigned? Sometimes, yes—but only when there is a binding agreement (lease or reservation) or a solid legal basis, and the landlord can prove actual loss or rely on a reasonable liquidated damages clause. A security deposit is primarily a guarantee, not a blank check for penalties. Conversely, tenants cannot always escape liability by pointing to a missing signature if the facts show a real meeting of minds and reliance.

If you want, paste (1) the exact deposit clause or reservation message and (2) the timeline (payment date, move-in date, cancellation date, whether possession happened). I can map the likely claims/defenses and what evidence matters most—still in general informational terms.