Executive summary (quick hits)

Two different things. Advance rent is payment for a future rental period (often the first or “last” month). A security deposit is a guarantee against unpaid obligations and damage beyond normal wear and tear.
Statutory caps for covered units. For residential units covered by rent-control rules, a lessor may not demand more than one (1) month’s advance rent and more than two (2) months’ security deposit.
Return of deposit. When the lease ends, the lessor must return the deposit (minus lawful deductions) within a reasonable time—commonly within 30 days if stipulated or under rent-control guidelines—together with an itemized statement of deductions.
Using the deposit to pay rent. Tenants cannot unilaterally treat the security deposit as the “last month’s rent” unless the lease expressly allows it or the lessor agrees in writing.
Outside rent-control coverage. If a unit is not covered by current rent-control thresholds, the Civil Code and the parties’ written lease govern. Contractual caps and rules will control so long as they do not violate law, morals, good customs, or public policy.
Receipts and records. Always require and issue written receipts clearly labeling amounts as advance rent or security deposit.
Common deductions. Unpaid rent, utilities, association dues, and reasonable repair costs for damage beyond normal wear and tear. Routine repainting and minor wear are not chargeable to the tenant.
Pre-termination. Forfeiture of deposit due to a tenant’s early termination is enforceable only if clearly stipulated and not unconscionable; courts may reduce excessive penalties.
Remedies. Deposit disputes typically start with Barangay conciliation. Monetary claims may be filed as small claims (no lawyers required) if within the jurisdictional amount, or included in an unlawful detainer case if possession is also in issue.

Legal sources and coverage

Civil Code of the Philippines (Arts. 1642–1688 on lease). Establishes basic rights and duties of lessors and lessees, damages, penalty clauses, and principles like good faith, compensation, and consignation.
Rent control statutes and implementing rules. The current rent-control regime (originating from Republic Act No. 9653, the “Rent Control Act of 2009,” as extended and implemented over time) sets the one-month advance and two-months deposit maximums for covered residential rentals (including rooms, bedspaces, and boarding houses) and excludes transient lodging like hotels and motels. Coverage thresholds (i.e., which rentals are “covered”) and some timelines are periodically reset by the housing authorities, so always check the latest coverage levels in force for your unit.
Local ordinances and building rules. LGUs and building administrators (e.g., condominium corporations) may impose procedural requirements (move-in/out forms, inspection windows) that complement but cannot override national law.
Tax regulations. The National Internal Revenue Code and BIR issuances govern receipting and tax timing (see notes under “Tax & accounting”).

Key definitions

Advance rental (advance rent). Payment for a future rental period. It’s income to the lessor upon receipt (unless otherwise accounted for under contract and tax rules). In practice, leases specify whether the advance covers the first or last month. Calling it a “last-month deposit” does not make it a “deposit”—it remains advance rent if it’s earmarked to pay rent.
Security deposit. A guarantee, not rent. It secures the tenant’s obligations and is refundable at lease end, net of lawful deductions. The deposit remains the tenant’s property unless and until lawfully applied.

Caps and collection

For rent-controlled residential units

Maximums at move-in:
- Advance rent: up to 1 month.
- Security deposit: up to 2 months.
No “key money” or disguised extras. A lessor cannot sidestep the caps by inventing other “deposits” (e.g., “maintenance,” “refurbishing,” “holdover”) that function like security deposits. Legitimate non-refundable charges (e.g., application fee) must be reasonable, clearly itemized, and not substitutes for a capped deposit.

For non-covered residential units (e.g., high-end rentals)

The Civil Code and lease stipulations govern. While market practice often mirrors 2 months deposit + 1 month advance, the parties may agree otherwise, subject to general rules on unconscionability and penalties.

Holding and handling the security deposit

Trust character. The deposit should be kept for the tenant’s benefit and not treated as the lessor’s income unless and until it is applied or forfeited under the lease.
Interest. National law does not generally require that security deposits earn interest. Interest is paid only if the lease expressly so provides (or if a special law/ordinance so requires).
Separate tracking. Maintain a separate ledger showing receipt, any interim application (with tenant’s written consent or under a contractual power to apply), and the final refund.

