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Security Deposit Withheld as Liquidated Damages

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Security Deposit Withheld as Liquidated Damages

Postby brookliner » Mon Jul 08, 2019 10:20 pm

After renting a unit for nearly a decade (and never paying rent late), we recently had to break our lease 3 months early because we were selected for an affordable housing lottery unit. We gave the landlord nearly 2 months notice and paid our rent in advance in good faith (rather than witholding it, which is perhaps what we should have done). We vacated the unit and turned in our keys, and the new tenant moved in within days. We got out with our rent paid up, and the landlord got a new tenant. However, our landlord has now refused to return our security deposit, citing the need to replace the stove because the oven window was "greasy," and witholding the remainder as liquidated damages. I have two questions:

1) Our lease states that "Tenant agrees to forfeit security deposit if for any reason whatsovever tenant terminates the lease prior to its expiration date." Is this clause actually enforceable? Assuming that there are no damages (stove aside for now) and there is no unpaid rent, doesn't this represent liquidated damages as an unenforceable penalty under NY law?

2) Is it ever the case that grease/darkening on the window of an oven counts as anything but normal wear and tear (particularly over a decade)? The stove is otherwise spotless.
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Re: Security Deposit Withheld as Liquidated Damages

Postby TenantNet » Tue Jul 09, 2019 4:17 am

First, the law has changed on how tenants are treated when they move out early. Now the LL has to show economic damage (i.e., the inability to re-rent the unit) before they can claim rent for the rest of the lease term. Even if the law hadn't changed, you say a new tenant moved in, so any claim the LL might have would be nothing. (I don't know if this new law applies just to rent stab tenants, but I suspect it applies to all tenants). If it's an issue, I can look that section up.

But here the LL is claiming "damages" that appear bogus. Even if the stove was greasy, that is not damages; that is normal wear and tear, that occurs in the normal and regular use of an item. Stoves get greasy due to cooking, carpets wear out over time, walls need repainting. None of those items - and many more - are damages.

Did you conduct an exit inspection? Did you take copious photos? Did the LL actually use the term "liquidated?" (don't get caught up in legalese -- use plain English).

You have two options if negotiations don't work. a) take the LL to small claims court, and b) contact the Attorney General's office.
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Re: Security Deposit Withheld as Liquidated Damages

Postby Landlords Boy » Thu Jul 11, 2019 2:07 pm

Reasonable charges for liquidated damages are permitted, since the LL is experiencing unplanned costs and expenses due to the tenant breaking the lease: advertising, paperwork, credit checks, etc. Otherwise lease-breaking tenants could churn a landlord into financial oblivion.

Can't speak to the stove issue itself. If the tenant neglected to clean it regularly over an extended period that might require early replacement of the stove.
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Re: Security Deposit Withheld as Liquidated Damages

Postby TenantNet » Thu Jul 11, 2019 2:27 pm

As I said the law has changed on that. There's a long history to this issue. Years ago the situation was the same as today, but over time the courts ruled that LL mitigation was not necessary and therefore tenants had to cover the remaining months of a lease term (at least until the unit was re-rented). The new law puts us back to the way things were before.

There is also an inference that in NYC, with the extreme demand for units, the LL could re-rent the place immediately, even if covered with roaches, bed bugs and excrement.

Here's one article on it: https://www.brickunderground.com/rent/l ... -face-fees

But the LL attorney is wrong on some things. Repainting is not something that would be covered by security deposits at any time. Worn walls (that require re-painting) are normal wear and tear, and tenants pay rent for that. That applies to all tenants, not just RS units.

However in some more extreme cases - such as when a tenant paints the walls black or in a day-glo color - failure to repaint in white, or near white, might be considered damages. But that's the exception. (it's often mentioned in the lease).

Many LLs claim things like painting or worn carpet are damages. They are not; never have been. And departing tenants do not have to pay a broker as the attorney suggests. That's BS.

