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:

When are non-refundable deposits legal?

When they are not regulated by statute, and when the liquidated damages provisions in the contract is reasonable at the time of execution.

Is it possible to recover non-refundable deposits even if you agreed to pay it in a written contract?

Yes. For a non-refundable deposit (or a liquidated damages clause) to be valid, it needs to be reasonable and proportional to the damage suffered by the party at the time of the contract. Also, many types of popular security deposits are regulated by law and often fully refundable.

What is California law on non-refundable deposits?

Many types of deposits and liquidated damages provisions are regulated by law (like residential leases, earnest money deposits in real estate). Non-regulated deposits are required to be reasonable and proportional to the damages at the time of the contract.

Are Non-Refundable Deposits Legal in California?

To know if a deposit can be legally ‘non-refundable’ – we need to examine a different legal term called ‘liquidated damages’. Parties to a contract can agree during the time the contract is executed what will be the damages ahead of time. This is what the law calls – ‘liquidated damages’, a pre-determined amount of damages in case a party breaches the contract.

Liquidated damages are enforceable as long as the provision is reasonable at the time of signature. 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 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

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 personal, 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?

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).

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.

Author Photo

Avi Sinai, Esq.

Avi Sinai started to practice law in 2011, focusing on business and real estate transactions. Through aggressive representation of his clients mainly in the commercial real estate field – he helped solved clients needs outside the court and helped them avoid future litigation. Need help with a real estate matter. Contact Avi today.

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