Legal Question in Real Estate Law in California

You are in a gray area. If all you said was that you refund the deposit, you could send them a letter saying that the amount of the refund will be zero because you are applying the back rent owed. This letter should be sent within 21 days of the date the told you they would not be renting. Explain to them in detail why you have to keep the deposit. If you are not the sole owner of the property tell them that your fiance would not give her approval. You could tell them that you are willing to give up the three months they owe you and that you could sue them for in return for keeping the one month's rent, and then get that in writing and signed by everyone.

I agree that you would have been entitled to keep the deposit to the extent it was compensation for rent due but not received while they had the right of possession even though they chose not to exercise that right.

However, once you agreed to return their deposit, we step into a gray area. Have you, by making that statement, orally modified the deposit and rental agreement? I think not. Civil Code section 1698 covers modification of written contracts, and subpart 1698(c) says, in relevant part, "Unless the contract otherwise expressly provides, a contract in writing may be modified by an oral agreement supported by new consideration." Here, there is nothing to suggest that the renting couple gave or agreed to give you anything in return for your agreement to give back their deposit. Hence, your oral agreement to refund the deposit is not an enforceable modification of the rental agreement.

As a practical matter, however, I think you might be guided by fairness principles, instead of strict legal theory. Pay them back if it seems fair to you, don't pay them if you feel you've been wrongly deprived of expected rent.

I'm assuming that you are referring to a holding deposit, and not a security deposit as referred to by Mr. Shers. A holding deposit is a deposit to hold the rental unit for a stated period of time until the tenant pays the first month's rent and any security deposit. The 21 day period that Mr. Shers refers to applies to security deposits, pet deposits, and cleaning deposits and that rule applies when a tenant moves out, not when a tenant has never moved in.

As a general rule, the landlord can keep some, and perhaps all of a holding deposit. The amount that the landlord can keep depends on the costs that the landlord incurred by reason of the tenant chaning their mind and not leasing the premises. This would be the landlord's damages, such as additional advertising costs to list the property for rent, and lost rent.

As Mr. Whipple pointed out, you are in a gray area. Arguably, by stating to the prospective renter that you were returning the deposit, an argument could be made that such a concession was an admission that you did not have damages. With respect to Mr. Whipple's discussion regarding modification of a contract, that would depend on the actual original contract (if it was in writing) and the terms of that contract.