A lessee of a property vacated the property before the end of the lease period, in coordination with the lessor, according to the lessee, and thus, demanded the refund of the deposit, while the lessor contended that the lessee breached the lease agreement and therefore the lessor may collect the deposit and is entitled to compensation for damage caused to it as a result of the breach.
The Court held that as the lessor did not warn the lessee of the breach of the lease agreement, it is not entitled to the deposit or compensation. When a party to an agreement refrains from warning the other party that its actions constitute a breach of the agreement between the parties, and does not insist on the performance of a contractual right at the time specified in the agreement, then it creates the impression that the delay or breach is not substantial or at the root of the transaction. Such conduct constitutes bad faith conduct which may amount to a waiver of the breach claim. Here, the lessee and the lessor had comprehensive discussions regarding the reduction in the rent amount and early vacating of the property, and the lessor did not indicate at any stage that early vacating constituted a breach of the terms of the agreement, which led the lessee to perceive the early vacating as consensual. Thus, the conduct of the lessor does not justify the forfeiture of the deposit or the payment of compensation for the breach of the agreement.