During the lease

Advance rent application. Apply strictly to the period stated in the lease (e.g., Month 1 or the agreed “last month”).
No unilateral conversion. A tenant may not unilaterally convert the security deposit into a rent payment during the term, unless the lease allows it or the lessor consents in writing.
Replenishment. If the lease permits the lessor to apply the deposit mid-term (e.g., to cure unpaid utilities or accidental damage), it should also require the tenant to replenish the deposit within a fixed period (commonly 5–15 days).
Top-ups after rent increases. A clause may require the tenant to top up the deposit to keep it equal to a stated number of months of current rent after an increase.
Sale of the property. Best practice (and often stipulated) is for the seller-lessor to transfer the deposit to the buyer-lessor and notify the tenant in writing; the new owner then assumes the obligation to return it at lease end.

End of lease: inspections, deductions, and refunds

Move-out inspection. Conduct a joint inspection close to the move-out date. Use an inventory/condition checklist that mirrors the move-in record.
Normal wear vs. damage.
- Normal wear (not chargeable): minor nail holes, gentle paint fading, light scuffs, ordinary appliance wear.
- Chargeable damage: broken tiles, burns, large holes, missing fixtures, heavy stains, pest infestations due to neglect, unauthorized alterations, and unpaid utilities/dues.
Deductions must be reasonable and documented. Keep receipts/quotations. Provide an itemized statement with the refund.
Timeline to return. Return the unused balance of the deposit within a reasonable time after lease end—30 days is the widely used benchmark in leases and rent-control guidance.
Forfeiture for pre-termination. Enforceable only if expressly provided and not unconscionable; courts may reduce excessive penalties under the Civil Code.
Abandonment. If the tenant abandons the unit owing rent, the lessor may apply the deposit to the arrears and lawful charges, subject to accounting to the tenant.

Prohibited acts and common pitfalls

Exceeding the statutory caps (for covered units) for advance rent or deposit.
Lockouts, removing doors, or cutting utilities to force payment or surrender—these are illegal self-help measures and can expose the lessor to criminal and civil liability.
Withholding the entire deposit for routine repainting or minor wear.
No receipts. Failing to issue proper written receipts (and BIR-registered official receipts for amounts that constitute income).
Disguised deposits. Re-labeling extra deposits as non-refundable “fees” that effectively secure tenant obligations.

Remedies and enforcement

Barangay Justice System (Katarungang Pambarangay). If parties reside or the property lies in the same city/municipality, most money disputes (like deposit refunds) must go through barangay conciliation before court. Bring your lease, receipts, photos, and the move-in/move-out checklist.
Small Claims Court. Pure money claims (e.g., refund of deposit, repair costs) may be filed as small claims if within the current jurisdictional threshold; lawyers are not required.
Ejectment (Unlawful Detainer). If possession is disputed (e.g., tenant overstays or stops paying rent), file an unlawful detainer case in the first-level court. Claims for back rent and damages (including application/forfeiture of deposit) can be included.
Consignation. If a lessor refuses to accept rent (e.g., to set up a default), the tenant may consign the rent with the court or a competent authority under the Civil Code to avoid default.
Administrative/consumer avenues. In some cities, housing boards or tenant-landlord desks mediate disputes; building administrators also have internal processes for unit condition disputes.

Prescription. Actions on written leases generally prescribe in 10 years (6 years if purely oral), counted from when the claim accrues (e.g., the date the refund became due).

Tax & accounting notes (practical, high-level)

Advance rent is typically recognized as income upon receipt by the lessor and should be covered by a BIR-registered official receipt; it may be subject to withholding and VAT/percentage tax, depending on the lessor’s status.
Security deposits are not income when received; they become income only if applied to rent or forfeited. Use an acknowledgment receipt and keep the amounts on the balance sheet (liability) until settlement.
Tenants paying business rent should observe withholding rules and secure official receipts for rent and acknowledgment for deposits. Coordinate with your accountant for current rates and documentation.