As for unplanned costs as LLB cites, that's also bogus. They say that because some stupid tenant will believe it and they can get away with it.
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Re: Security Deposit Withheld as Liquidated Damages

Postby Landlords Boy » Thu Jul 11, 2019 3:13 pm

Thanks for the link. I was especially interested in the part that said that if the new tenant pays less in rent than the old one then the old tenant is still on the hook for damages for the difference. I think this clause will be used extensively since LLs can't put a decent amount of money into refurbishing apartments anymore - that is, they could refurbish, but we'll never be able to recoup their costs, especially for large apts.

By the way, the 14-day security deposit refund requirement is too severe. Just this month, due to the July 4th holiday, my initial requests to the bank to close out tenant accounts and provide me with their current balances was ignored. I had to repeat them on Monday and couldn't send out the last sd refund check until today. That's cutting it way too close. December and January refunds will likely be worse.
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Re: Security Deposit Withheld as Liquidated Damages

Postby TenantNet » Thu Jul 11, 2019 3:26 pm

Hey, LLs had 25 years of get-out-of-jail-free cards. There's no reason to complain.
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Re: Security Deposit Withheld as Liquidated Damages

Postby Landlords Boy » Thu Jul 11, 2019 3:38 pm

TenantNet wrote:Hey, LLs had 25 years of get-out-of-jail-free cards. There's no reason to complain.

If you didn't do a crime, you shouldn't do jail time. That's why ex post facto laws designed to punish people who followed the law of the time are unconstitutional. That was Sam Addams great victory over George III.
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Re: Security Deposit Withheld as Liquidated Damages

Postby TenantNet » Thu Jul 11, 2019 4:03 pm

Oh, brother. Go vote for Trump.
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Re: Security Deposit Withheld as Liquidated Damages

Postby TenantNet » Sat Jul 13, 2019 1:36 pm

Here's another article on this subject:

https://www.law.com/newyorklawjournal/2 ... al-leases/

New Rent Laws Abrogate No-Mitigation Rule in Residential Leases
The recently enacted Housing Stability and Tenant Protection Act of 2019, which Gov. Andrew Cuomo signed into law on June 14, 2019, has now completely abrogated the no-mitigation rule in the context of residential leases.
By Massimo F. D’Angelo | July 12, 2019 at 11:45 AM

In 1995, the Court of Appeals in Holy Properties Ltd., L.P. v. Kenneth Cole Productions, 87 N.Y.2d 130 (1995), threw landlord tenant law into a tailspin when it held that landlords had no duty to mitigate their damages by re-letting the premises where the tenant abandons prior to the expiration of the lease. Although Holy Properties dealt with a commercial lease, courts widely extended the application of this rule to residential leases as well.

However, the recently enacted Housing Stability and Tenant Protection Act of 2019 (the 2019 Tenant Act), which Gov. Andrew Cuomo signed into law on June 14, 2019, has now completely abrogated the no-mitigation rule in the context of residential leases.

Rationale Behind the No-Mitigation Rule

Generally, the law imposes upon a party who suffers an injury as the result of a breach of contract, the duty to make reasonable efforts to minimize the injury. Wilmot v. State of New York, 32 N.Y.2d 164 (1973); Losei Realty v. City of New York, 254 N.Y. 41 (1930). Notwithstanding this general principle of law, the Holy Properties court ruled that where a tenant breaches a lease by vacating the space prior to termination and the lease entitles landlord to recoup rent following an eviction, the law allows the landlord to do absolutely nothing to re-let the space. Moreover, while the landlord sticks its head in the sand, it can then still sue the tenant for all of the future rent becoming due under the lease through and including the termination date, along with attorney fees and costs to boot. Therefore, it is no surprise that New York’s no-mitigation rule absolving landlords from mitigating their damages following a tenant abandonment of its leasehold before a lease’s expiry—places it in the minority when compared to other jurisdictions—particularly since the rule promotes laziness, which the law abhors.

