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Pineda v. Rozsanksy

A-6080-04T1 (N.J. Super. App. Div. 2006) (Unpublished)

LANDLORD-TENANT; DAMAGES—A provision in a residential lease application setting forth liquidated damages in the amount of the security deposit for the failure of a tenant to sign the lease is an unenforceable penalty and the landlord is only entitled to its actual damages for temporarily removing the property from the market.

A prospective tenant submitted an application for a one-year lease. The application required a deposit payment, which the prospective tenant paid. The application provided that: “a deed of lease must be executed within five days otherwise applicant will be liable for liquidated damages, including but not limited to broker’s fee and/or additional repairs required.” Approximately seven days after submitting the application, the prospective tenant decided against signing a lease or occupying the apartment and demanded the return of her deposit. Relying on the language of the application, the landlord declined to return the deposit.

Consequently, the prospective tenant filed an action seeking the return of the deposit. The prospective tenant claimed the condition of the apartment made it uninhabitable. The landlord claimed that the prospective tenant sought to avoid the agreement for reasons unrelated to the condition of the apartment, denied any defect in its condition, asserted the non-refundability of the deposit, and argued that it was entitled to compensation for his lost rental. The lower court found that the agreement to sign a lease was valid and that the prospective tenant had knowingly entered into the argument. While rejecting the landlord’s theory of recovery based on liquidated damages, the lower court recognized, as valid, the landlord’s claim of lost rent. However, the lower court also imposed upon the landlord the duty to mitigate its damages. Without making a finding of fact as to the condition of the apartment, the lower court then ruled that the prospective tenant was entitled to return of two-thirds of the deposit. Subsequently, the landlord appealed the judgment against it for two-thirds of a deposit given by the prospective tenant.

On appeal, the Appellate Division first agreed with the lower court that under the circumstances of this case, the liquidated damages clause in the application constituted an unenforceable penalty. Furthermore, the Appellate Division affirmed the lower court’s determination of the validity of the agreement between the parties. The Court then noted that the prospective tenant derived a benefit in the form of an option to rent and that the landlord suffered a detriment by the requirement that it remove the apartment from the rental market until a lease was signed or until the agreement to sign was voided. Notwithstanding, the Appellate Division held that the judgment against the landlord required reversal. First, the Court found that the landlord had not been given the opportunity to establish its actual damages arising out of the temporary removal of the apartment from the rental market. Second, the Court found that the lower court’s decision to award the prospective tenant two-thirds of the deposit lacked any evidentiary basis. Lastly, the Court found that condition of the apartment was relevant in the damages calculation because the landlord would not be entitled to collect rent from any prospective tenant if the landlord was in breach of its warranty of habitability. Accordingly, the lower court’s judgment was reversed and the matter was remanded for further proceedings.

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