Special settings

Boarding houses/bedspaces/dorms. Generally treated as residential leases; the same caps for covered units apply.
Transient stays (hotels, motels, tourist homes). Typically excluded from rent-control coverage; deposits and advance payments follow contract and general law.
Short-term furnished rentals (e.g., serviced apartments). If the setup is essentially a lease of a residential unit, rent-control rules may still apply if the unit is covered; otherwise, contract governs.

Model clauses you can adapt

Advance Rent. “Upon signing, Lessee shall pay one (1) month advance rent to be applied to the rent for [specify month: the first month of the term / the last month of the term]. Advance rent is non-refundable except as otherwise provided by law.”

Security Deposit. “Upon signing, Lessee shall pay a security deposit equivalent to two (2) months’ rent as security for performance of all obligations under this Lease. The deposit shall not be treated as rent and may be applied by Lessor only to (a) unpaid rent, (b) unpaid utilities/association dues, and (c) reasonable repair costs for damage beyond normal wear and tear. If any portion is applied during the term, Lessee shall replenish the deposit within [7] days of written notice.”

Top-Up After Rent Increase. “If the monthly rent increases under this Lease, Lessee shall top up the security deposit within [15] days so that it remains equal to [two] months of the then-current rent.”

Inspection and Refund. “Within [3] days before move-out, the Parties shall jointly inspect the Premises. Within [30] days from the end of the Lease and turnover of the keys, Lessor shall return the unused balance of the security deposit with an itemized statement of deductions and supporting receipts/quotations.”

Pre-Termination. “If Lessee pre-terminates the Lease without legal cause and without the written consent of Lessor, the security deposit shall be forfeited as liquidated damages, without prejudice to Lessor’s right to recover additional proven damages. The Parties acknowledge that courts may reduce penalties deemed unconscionable.”

Assignment of Deposit on Sale. “If the Premises are sold, Lessor shall assign the security deposit to the purchaser and notify Lessee in writing. The purchaser shall assume the obligation to refund the deposit in accordance with this Lease.”

Practical checklists

For landlords

Use a written lease. Spell out caps, what counts as normal wear, deductions, inspection windows, top-ups, and refund timelines.
Keep a move-in inventory with date-stamped photos.
Issue clear receipts labeling advance rent vs deposit.
Account promptly at move-out; return the balance within the agreed timeline.

For tenants

Confirm whether you are rent-control covered; insist on the 1-month advance/2-months deposit cap if so.
Avoid paying unlabelled “fees.” Get receipts that explicitly say “advance rent” or “security deposit.”
Do a walk-through on move-in and move-out; document everything.
If the landlord delays the refund, send a formal demand with your bank details and a deadline; escalate via barangay if needed.

Frequently asked questions

Can I use my security deposit to pay the last month’s rent? Not unless your lease says so or your landlord agrees in writing. Otherwise, the deposit is meant to cover damage/arrears and is refundable at the end.

Is the landlord required to pay interest on the deposit? There’s no general statutory requirement for interest. Interest applies only if stipulated (or if a special rule applies in your locality/building).

How soon must the deposit be returned? Follow your lease. Thirty (30) days after turnover is a widely used standard. The lessor must also provide an itemized deduction list.

What if the landlord required three months’ deposit? If your unit is rent-control covered, demanding more than two months deposit (or one month advance) is not allowed. If not covered, the Civil Code and the contract control; negotiate for fair terms.

Can the landlord charge me for repainting after a one-year stay? Only if repainting is due to damage beyond normal wear (e.g., large stains, unauthorized colors). Ordinary fading or minor marks are not chargeable.

Final notes

Always anchor your arrangement on a clear, written lease and proper receipts.
Rent-control coverage thresholds and timelines are periodically updated. If your unit may be covered, verify the current thresholds with housing authorities before you sign.
This article provides general legal information. For high-value leases or complex fact patterns, consult counsel for tailored advice.