Verbal Lease, Early Termination, and Deposit Refunds in the Philippines

Introduction

In the Philippine legal system, lease agreements for real property, particularly residential and commercial spaces, are primarily governed by the Civil Code of the Philippines (Republic Act No. 386), specifically under Title VI on Lease (Articles 1643 to 1688). These provisions outline the rights and obligations of lessors (landlords) and lessees (tenants). While written contracts are common and preferred for clarity and enforceability, verbal leases are also recognized under Philippine law. Issues such as early termination of leases and the refund of security deposits frequently arise in landlord-tenant disputes, often leading to cases before barangay (village) mediation, the courts, or regulatory bodies like the Housing and Land Use Regulatory Board (HLURB) for certain properties.

This article comprehensively explores verbal leases, early termination provisions, and deposit refund mechanisms within the Philippine context. It draws from statutory laws, jurisprudence from the Supreme Court, and established legal principles. Understanding these elements is crucial for both lessors and lessees to avoid conflicts and ensure compliance with the law.

Verbal Leases: Validity and Enforceability

Legal Basis for Verbal Leases

Under Article 1643 of the Civil Code, a lease is defined as a contract whereby one party (lessor) binds himself to grant to another (lessee) the enjoyment or use of a thing for a price certain and for a period which may be definite or indefinite. Importantly, Philippine law does not require leases to be in writing to be valid. Article 1356 of the Civil Code states that contracts are obligatory in whatever form they may have been entered into, provided all essential requisites for their validity are present: consent, object, and cause.

Verbal leases, therefore, are legally binding as long as there is mutual agreement on key terms such as the property description, rental amount, payment terms, duration, and other essential conditions. This is supported by Supreme Court rulings, such as in Dalion v. Court of Appeals (G.R. No. 78903, 1990), where the Court affirmed that oral contracts are enforceable if proven by competent evidence.

However, verbal agreements pose evidentiary challenges. In disputes, the burden of proof lies on the party asserting the existence of the lease. Acceptable evidence includes witness testimonies, payment receipts, utility bills in the lessee's name, or any acts indicating possession with the lessor's consent (Article 1403, Civil Code, on the Statute of Frauds, which exempts executed oral contracts from writing requirements).

Limitations and Risks of Verbal Leases

While valid, verbal leases are subject to certain limitations:

Duration Constraints: Under Article 1687, if the lease period is not fixed, it is presumed to be from year to year (for rural lands), month to month (if rent is monthly), or day to day (if daily). This implies periodic tenancies, which can be terminated with proper notice.
Statute of Frauds: For leases exceeding one year, the Statute of Frauds (Article 1403(2)(e)) requires a written note or memorandum if the contract is not yet partially executed. However, if the lessee has already taken possession and paid rent, the verbal lease becomes enforceable even beyond one year (Paredes v. Espino, G.R. No. L-23351, 1968).
Special Laws: In residential rentals, Republic Act No. 9653 (Rent Control Act of 2009), as extended by subsequent resolutions, applies to units in the National Capital Region (NCR) and other highly urbanized areas with monthly rent not exceeding PHP 10,000 (as of extensions up to 2021; check current thresholds). This law regulates rent increases but does not invalidate verbal leases. For boarding houses or dormitories, additional regulations under local ordinances may apply.
Risks: Ambiguities in verbal terms often lead to disputes over rent adjustments, maintenance responsibilities, or subleasing. Lessees may face eviction without clear proof, while lessors risk non-payment claims.

In practice, courts encourage written leases to prevent misunderstandings, but verbal ones remain common in informal arrangements, such as family rentals or short-term stays.

Early Termination of Leases

Grounds for Early Termination

Early termination refers to ending the lease before the agreed-upon period expires. The Civil Code distinguishes between fixed-term and indefinite-term leases.

Fixed-Term Leases: If a definite period is agreed upon (e.g., one year), neither party can unilaterally terminate without cause (Article 1687). Valid grounds for lessor-initiated termination include:
- Non-payment of rent (Article 1659).
- Violation of lease terms, such as unauthorized subleasing (Article 1657).
- Need for repairs or personal use by the lessor or immediate family (Article 1680, but with notice and compensation requirements).
- Expiry of the term.
For lessee-initiated termination, grounds are limited to implied warranties, such as the property becoming uninhabitable (Article 1661) or serious breach by the lessor (e.g., failure to maintain peaceful possession under Article 1654).
Indefinite or Periodic Leases: These can be terminated by either party with notice. For monthly rentals, 15 days' notice is required if the rent is PHP 1,000 or less, or 30 days otherwise (Article 1687). Supreme Court cases like Rosales v. CFI of Misamis Oriental (G.R. No. L-40614, 1985) emphasize that notice must be in writing or proven verbally to avoid disputes.

