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Where a security deposit is, during the life of the agreement, a fund from which the lessor may reimburse himself for his actual damages for breach of covenant, a different rule should be applied to the provision for its forfeiture upon termination of the agreement; in such case, the security deposit retains its "compensatory" character and is presumed to be liquidated damages and not a penalty.
Appellant lessor and appellee lessee entered into a lease agreement, whereby the appellee was required to make a $25,000.00 deposit, denominated in the lease as a “cash bond” guaranteeing the performance of all the covenants of the lease, including the covenant to pay rent. In 1950, the appellee vacated the leased premises upon threat of eviction for non-payment of rent. Despite demand, appellant did not account for the cash bond of $25,000 held by it. Subsequently, appellee filed the present suit to have the lease declared cancelled and for return of lease deposit under Fla. Comp. Gen. Laws § 83.20(2), in Florida. The trial court ruled in favor of the appellee. Appellant challenged the decision.
Under the circumstances, should the security deposit be returned to appellee lessee?
The court reversed the judgment portion which awarded return of the deposit, concluding it was error to do so when the sum was deposited for security of performance to be paid in advance and forfeited on default. The court explained that, under such circumstances, the sum was for forfeiture only upon termination of the agreement and not for a mere breach of any covenant and thus could be enforced as liquidated damages. The court determined that nothing in the record overcame the liquidated damages presumption and that the deposit was not a penalty. The court found the record also failed to show any circumstance which would activate a court of equity to relieve appellee from such forfeiture.