Security DEPOSIT

Hi! my husband & i used to manage a 4-door apartment in sampaloc, manila. our landlady stays in new york, USA. we rented the units and accepted boarders. we managed them for about five years. for that period we had no problem with our landlady since she was in the States and whenever she's home here in the philippines, she had no problem with how we were doing the business. however, in february 2012, a very angry landlady called me up and verbally lambasted my husband. i could not accept that she was saying those words to me and not straight to my husband so that he could explain his side. since the units were almost half-filled during that time, i talked to my husband and told him we better decide whether we have to renew our contract which was due in May 2012. we decided that we will no longer continue. so we wrote a proposal to our landlady to use up our SECURITY DEPOSIT until October 2012. her representative (her brother-in-law) verbally said yes. now she was saying (thru a law firm) that we have to pay her around 400,000 for water bills, unpaid rent and renovation costs. what do we do? does she really has the right to demand from us when its almost a year now that we had no business relationship anymore? thanks