Are Non-Refundable Deposits Legal? (2024)

Mar 1, 2022 | By Avi Sinai | Read Time: 5 minutes

Updated: 12/27/2022

Non-refundable deposits are everywhere. We see them in business, consumer products, and various reservation systems. But is it legal? From the standpoint of business owners or service providers, it is easy to see why a non-refundable deposit is a great idea. If you have the leverage to ask for it, and the consumer is willing to give it to you, then why not?

The basic principle behind a security deposit is to take payment in advance so to avoid a future loss if the other party changes their minds. There are several types of security deposits that we all know:

• Security deposits in residential apartment leases
• Earnest money deposit for buyers in real estate transactions
• Deposit to secure a car order
• Special event venues and vendors often require non-refundable security deposits in advance

Are Non-Refundable Deposits Legal in California?

Sometimes. A deposit is ‘non-refundable’ if it’s reasonable at the time of the contract was signed. In California law this concept is called ‘liquidated damages’. Parties to a written contract can agree in writing what is going to be the ‘penalty’ for a party to break the agreement. This penalty is called ‘liquidated damages’, a pre-determined amount of damages in case a party breaches the contract.

Liquidated damages are enforceable as long as the amount is reasonable at the time of execution. That means that if the terms of the liquidated damages are fair at the time the contract is signed, it can be enforced. If the amount charged is not reasonable, then it is not enforceable, even if both sides agreed in writing.

Non-refundable security deposits in residential leases are generally not allowed, even on early lease termination.

Non-Refundable Deposits in Real Estate Purchases

A popular example is the earnest money deposit in real estate transactions. In California residential purchases, buyers are usually required to deposit money in escrow to secure the purchase and sale agreement. Usually it’s 3% of the purchase price unless the parties agree otherwise. If the buyer removes contingencies and then does not close the deal, the seller can keep the 3% as a non-refundable deposit.

3% is considered ‘reasonable’ in the context of earnest money deposit as ‘non-refundable’ by law. But anything more than that will have to come at some justification, and sellers/agents should consult an attorney before charging more.

There are also special laws in California that require parties to a residential contract to sign liquidated damages provision specifically in the contract for it to be valid. California Civil Code § 1102.3, for example, requires the seller to give the buyer specific disclosures before close of escrow. If those disclosures are not provided, buyer has a right to cancel the agreement and get the EMD. Most important – those disclosures are mandatory and cannot be waived by the buyer.

When are Non-Refundable Deposits are Actually Refundable?

To turn the table against non-refundable deposits, the liquidated damages amount has to be unreasonable at the time of the contract. They are also void, and unenforceable in the case of purchase/service of personal property – for family and household purposes.

What is considered unreasonable? The liquidated damages must be somewhat related to the actual damages suffered as a result of non-performance. That means that if the deposit exceeds or much higher than the actual damage it’s probably unreasonable, and therefore reasonable.

This is called the ‘reasonable endeavor test‘. To determine if a liquidated damages clause is valid the court will look at:

• Is the amount designed to substantially exceed the damages?
• Is the primary purpose of the deposit is a threat of non-performance?
• Relative equality and bargaining power of the parties
• Did each side have an attorney representing them?

Can my Landlord ask for a Non-Refundable Deposit in a Residential Lease?

No. The right to a security deposit accounting under § 1950.5 cannot be waived at the inception of tenancy. This does not mean your security deposit is fully refundable when you move out. The landlord can recover damages to the unit beyond normal wear and tear.

In some limited cases a tenant can waive the right to the security deposit during the tenancy. It has to be in writing, and subject to an eviction notice or early termination.

Can a Security Deposit in a Commercial Lease be Non-Refundable?

Depends. Commercial leases can contain a waiver of California Civil Code § 1950.7 – where a tenant waives the right to ask for the deposit back in case of a breach of the lease. Under 1950.7 excess security deposit (after landlord deducts unpaid rent) is refundable to the tenant. A commercial tenant can agree in writing to waive this protection under 1950.7.

Commercial security deposit can be any amount agreed to by the landlord and tenant. In residential leases, the amount is limited to 2 months of rent or 3 for furnished units.

How Can a Lawyer Help you Recover Non-Refundable Deposits?

Sinai Law can help you recover non-refundable deposits, even if you agreed to pay it in writing. Businesses use deposits as an unfair way to exploit consumers and our firm has been successful in recovering deposits that our clients thought were gone forever.

Our process is simple – after we compile the evidence and determine viability and liability, we issue a demand to the defendant in less than 24 hours. If the defendant does not comply, we file a lawsuit right away and seek maximum damages, including costs and attorney’s fees (when applicable).

Are Wedding Deposits Refundable?

Yes. The same rules apply to amounts given to vendors before a wedding. DJs and caterers love telling their customers the deposits are not refundable, even 5 months before a wedding. Unless the wedding is cancelled right before the day of the event – there is no reason for a vendor to keep the entire security deposit.

The security deposit, or liquidated damages, have to be reasonable at the time of signing the contract. Consider the following example:

A couple hires a band to play at their wedding 6 months in advance for a total payment of $10,000, and $5,000 up front deposit. The wedding is canceled a month before the wedding date and the band refuses to refund the deposit since it’s non-refundable.

Unless the band can show $5,000 in reasonable expenses, or that they cannot be booked by another wedding on the same wedding date – it’s unlikely the deposit will be considered non-refundable. It’s important to read the contract with every vendor and negotiate a force majeure clause that allows you to cancel or change the wedding date without penalties.

The Types of Security Deposits We Help Recover

We can help you recover any non-refundable deposit that was illegally taken away from you. Here are a few examples:

• Deposits for renting an apartment
• Earnest money deposits in real estate transactions
• Deposits for event venues
• Service contract deposits
• Wedding deposits

Contact a Law Firm Today to Get your Deposit Back

Losing your security deposit feels horrible. It’s money you are supposed to get back, and sometimes it’s money you are counting on. We believe unfair business practices hurt families, and something has to be done. We help individuals recover non-refundable security deposits with affordable and fast service.

If you want know how we can help you recover your deposit back – contact our firm today for a free consultation and case evaluation.