LEGAL CORNER: The Security Deposit and Landlord’s Obligation to Mitigate Damages Under the 2019 HSTPA

In a recent decision, 14 East 4th Street Unit 509 LLC v. Toporek [see https://bit.ly/339BzL5], the Appellate Division, First Department discusses the requirements contained in the Housing Stability and Tenant Protection Act of 2019 relating to the landlord’s duty regarding security deposits and landlord’s duty to mitigate damages upon a tenant breach of the lease. This case involved a tenant who breached his lease and vacated an apartment six months prior to the lease’s expiration.

The court in Toporek addressed two specific areas of the 2019 HSTPA: (1) Real Property Law § 227-e [see https://bit.ly/3sO37yH] relating to whether the landlord complied with the new requirements under the law regarding mitigation of damages, and (2) the General Obligations Law § 7-108[1-a][b] [see https://bit.ly/3uFg54b] which deals with the requirements of the landlord regarding releasing of the security back to the tenant and a landlord’s right to retain all or part of the security deposit for repairs and/or restoration of the apartment to its original condition.

The Facts of Toporek

The landlord in Toporek owns a luxury 10-unit apartment building. The parties had originally entered into a two-year lease in October 2017. The monthly rent for the first year was $17,500 and $18,000 for the second year. At the expiration of the initial two-year term, they then entered into a one-year renewal at a reduced monthly rent of $17,000. Since the renewal was entered into after the enactment of the HSTPA, the landlord collected one month’s security deposit in accordance with the new law, and this lease was subject to the 2019 HSTPA.

On May 6, 2020, the tenant had not paid May’s rent and the landlord sent an e-mail to tenant regarding the non-payment. The parties then spoke and, thereafter, the landlord “…sent the tenant an e-mail purporting to summarize what was discussed during their call, including that the apartment would be listed on StreetEasy as available for rent on July 1st and that tenant was responsible for ‘making the apartment move in ready condition’ by having it painted, deep cleaned and restored to its original condition. Tenant would also be responsible for the cost of listing the apartment, including any broker’s fee.” A few days later the tenant notified the landlord that he was terminating the lease and moving out in the beginning of June. The tenant also requested that his security deposit be applied to unpaid May rent. It is important to note that the court pointed out that “[a]n addendum to the renewal lease provide[d] that the ‘[s]ecurity deposit shall not be used by tenant toward any rent,’ which conforms with the new law.” It is important for landlords to include this language in any lease or renewal.

After receiving the communication from the landlord, the tenant informed the landlord “…that he would be getting in contact with [landlord’s representative], so that [the landlord’s representative] could inspect the apartment and ‘take some video’ to document the process before he would turn the keys over to her.” Thereafter the landlord’s attorney sent correspondence to the tenant “…notifying tenant that he was not allowed to apply the security deposit to his unpaid rent, and his request to terminate the lease prematurely was denied.” The letter also indicated that the tenant would not receive the security deposit back until the landlord was able to inspect the apartment and assess any damage. The attorney also informed the tenant “…that even if he moved out, he would remain responsible for the remaining rent payments due under the lease through October 31, 2020, the end of his lease.”

On June 1st, the tenant notified the landlord that he had already moved out and left the keys at the apartment. The landlord inspected the apartment and on June 3rd landlord’s counsel sent a letter “…referring to tenant’s request that the building’s superintendent make repairs to the apartment on his behalf. Although landlord agreed to do so, the letter stated that it would be at tenant’s expense.” Subsequently, the landlord’s attorney transmitted additional correspondence to the tenant and informed the tenant the cost of the repairs was $18,442.71, which was $1,442.71 more that the security deposit (i.e., $17,000), and demanded that the tenant pay the difference.

The court also noted that the letter “…was accompanied by an itemized statement describing each item that needed to be repaired, replaced, or cleaned, the estimated cost of doing so, and a color photograph showing the condition alleged. The costliest repair, in excess of $10,600, was to the floors.” Providing the tenant with an itemized statement is a requirement under the 2019 HSTPA. The tenant failed to remit the payment and the landlord, in turn, commenced an action against the tenant. The landlord sued tenant to recover: (1) the $102,000 (which represented the rent owed from May 1, 2020, through October 31, 2020, (2) the $1,442.71 (excess due to landlord for the damage to the apartment), and (3) cost of legal fees. The court pointed out that the tenant asserted various defenses, which included landlord’s failure to mitigate the tenant’s damages and that the landlord “wrongfully” retained the tenant’s security deposit.

Landlord’s Duty to Mitigate Damages Under RPL § 227-e: A Significant Change in Existing Law

Under Real Property Law § 227-e a landlord now has an “…affirmative duty to mitigate damages where a tenant vacates the premises before the end of the lease.” Section 227-e provides as follows:

“[a] landlord shall, in good faith and according to 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. If landlord rents the premises at fair market value or at the rate agreed to during the term of the tenancy, the new tenant’s lease shall, once in effect, terminate the previous tenant’s lease and mitigate damages otherwise recoverable against the previous tenant because of such tenant’s vacating the premises. The burden of proof shall be on the party seeking to recover damages. Any provision in a lease that exempts a landlord’s duty to mitigate damages under this section shall be void as contrary to public policy.” [see https://bit.ly/3sO37yH]

The court points out that with the passage of Section 227-e, “…the legislature resolved an issue that had plagued the courts, since 1995 when Holy Properties L.P. v Kenneth Cole Prods. (87 NY2d 130 [1995]) [see https://bit.ly/3gBEdMN] was decided by the Court of Appeals, holding that there is no duty to mitigate damages in the context of lease agreements.” Although the Holy Properties case involved a commercial lease, “…most courts applied its holding to residential leases as well.” Therefore, until Section 227-e was enacted, in New York, a landlord did not have any duty to mitigate damages if a tenant vacated the premises before the end of the term and failed to pay the rent due through the expiration date of the lease. A landlord was under no obligation to find a new tenant, and could then pursue the tenant for the rent due through the end of the lease term.

