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Shin v. Bergenfield Senior Housing LLC

A-1563-09T3 (N.J. Super. App. Div. 2010) (Unpublished)

LANDLORD-TENANT; SECURITY DEPOSITS — Where the owner of a residential property master leases the property to a prospective buyer and that buyer misappropriates security deposits received from its subtenants, the property owner will not be liable to those subtenants absent active participation in the subleasing process.

A number of tenants lived in a senior-restricted residential condominium building consisting of ninety individual units. The building owner entered into an agreement to sell eighty-eight unoccupied units in the building allowing the bulk buyer to rent out the units pre-closing. The buyer had to post a one and one-half months’ rent security deposit for each lease or sublease until closing of title, after which the deposits were to be released to the buyer. A company was formed by the buyer and others to manage the property and handle the tenant applications, rent monies, and security deposits.

The buyer then entered into about eighty subleases with elderly tenants, mostly at below market rent, allowing them to move in with the expectation that the elderly tenants would qualify for public assistance. Unknown to the seller, the tenants were charged rent and a security deposit. They were also charged monthly “co-rent” and “co-security,” representing additional rent of $100 to $300 per month. This brought the rent closer to the market rate pending receipt of the rental subsidies.

Ultimately, the management company misappropriated the tenants’ rent and security deposits by placing them in its own business account. The company also misappropriated the “co-rent” and “co-security” received from the tenants. The buyer did not close, and the seller declared a default, claiming the buyer’s non-refundable deposits and ousting the buyer and its representatives from the premises.

A tenants association sued the seller, the buyer, and the management company for damages, chiefly under the Security Deposit Act (SDA) and the Consumer Fraud Act (CFA). The lower court found in favor of the tenants in the amount of their security deposits (plus interest) as against the seller, entered judgment against the buyer and the management company, for the tenants’ loan monies and interest, and found for the seller to recoup its losses against the buyer and the management company. It dismissed the tenants’ claims for extra-rental monies paid. The lower court found the tenants willingly paid the extra rent and suffered no damages as a result. It made an express finding of good faith on the part of the seller, finding it did everything it possibly could to protect the security deposits by requiring the buyer to document and account for its tenant security deposits. The tenants appealed from the judgment, arguing the lower court erred in not awarding double damages for failing to return security deposits, and treble damages for a violation of the CFA.

The Appellate Division affirmed the lower court’s ruling, finding it reasonable that the lower court did not award enhanced damages under the SDA because the tenants continued to occupy their units. The SDA provides for such damages when security deposits are not returned after a tenancy ends. The tenants were permitted to offset their rents by the amount of the security deposit with interest, and were not required to offer another security deposit.

The Court also affirmed the lower court’s finding that there was nothing deceptive or unlawful in the manner in which the monies were obtained from the tenants for purposes of application of the CFA, specifically finding the tenants understood exactly what the “co-rent,” “co-security,” and loans were for and willingly paid them. The tenants were aware their base rents were way below market and did not suffer by paying the extra rent.

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