Recently I have gotten an offer from a potential tenant. I noted that if I refused to sign the rental agreement at the last moment, I have to return the earnest deposit (1 month) and pay another 1 month deposit to the tenant. Just wanna ask if this is standard market practice ?

Yes, that is normal.

Once you have accepted the offer and tenant paid a deposit, there is a binding contract.

Hence, if you fail to proceed with it, you will need to pay compensation. In this case, 1 month's rent as compensation.

Compensation is fine. The thing is that the tenant want to replace most furnitures and they add in a clause saying that if there are defects during handover , they can choose not to proceed. If that happens, who is going to compensate me for the incurred costs ?

if you guys cannot come to an agreement with the terms and conditions it can be aborted and you don't have to compensate unless these terms were agreed upon before the tenant paid the deposit.

having said that , defects can be very small or it can be very big..if its a serious defect like structural, leakage then ok they should be given an option to terminate

As to your question, if its a major defect, you have to go after the developer to rectify them but if its after the defect period, some developers will still rectify if its a very serious defect like roof collapse , water tank burst, major leakage that cause flooding of entire house, structural cracks in walls, etc..

If developer does not rectify, you will have to pay for the costs - nothing to do with your tenants.

So as long as you did not sign any letters/documents indicating that the "replacement of fittings/fixtures" are to be incorporated as a salient term in the formal tenancy agreement then you are fine, you may even get out of the negotiation without even paying a single cent simply because the parties cannot come to term for an agreement.

Just to clarify, the market practice is "to compensate only if there is breach", no one is obliged to pay anything if he/she has committed no breach at its part. Merely refunded the sum already paid would suffice.

Do not get coerced by unscrupulous agents who wanted to push the deal through just so that they could get their commission. If dispute arises, seek a legal counsel for advise.