Lease Provision Allowing Landlord to Comingle Security Deposit with Landlord’s Funds Was Void—Question of Fact Whether Both Parties’ Actions Resulted in Termination of the Lease by Operation of Law

The Second Department determined defendants-tenants were entitled to the return of their security deposit because the lease purported to allow the landlord to comingle the security deposit with the landlord’s funds.  The court further determined the landlord was not entitled to summary judgment for breach of the lease because the landlord accepted the keys to the property when the tenants left before the end of the lease, put the house on the market, and did not demand additional rent for over two months:

General Obligations Law § 7-103(1) provides that a security deposit with respect to the use or rental of real property “shall continue to be the money of the person making such deposit . . . and shall be held in trust by the person with whom such deposit or advance shall be made and shall not be mingled with the personal moneys or become an asset of the person receiving the same.” General Obligations Law § 7-103(3) provides that any provision of a lease “whereby a person who so deposits or advances money waives any provision of this section is absolutely void.” When a landlord commingles the security deposit with his or her personal funds in violation of General Obligations Law § 7-103(1), the tenant has “an immediate right to the return of the funds, even if the [tenant] had breached the lease” … . Here, the defendants made a prima facie showing of their entitlement to judgment as a matter of law on their counterclaim by submitting the subject lease, which contained a provision stating that the security deposit may be commingled with the plaintiffs’ general funds. This provision is void by operation of General Obligation Law § 7-103(3), and, in addition, raises an inference that the plaintiffs violated General Obligations Law § 7-103(1) by commingling the security deposit with their own funds …. In opposition, the plaintiffs, who did not submit any evidence that they did not commingle the security deposit with their own funds, failed to raise a triable issue of fact.

The Supreme Court also properly denied the plaintiffs’ cross motion for summary judgment on the first cause of action, which was to recover damages for breach of the lease. The plaintiffs made a prima facie showing that the defendants breached the lease by failing to make monthly rent payments beginning on October 1, 2011. In opposition to that showing, the defendants submitted evidence that, after they vacated the house on or about September 4, 2011, the plaintiffs accepted a return of the keys to the house, immediately put the house on the market for sale, and did not demand payment of rent until late November, 2011. Accordingly, the defendants raised a triable issue of fact as to whether the parties both acted so inconsistently with the landlord-tenant relationship that a surrender of the premises was effected by operation of law, thereby terminating the lease prior to the rent becoming due on October 1, 2011… . Soloman v Ness, 2014 NY Slip Op 04185, 2nd Dept 6-11-14