Legal Question in Landlord & Tenant Law in California

A security deposit is given to secure performance of ALL obligations under the agreement. That would include payment of a cancellation fee. There would be no point in the owner refunding you the deposit and then having to collect the cancellation fee from you, particularly since you are disputing you owe it. That's what security is given for, to provide an alternate source of payment in the event the other party is not inclined to perform, OR to avoid the trouble of collecting. Most often that is to avoid collecting a cleaning or repair fee after the renter leaves, but there is no reason those are the only obligations that are secured by the security deposit. As for how much he can keep, the same principal applies. If he re-rented the property for the same amount as you were to pay, you could at least argue that you are entitled to a refund (though that does not seem to be what the agreement says). If he was not able to re-rent it, he could charge the whole cancellation fee. Since he had to rent it for less, he is certainly entitled to charge the difference as a cancellation fee. Again, he has the right to charge the fee against the security he is holding for performance, rather than refund the deposit and then try to collect what you owe for cancelling. Lastly, if the agreement provided for a $500.00 cancellation fee and did not provide in the agreement that it would be waived if the property was re-rented, then he is right that he is extending you a courtesy by refunding anything. You agreed to pay $500.00 if you cancelled. You cancelled. So any refund is a courtesy.