Procedures and Remedies

Notice Requirements: Termination requires notice, which can be verbal but is advisable in writing for proof. In ejectment cases (unlawful detainer under Rule 70, Rules of Court), failure to give proper notice can lead to case dismissal.
Barangay Conciliation: Under the Katarungang Pambarangay Law (Presidential Decree No. 1508, as amended by Republic Act No. 7160), disputes must first undergo barangay mediation before court filing, except in cases of imminent violence.
Court Actions: If mediation fails, lessors can file for ejectment in the Municipal Trial Court. Lessees can seek damages or specific performance if termination is wrongful.
Special Considerations: Under the Rent Control Act, evictions are restricted; grounds are limited, and rent cannot be increased beyond allowed rates (e.g., 4-7% annually depending on extensions). For agricultural leases, the Agricultural Land Reform Code (RA 3844) provides tenant protections against early termination.
Force Majeure: Events like natural disasters may allow termination without liability (Article 1660), as seen in cases during the COVID-19 pandemic where courts granted rent moratoriums under Bayanihan Acts (RA 11469 and 11494).

Early termination without valid cause exposes the breaching party to damages, including lost rentals or relocation costs (Article 1659).

Deposit Refunds: Rights and Obligations

Nature and Purpose of Deposits

Security deposits, typically one to three months' rent, serve as protection against damages, unpaid utilities, or rent arrears (Article 1678). Advance rentals may also be required but are distinct. Deposits are not income for the lessor and must be refunded upon lease end.

Refund Process

Timing and Conditions: Upon termination, the lessor must refund the deposit within a reasonable time, typically after inspection (Article 1678). Deductions are allowed only for:
- Unpaid rent or utilities.
- Repairs for damages beyond normal wear and tear (e.g., broken fixtures, not faded paint).
- Cleaning costs if stipulated.
The lessor must provide an itemized list of deductions; failure to do so may entitle the lessee to full refund plus damages (Cequena v. Bolante, G.R. No. 137182, 2000).
Interest on Deposits: Under Article 1678, deposits do not earn interest unless placed in a bank account, but jurisprudence rarely enforces this unless agreed upon.
Disputes: If withheld unjustly, lessees can demand refund via barangay mediation or small claims court (for amounts up to PHP 400,000 under A.M. No. 08-8-7-SC). Courts award attorney's fees and moral damages in bad faith cases.
Special Laws: In rent-controlled areas, deposits are capped (e.g., two months' rent under RA 9653). For condominiums, the Condominium Act (RA 4726) may impose association rules on deposits.

Common Issues and Protections

Forfeiture Clauses: Verbal agreements may imply no forfeiture, but if present, they must be reasonable; unconscionable clauses are void (Article 1306).
Abandonment: If the lessee abandons the property, the lessor can retain the deposit for losses but must mitigate damages by re-leasing (Article 2208).
Jurisprudence: In Spouses Cruz v. Mercantil (G.R. No. 173472, 2011), the Court ruled that deposits must be refunded promptly, with interest if delayed unreasonably.

Lessees should document the property's condition at move-in (e.g., photos) to contest deductions.

Interplay Between Verbal Leases, Early Termination, and Deposits

In verbal leases, ambiguities amplify issues in early termination and deposit refunds. For instance, without written terms, proving "cause" for termination or justifying deductions becomes contentious. Courts apply the principle of mutuality (Article 1308) and interpret doubts against the drafter, but in verbal cases, equity prevails.

Conclusion

Verbal leases offer flexibility but demand caution due to evidentiary hurdles. Early termination requires adherence to notice and grounds to avoid liability, while deposit refunds underscore the lessor's fiduciary duty. Parties are advised to formalize agreements in writing and seek legal counsel for disputes. These principles ensure fair dealings in the Philippine rental market, balancing property rights with tenant protections under the Civil Code and related laws.