Tenant's Security Deposit Not Credited to Unpaid Rent
Facts: A real estate company rented a corner store and partial basement of a building for a 10-year lease term. The tenant paid $42,000 as a security deposit. Two guarantors also signed separate written guaranty agreements, guaranteeing full performance of the terms of the lease, including rent payment. Shortly after it moved into the space, the tenant breached the lease agreement by failing to pay its monthly rent as well as its additional rent. Consequently, the tenant was evicted from the premises but still owed rent and additional rent. Immediately following the eviction, the owner signed a separate leaseagreement for the premises with a new tenant, but at a lower rental rate than the evicted tenant had paid.
The owner sued the tenant for the rent and additional rent owed under its lease. It also sued the guarantors for breaching the guaranty, based on the tenant’s failure to pay, pre-eviction and post-eviction. It asked the court for a judgment in its favor without a trial.
The tenant and the guarantors asked the court to dismiss the case. They claimed that the “limited guaranty of lease” entitled the owner to some money for the period that the tenant occupied the premises and rent hadn’t been paid, but they disagreed with the owner’s allegation that the tenant owed future unpaid rent before it vacated the premises. The guarantors further alleged that their obligation to the tenant was based on a “good-guy” guarantee clause, under which the guarantor is obligated to guaranty rental payment accruing only during the period in which the tenantis actuallyoccupyingthe space, but once the tenantno longer occupies the space, regardless of the time remaining under the lease, the guarantor is relieved of all further liability.
The guarantors maintained that, once the tenant surrendered the premises, they could no longer be held liable for rent post-surrender of the premises. They also claimed that under New York law, it is improper for an owner to keep the security deposit and not apply it to the amount allegedly owed by the defendants for the pre-surrender period.
Decision: A New York court ruled in favor of the owner.
Reasoning: “It’s established that under New York law, a landlord has no duty to mitigate damages by re-renting leased premises upon a tenant’s default,” the court pointed out. Once a leaseis executed, the tenant’s obligation to pay rent is fixed according to its terms and the owner is under no obligation or duty to the tenant to relet, or attempt to relet abandoned premises in order to minimize damages, it said. Therefore, said the court, the owner had no legal obligation to mitigate damages after the defendants breached the lease agreement and were evicted. Nor was there a duty imposed on the owner to mitigate damages by the terms of the leaseitself. Here, the owner did in fact mitigate damages by entering into the new lease, the court noted.
Additionally, the tenant and guarantors argued that the security deposit paid when the lease was signed should be credited to any money owed to the owner during the pre-surrender period. However, past courts have determined that an owner has a right to retain a security deposit from a defaulting tenant. “To enforce a written guaranty, all that the creditor need prove is an absolute and unconditional guaranty, the underlying debt, and the guarantor’s failure to perform under the guaranty,” said the court.
In this case, the guaranty specifically addressed the security deposit issue because its terms established that the owner should not be required to resort to any security held under the lease and that the guarantors’ liability was primary. The guaranty also stated that any security deposited under the terms of the lease would not be computed as a deduction from any amount payable by the tenant or guarantors under the terms of the guaranty orlease. Here, the owner established that the guaranty should be enforced, and that the tenant and guarantors aren’t entitled to a credit from the security deposit for a reduction of the “pre-surrender” amount owed.
- 174 Second Equities Corp. v. Lax, July 2012