Court Sides With Students In Dispute Over ‘So-Called’ Security Deposit
Written by: Alan Nochumson
In E.S. Management v. Gao, 2017 Pa. Super. LEXIS 925 (Nov. 15), the Superior Court of Pennsylvania recently upheld a verdict against a landlord who attempted to pressure individuals to enter into a lease arrangement or risk losing their so-called “security deposit.”
In E.S. Management, several foreign students from Carnegie Mellon University were seeking housing for the 2014-2015 academic year, the opinion said. While the students were in China, they had a friend in Pittsburgh go and look at an apartment that was available for rent from E.S. Management, the opinion said.
One of the students then had an aunt who was residing in the United States wire $5,885 to E.S. Management in order to prevent the apartment from being rented to others, the opinion said.
The $5,885 so wired to E.S. Management reflected a nonrefundable application fee of $100, two months’ rent of $3,990 ($1,995 per month), and last month’s rent of $1,795, less a discount of $200, the opinion said.
The students were then presented a written lease for their review, the opinion said.
According to the written lease, the security deposit due would equal one, not two, months of the rent due and the students would be responsible for the payment of utility charges for the apartment.
When the students and the landlord could not agree upon the terms and conditions related to the payment of the utility charges, they notified E.S. Management they would not rent the apartment and demanded reimbursement of the security deposit wired to E.S. Management, less the nonrefundable application fee of $100, the opinion said.
Because E.S. Management refused to so make the refund payment, the aunt who paid the security deposit initiated suit against E.S. Management in the local magisterial district court.
Soon thereafter, E.S. Management filed a separate suit against the students and the aunt in the same magisterial district court.
When the magisterial district court found in favor of E.S. Management in both cases, the aunt and all of the students except one of them filed a notice of appeal to the Court of Common Pleas.
In the suit initiated by the aunt, she filed a complaint against E.S. Management, alleging causes of action for breach of contract, and violations of the Landlord and Tenant Act of 1951 (LTA), 68 P.S. Section 250.101 et seq., and Pennsylvania’s Unfair Trade Practice and Consumer Protection Law (UTPCPL), 73 P.S. Section 201.101 et seq.
In the complaint, the aunt alleged that she forwarded the disputed security deposit to E.S. Management with the understanding that it would be returned to her if the parties failed to enter into a written lease for the apartment under mutually agreeable terms and conditions.
According to the complaint, since the parties could not reach an agreement on the utility charges under the proposed lease arrangement, she expected the return of the $5,785 so advanced by her.
In the suit commenced by E.S. Management, it filed a complaint raising a cause of action for breach of contract and, in the alternative, for promissory estoppel. In that suit, E.S. Management sought the rent due for the entire proposed term of the lease and anticipated utility charges.
In response, the aunt and the students not only filed an answer to that complaint, but also included the exact counterclaims that the aunt set forth in her complaint in the related case.
After a board of arbitrators found in favor of the aunt and the students in all respects, the cases were then appealed for a trial to occur.
The breach of contract claims were heard at a consolidated jury trial. At the conclusion of trial, the jury found that no contract existed between the parties and that E.S. Management failed to establish one of the elements of promissory estoppel. The jury, however, did not award damages to either party.
Immediately after the trial court dismissed the jury, it conducted a bench trial on the remaining claims set forth under the LTA and the UTPCPL.
Following the bench trial, the trial court concluded that E.S. Management violated the LTA and the UTPCPL and that the aunt and the students were entitled to treble damages.
The trial court concluded that E.S. Management violated 68 P.S. Section 250.511a of the LTA by requiring “’a sum in excess of two months’ rent to be deposited in escrow for the payment of damages to the leasehold premises and default in rent thereof’ which also is a violation of the provision of the UTPCPL at 73 P.S. Section 201-2(4)(xxi).”
Furthermore, the trial court held that E.S. Management violated the UTPCPL by, among other things, failing to inform the aunt and the students, either verbally or by writing, when it requested the security deposit, that this sum could be forfeited if they elected not to rent the apartment.
E.S. Management subsequently appealed the trial court’s rulings to the Superior Court.
The Superior Court first addressed E.S. Management’s argument that the trial court erred in finding that E.S. Management violated the LTA because it collected a security deposit from the students that exceeded two months of rent and that such violation ran afoul of the UTPCPL.
As noted by the Superior Court, under Section 250.511a(a) of the LTA, “no landlord may require a sum in excess of two months’ rent to be deposited in escrow for the payment of damages to the leasehold premises and default rent thereof during the first year of any lease,” 68 P.S. Section 250.511a(a).
While admitting that it had collected two months’ rent of $3,990 ($1,995 per month), E.S. Management reasoned that the additional $1,795 should qualify as prepayment of the last month’s rent and not be deemed security for default rent.
The Superior Court flatly rejected this argument and instead relied upon the reasoning employed by the trial court.
At trial, the judge stated that “the $1,795 was part of the $5,785 deposited with E.S. Management ‘to secure the execution of a rental agreement on residential property,’ therefore 68 P.S. Section 250.511b clearly makes its deposit into an escrow account mandatory” and “since the $1,795 is last month’s rent, which is not owed to E.S. Management until 12 months in the future, that $1,795 is for ‘default in rent’ during the last month.”
The trial court judge also noted that a representative of E.S. Management actually testified at trial that the $1,795 would be used for last month’s rent due under their lease arrangement if the students failed to pay the rent that month.
The Superior Court also concluded that the collection of a security deposit in excess of two months of rent also violated the tenets of the UTPCPL.
In doing so, the Superior Court cited to Section 201-2(4) (xxi) of the UTPCPL which provides that ‘unfair or deceptive acts or practices’ include “engaging in any other fraudulent or deceptive conduct which creates a likelihood of confusion or of misunderstanding.”
The Superior Court agreed with the trial court’s reasoning and cautioned that a violation of the LTA does not automatically cause a violation of the UTPCPL.
Rather, the Superior Court stated that E.S. Management’s conduct in collecting the security deposit was deceptive, which created a likelihood of confusion or misunderstanding in violation of the UTPCPL.
The Superior Court noted that the lease that E.S. Management emailed to the students set forth a much smaller security deposit of $1,995.
Despite the plain and unambiguous terms and conditions of the lease, E.S. Management claimed at trial that it demanded a double security deposit of $3,990 from the students because they were international students without Social Security numbers and other information available from students who are U.S. citizens.
The Superior Court emphasized that conduct was deceptive and would confuse someone with good understanding of the English language, unlike the students who struggled to understand and speak English.
The Superior Court also addressed E.S. Management’s argument that the trial court abused its discretion in awarding the students treble damages under the UTPCPL.
Under Section 201-9.2 of the UTPCPL, “the court may, in its discretion, award up to three times the actual damages sustained, but not less than $100, and may provide such additional relief as it deems necessary or proper.”
Quoting Schwartz v. Rockey, 932 A.2d 885, 898 (Pa. 2007), the Superior Court pointed out that “courts … should focus on the presence of intentional or reckless, wrongful conduct, as to which an award of treble damages would be consistent with, and in furtherance of, the remedial purposes of the UTPCPL.”
Keeping this in mind, the Superior Court concluded that the trial court did not abuse its discretion in awarding treble damages to the students.
As the trial court reasoned, although E.S. Management knew that other renters were unlikely as the student rental season “window” had closed, it rushed the students into submitting the so-called security deposit to E.S. Management by telling them it would prevent other prospective tenants from renting the apartment, but, it never told the students until after it got the funds that the funds could be forfeited if the students did not lease the apartment.
Reprinted with permission from the December 12, 2017 edition of The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.