The Security Deposit

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1. Introduction

Security deposits are usually required in lease agreements. But what are they and is there a limit to how much they can be? This would usually depend on the lease agreement, but below is a discussion of what is generally found in lease agreements.

Lease agreements are contracts which contain the terms and conditions of the lease. It is voluntarily agreed upon and freely entered into by the lessor and the lessee. The lease agreement can be anything that the lessor and the lessee agree upon provided it is not contrary to law, morals, good customs, public order, or public policy. The same would also apply to sublease agreements.

2. Definition of Security Deposit

Security deposits are usually used as a guarantee so that the lessee will faithfully and fully comply with the terms and conditions of the lease. This means that, in most contracts, if the lessee violates any term or condition of the lease then the security deposit is forfeited in favor of the lessor.

For example, if the lessee brings in pets when pets are not allowed in the leased property or if the lessee abandons the leased property, then the lessor keeps the security deposit because the lessee broke the terms and conditions of the lease agreement.

3. The Amount of Security Deposit

In the Philippines, the amount of security deposit is usually based on the monthly rent. For example, a security deposit would be equivalent to 1-month rent or 2 months rent.

Generally, there is no limit to the security deposit that can be required by the lessor, except if the lease falls under Republic Act No. 9653 (the "Rent Control Act"), as extended and amended by the National Human Settlements Board Resolution No. 2021-02.

Under the Rent Control Act, the security deposit cannot be more than two (2) months of rent.

The Rent Control Act covers all residential units in the National Capital Region and other highly urbanized cities where the total monthly rent is between One Peso (Php1.00) and Ten Thousand Pesos (Php10,000.00) and all residential units in other areas where the total monthly rent is between One Peso (Php1.00) and Five Thousand Pesos (Php5,000.00).

4. The Purpose of Security Deposit

Usually, the lease agreement provides that the security deposit will be kept by the lessor during the duration of the lease. Most lease agreements would also state that the security deposit will not earn interest during the period of the lease. The exception is when the lease falls under the Rent Control Act.

Under the Rent Control Act, the security deposit should be kept in a bank under the lessor's account name during the duration of the lease and any and all interest earned by the security deposit shall be returned to the lessee at the end of the lease.

5. The Use of Security Deposit

Most lease agreements would provide that the security deposit cannot be used as rent payments. However, most lease agreements would provide that, aside from being a guarantee for full and faithful compliance with the terms and conditions of the lease agreement, it can also be used to pay for any unpaid bills (ex. electric bills, water bills, internet bills, etc.) that the lessee may have left behind when the lease ended. It would also often provide that the security deposit can be used to fix the damages caused to the property, aside from the usual wear and tear.

6. Returning the Security Deposit

Security deposits are usually returned after the lease period has ended and the lessee has vacated and returned the property. Most lease agreements would provide for a specific period after the surrender of the property within which the security deposit is returned. This is to allow the lessor to inspect the property and make sure that there are no damages or unpaid bills that can be charged against the security deposit.

If the security deposit is not returned within the period stated in the contract, the lessee can send a request letter or a demand letter for the return of the security deposit.

It must be noted that the parties may agree to different terms for the use and purpose of the security deposit provided that the same are not contrary to law, morals, good customs, public order, or public policy.

7. Conclusion

In conclusion, security deposits play a crucial role in lease agreements, serving as a form of assurance for lessors against potential breaches by lessees. Typically equivalent to one or two months' rent, these deposits are forfeited if lessees violate lease terms, such as bringing pets into a pet-free property or abandoning the premises. While there's generally no limit on deposit amounts, the Rent Control Act in the Philippines imposes a cap of two months' rent in certain cases, ensuring fairness in residential leases.

Throughout the lease term, the deposit is usually held by the lessor, though it may accrue interest for the lessee in accordance with the Rent Control Act. It's commonly understood that the deposit cannot cover rent but can be used for outstanding bills or property damages beyond normal wear and tear. Upon lease termination, the deposit is returned to the lessee after a property inspection, though delays may prompt lessees to issue formal requests for its release, ensuring transparency and fairness in lease agreements.

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