What legal provisions govern the non-refund of premises security deposits?

In practice, disputes relating to the non-refund of premises security deposits are becoming increasingly common and complex. The law provides specific regulations governing such an issue, while also establishing dispute resolution mechanisms through negotiation, arbitration, or court proceedings to safeguard the legitimate rights and interests of the parties involved.

I. What circumstances may lead to the non-refund of a premises security deposit?

In lease transactions, a security deposit serves as a security measure to bind the obligations between the lessee and the lessor. However, in reality, there are various circumstances that may result in the non-refund of such deposits, including:

• The lessee breaches contractual obligations (e.g., unilaterally terminates the contract prior to its expiry, causes damage to the leased property, or delays rental payments)
• The lessee uses the premises for improper purposes, thereby adversely affecting the legitimate interests of the lessor.
• The contract contains explicit provisions stipulating that the deposit shall not be refunded in the case of a breach by either party.

In summary, whether a security deposit is refundable largely depends on the contractual terms and the extent of the breach committed by the parties. Therefore, careful and well-structured contract drafting from the outset is a main factor in mitigating risks.

II. What legal provisions govern the non-refund of premises security deposits?

1. How does the law regulate the non-refund of security deposits in commercial transactions?

Pursuant to Article 328 of the Civil Code 2015, a security deposit may only be forfeited if the depositing party refuses to perform the contract or unilaterally terminates the agreement prior to its agreed term, unless otherwise agreed by the parties.

Conversely, if the failure to perform the contract arises from objective causes, such as force majeure or reasons attributable to authorities or third parties beyond the control of the deposit-holding party, such party must return the deposit and shall not be subject to deposit sanctions, in accordance with Article 156 of the Civil Code 2015. 

2. In the case of a dispute, who has the authority to determine the non-refund of a premises security deposit?

According to Clause 2, Article 328 of the Civil Code 2015, where a contract has been concluded and performed, the deposit must be returned to the depositing party or offset against payment obligations. Conversely:

• If the depositing party refuses to conclude or perform the contract, the deposit shall belong to the receiving party. If the receiving party fails to perform the contract, it must return the deposit along with an equivalent amount, unless otherwise agreed.
• In the case of a dispute where the parties cannot reach an agreement on the refund, they have the right to request a competent dispute resolution body to settle the matter. At that stage, the Court or Arbitration Tribunal shall have final authority to issue a legally binding decision based on evidence and contractual agreements, thereby determining the obligations of the parties.

Accordingly, the determination of whether a deposit is refundable depends on the contractual agreement and the nature of the breach (unilateral termination or non-performance). Where no agreement can be reached, the Court or Arbitration serves as the final adjudicatory body to ensure legal protection for the depositing party.

3. Is it possible to initiate legal proceedings against the lessor for failure to refund a security deposit?

Article 186 of the Civil Procedure Code 2015 provides that: Agencies, organizations, and individuals have the right to initiate lawsuits, either on their own behalf or through lawful representatives, before a competent court to protect their lawful rights and interests. Therefore, if the lessor fails to refund the deposit, the lessee has the right to file a lawsuit before a competent court to protect their legitimate interests.

Under Article 328 of the 2015 Civil Code, if the receiving party refuses to conclude or perform the contract, it must return the deposit and pay an equivalent amount, unless otherwise agreed. Failure to do so constitutes a breach of contract and leads to legal liability. In such disputes, the claimant may file a lawsuit at the People’s Court where the lessor resides or where the contract is performed.