Although the rule appears, at least on its face, to be counterintuitive, the Holy Properties court rationalized that it serves to impart stability and certainty into business transactions. This is of paramount importance in the context of real property, which is sui generis, thus requiring adherence to established precedents more so than in any other area of the law. 159 MP Corp. v. Redbridge Bedford, — N.E.3d —, 2019 WL 1995526 (N.Y.), 2019 N.Y. Slip Op. 03526. In other words, parties, who are free to contract as they please, will be held to the benefit of their bargain, with the language of their contracts being enforced in accordance with their plain language and meaning. Vermont Teddy Bear Company Co. v. 538 Madison Realty Company, 1 N.Y.3d 470 (2004).

Abrogation of Rule in Residential Arena

In promulgating the 2019 Tenant Act, the main purpose of which was to afford better protections to tenants in order to halt their increased displacement, the Legislature decided to completely nullify the no-mitigation rule espoused under Holy Properties in the residential setting. The plight to minimize tenant evictions and the resulting widespread dispossession from their homes is presently at the forefront for the City given the current affordable housing crisis. Consequently, annulment of the rule in residential leases is concomitant with the underlying purpose of the newly enacted legislation.

Section 4 of the 2019 Tenant Act amended the Real Property Law (RPL) by adding a new §227-e, which explicitly imposes upon landlords a duty to mitigate damages if a tenant vacates the premises in violation of the terms of the lease. In particular, §227-e applies to any lease or rental agreement covering premises occupied for dwelling purposes. Hence, while the statute applies across the board to all residential leases, inclusive of free market leases, it clearly does not apply to the ambit of the commercial universe, meaning that Holy Properties has only been provisionally repudiated by the 2019 Tenant Act, at least for the present.

Beyond this, the statute places the burden of proof to show that the landlord properly mitigated upon the landlord. Further, §227-e explicitly exempts any contractual lease provision in which landlord’s duty to mitigate is absolved, as void for being contrary to public policy.

Critically, the statute provides that a landlord mitigating its damages must, “in good faith and according to the landlord’s resources and abilities, take reasonable and customary actions to rent the premises at fair market value or at the rate agreed to during the term of the tenancy, whichever is lower.” Under this statutory framework, the onus rests squarely on a residential landlord to take affirmative steps to re-let the abandoned space by, inter alia, engaging professional residential real estate brokers, marketing and advertising the space.

Conclusion

The statute gives broad deference to the factfinder to determine whether the landlord acted in good faith, and took reasonable steps commensurate with its subjective “resources and abilities” in mitigating. This leaves a vast gray area in the law which will be further developed as residential landlords and tenants fight over whether a landlord aptly mitigated. More importantly, however, the landlord will need to fastidiously document all of its mitigation efforts since the statute has shifted the burden of proof of adequate mitigation efforts upon the landlord. Contrarily, the statute arms tenants, who vacate their leases before expiration, with a powerful weapon to combat against the landlord’s claims for recovery in collection cases in all instances where tenants vacate before their leases terminate. Much to their chagrin, the 2019 Tenant Act also bars landlords from charging for residential application fees, limits the fees that can be charged for background checks to $20, and extends by five days a tenant’s time within which to pay rent before the landlord may serve a default notice (see RPL 238-a).

In light of the Legislature’s penchant for progressive policy changes to the real property law for the purpose of further augmenting tenant protections, it will be interesting to see whether the no-mitigation rule is similarly voided in the commercial context through subsequent legislation.

Massimo F. D’Angelo is a partner at Desiderio, Kaufman & Metz, PC.
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Re: Security Deposit Withheld as Liquidated Damages

Postby TenantNet » Sat Jul 13, 2019 1:48 pm

Of course the reference topic is at http://tenant.net/phpBB3/viewtopic.php? ... 01&p=58226
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