If your pet did in fact damage the carpet over and above normal wear and tear then you could indeed be liable for replacement of the carpet. But in no way is your landlord entitled to an upgrade in improvements to the apartment.  Truthfully, you may not smell anything living there.  Sometimes your sense of smell is blocked to an odor you live with all the time.  You are going to have to agree to get someone in there to mediate - an impartial third party.  Then if you think that the carpet needs to be replaced, I would bring in someone to look at it.  Make sure that they give you a quite for the same grade carpet - not a better or worse version.  Take in to account the age of the original carpet (you are entitled to depreciation) and then make your landlord an offer.  If they refuse you have the necessary proof when they sue you.  Good luck.