4. In which cases is the lessor obligated to refund the security deposit?

Pursuant to Article 328 of the Civil Code 2015, the law clearly sets out the circumstances under which the lessor must refund the deposit, including:

• The contract has been duly concluded and fully performed: The lessor must return the deposit or offset it against contractual payment obligations.
• The lessor refuses to conclude or perform the contract: In such case, the lessor must return the deposit and pay an additional amount equivalent to the deposit value, unless otherwise agreed.
• Mutual agreement to terminate the contract: The refund shall be performed t in accordance with the parties’ agreement, which should preferably be documented in writing for legal certainty.
• Occurrence of force majeure: If the contract cannot be performed due to force majeure (e.g., natural disasters, epidemics), the lessor must still return the deposit.
• The deposit agreement is declared invalid: Where the agreement is deemed invalid due to legal violations, the lessor must return the deposit in accordance with the principle of restoring the original status of the parties.

III. Clarifications on issues relating to the non-refund of premises security deposits

1. Can the non-refund of a security deposit be considered fraud or misappropriation of property?

The non-refund of a security deposit may lead to criminal liability if accompanied by elements of fraud or misappropriation of property. Under Article 174 of the Criminal Code 2015 (as amended in 2017), if the lessor uses deceptive means, such as providing false information to induce the lessee into making a deposit, and subsequently appropriates such deposit, such a conduct may constitute the criminal offence of fraud or misappropriation of property. In such cases, the act is not merely a contractual breach but may amount to a criminal offence if all statutory elements are satisfied.

2. In cases of co-ownership of real estate, how is liability determined when a deposit is not refunded?

Where real estate is co-owned, any disposition of the property, including entering into a deposit agreement, requires the consent of all co-owners pursuant to Articles 213, 217, and 218 of the Civil Code 2015.

• If a deposit agreement is concluded without the consent of all co-owners, such agreement shall be invalid. Under Article 131 of the Civil Code 2015, the parties must restore to each other what they have received, and the party at fault must compensate for any damages caused.
• If the deposit agreement is valid but the receiving party refuses to conclude or perform the contract, then under Clause 2, Article 328, such party must return the deposit and pay an equivalent amount, unless otherwise agreed.

Note: In co-ownership, all co-owners take responsibility for the deposit, even if they are not the direct recipients, and any transaction lacking unanimous consent is invalid.

Accordingly, liability for non-refund of the deposit lies with the receiving party, as it is the party in possession of the funds. If such a party deliberately refuses to refund, the depositing party has the right to initiate legal proceedings to recover the deposit and claim damages upon proof of fault.

3. Which contractual clauses help prevent risks related to non-refund of security deposits?

A main contractual provision to mitigate such risks is the deposit sanction clause. Specifically, the contract should clearly stipulate that if the receiving party fails to conclude or perform the contract, it must refund the full deposit and pay an additional equivalent amount.

This provision is consistent with Clause 2, Article 328 of the Civil Code 2015. Including such a clause helps clearly define legal consequences and impose binding obligations on the receiving party, thereby minimizing risks for the depositing party.

4. What effective legal measures can be taken to promptly address cases of non-refund of security deposits?

Effective legal measures include:

• First, the depositing party should issue a formal written demand for payment, specify a deadline, and retain all evidence as a legal basis.
• If unresolved, the depositing party may rely on Clause 2, Article 328 of the Civil Code 2015 and contractual provisions to demand refund and sanctions, or invoke fine clauses under Article 418 of the Civil Code.
• Where there is a risk of asset dissipation, the depositing party may request the court to apply interim emergency measures such as asset freezing or distraction. If the dispute persists, a lawsuit may be filed before the People’s Court to compel refund, sanctions, and damages; upon obtaining a judgment, enforcement may be sought through the civil judgment enforcement authority.

If there are signs of fraud or misappropriation, the depositing party may report the matter to the police for criminal handling under Article 174 of the Criminal Code. These steps help ensure protection of rights and expedite dispute resolution.

IV. Are you looking for a reputable law firm for advice on non-refund of premises security deposits?

If you are facing a dispute regarding the non-refund of a premises security deposit and require reliable legal consultation, contact NPLaw today. With a team of experienced lawyers specializing in contract law and civil dispute resolution, NPLaw will assist you in identifying optimal solutions and safeguarding your lawful rights and interests.