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MD Associates v. Alvarado

302 N.J. Super. 583, 695 A.2d 760 (App. Div. 1997)

LEASES; SECURITY DEPOSITS; DAMAGES—In a small claims collection action for unpaid rent from a residential tenant, a landlord discovers that the Court, sua sponte, can interpose a counterclaim for double damages by reason of landlord’s failure to timely return a security deposit. It’s “scant” prejudice to the landlord.

After vacating their apartment at the end of the lease term, tenants were sent a notice for charges made by the landlord against the security deposit, including a bill for additional rent for the month of June. When tenants failed to pay, landlord commenced an action in small claims court. At trial, the judge believed tenants’ testimony that they vacated at the end of May and held there was no basis for charges for June rent. Even though the tenants never raised the claim, the judge further concluded that tenants had a valid claim for a statutory penalty based on landlord’s wrongful retention of the security deposit. The penalty entitles a tenant to double the amount of security deposit due, plus costs and attorney fees. Landlord claims the trial judge improperly amended the pleadings sua sponte to include a counterclaim.

The Appellate Division did not disturb the findings of fact made by the trial court. It ruled only on the issue of whether a trial judge, sua sponte, can amend pleadings to assert a counterclaim for the security deposit plus the statutory penalty. If so, the Court also sought to determine whether the landlord was prejudiced by such action. The Court found the purpose of the statute is to protect tenants from overreaching landlords. Since this action was brought in the Small Claims section of the Special Civil Part, under Court Rule 6:3-1 the tenants were unable to file an answer. However, they were not precluded from asserting a defense. Furthermore, precedent held that the trial judge had the authority to declare rights and responsibilities of parties to a commercial lease and could treat a tenant’s claim that a landlord failed to mitigate damages as not only a defense, but also as a request for declaratory relief. Accordingly, the Appellate Division recognized the inherent and express authority of a small claims court judge to recognize defenses to a claim and, in appropriate cases, to fashion a counterclaim. This authority would generally not be recognized in small claims court in the absence of prior written notice to a plaintiff, but in landlord-tenant cases, the Appellate Division held there would be “scant” prejudice to a landlord by converting a defense into a counterclaim for any wrongfully held security deposit. The Court affirmed the trial judge’s actions and even went as far as concluding that to disallow a sua sponte assertion of counterclaim for a wrongfully withheld security deposit, thus subjecting landlord to double damages, would constitute a windfall for the landlord.


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