However, it is important to note that Section 227-e only applies to residential leases. With respect to commercial leases, the decision in Holy Properties would still apply and a landlord would have no duty to mitigate damages unless an express provision to the contrary is included in the lease agreement. In Holy Properties, the Court of Appeals held “…that once a tenant abandons the premises before the lease term, ‘landlord [is] within its rights…to do nothing and collect the full rent due under the lease.’”

The court in Toporek further “…clarifies that the doctrine of mitigation of damages is not an affirmative defense to be asserted by a tenant, but rather the burden is on landlord to establish it took reasonable and customary actions to ‘render the injury as light as possible’ (Wilmot v State of New York, 32 NY2d 164, 168 [1973]).” Therefore, the landlord must make sure to document all steps taken to mitigate damages in order to provide the necessary proof in court to preserve its right to collect the remaining rent.

In Toporek, the landlord provided “…[a] sworn affidavit, copies of the lease, the renewal lease, the communications between the parties, the attorney’s correspondence with tenant, and a copy of the spreadsheet [landlord] prepared documenting the steps [landlord] took to re-rent the apartment after tenant moved out.” The landlord also provided proof that it “…paid for listings of the apartment on multiple online real estate listing platforms, including StreetEasy, Zillow, Trulia and Naked Apartments and the apartment was immediately listed.” Additionally, the landlord provided proof of various showings over several months, and unfortunately was unable to rent the apartment until February, 2021.

The Appellate Division ultimately decided that the landlord “…took reasonable and customary actions to mitigate damages…,” and held that the unpaid rent was due from the tenant. It is important that landlords take “reasonable and customary actions” and begin to market the premises as soon as possible after the tenant vacates the premises in order to preserve its right to recover the remaining rent due through the expiration date of the lease. The court also pointed out that the tenant provided no proof that the steps the landlord took were unreasonable or not customary in the real estate rental industry.

General Obligations Law § 7-108(1-a): Duties Regarding the Security Deposit

The court in Toporek also provides important guidance with respect to General Obligations Law § 7-108(1-a) which was also enacted as part of the 2019 HSTPA. The tenant argued that under Section 7-108(1-a)(d) “…the landlord forfeited its right to retain any portion of his security deposit because it failed to provide him with written notice of his right to request an inspection before he vacated the apartment.” However, the court disagreed and pointed out that a “plain” reading of the statute “…does not mandate forfeiture.” Instead, the court explained that the penalty of a forfeiture of the security deposit only applies when a landlord fails to provide the itemized statement required under General Obligations Law § 7-108(1-a)(e). The court pointed out that the landlord in Toporek did provide the itemized statement.

First, it is important to note that under General Obligations Law § 7-108 (1-a)(b) “…the entire amount of a nonregulated residential tenant’s security deposit ‘shall’ be returned to tenant, except for amounts lawfully retained for, inter alia, ‘damage caused by tenant beyond normal wear and tear’.” Therefore, once the landlord complies with all of the requirements of Section 7-108(1-a), the landlord may then retain that portion of security deposit required to repair any damage (beyond normal wear and tear) to the premises or to restore the premises to the condition it was in at the beginning of the lease term. If the cost to repair exceeds the security deposit amount then the landlord may retain all of it and recover the balance from the tenant.

Further, as explained by the court, a landlord must, in accordance with General Obligations Law § 7-108 (1-a)(d), “…provide the tenant with written notice of a right to have and be present at an inspection of the premises upon moving out.” Section 7-108(1-a)(d) requires that after either party provides notice to the other of the intention to terminate early (unless tenant terminates with less than two weeks’ notice), landlord shall then notify tenant in writing that tenant has the right to request an inspection, which shall be made no sooner than two weeks, and no later than one week, before the end of the tenancy. Landlord must provide no less than 48 hours’ notice to tenant of the date and time of the inspection. Thereafter, landlord must provide tenant with an itemized statement outlining the repairs, replacements, cleaning, etc. which are required and the cost of same, which would be deducted by tenant’s security deposit. Tenant would then have an opportunity to cure said deficiencies prior to the end of the tenancy or dispute same.

General Obligations Law § 7-108 (1-a)(e), requires that within 14 days after tenant has vacated, landlord shall provide tenant with an itemized statement outlining the basis for the amount of the deposit retained, if any, and shall then also return any remaining portion of the deposit to tenant. The court emphasizes that “if a landlord fails to provide tenant with the statement and deposit within 14 days, landlord shall forfeit any right to retain any portion of the deposit.”

The court points out that subsections (d) and (e) of Section 7-108(a-1) “…collectively provide a blueprint that a landlord must follow before a tenant’s security deposit can be applied to claimed repairs, by the plain terms of the statute only the obligations in subdivision (e) are subject to a penalty of forfeiture if they are not complied with….” The court further indicates that the only issue in this case that needed to be resolved at a trial was whether the costs for the repairs and/or restoration were reasonable and necessary.

Compliance with the 2019 HSTPA is Critical

It is important for all landlords and real estate licensees who engage in residential rentals to understand all of the requirements of the 2019 HSTPA. With the COVID-19 pandemic and the eviction ban in place until recently, many of the cases that would have provided crucial guidance have not made it through the court system. It is important to seek legal counsel before presenting a lease agreement to any tenant because old forms of leases may contain clauses that are no longer valid or permissible under the 2019 HSTPA.