New York City Enacts New COVID-19 Legislation Gutting Commercial Lease Guaranties

New York City Enacts New COVID-19 Legislation Gutting Commercial Lease Guaranties

As executives and legislatures across the country continue to take varying approaches to soften the economic and public health toll that COVID-19 leaves in its wake, the New York City Council has met the novel COVID-19 virus with a novel (and arguably unconstitutional) measure that Mayor Bill de Blasio signed into law on May 26, 2020. Int. No. 1932-A is an ordinance which purports to void personal guaranty provisions in connection with commercial leases for defaults occurring between March 7 until September 30, 2020.

The legislation was rolled out in a package of ordinances designed to protect tenants, businesses and restaurants during the COVID-19 pandemic and, according to the Mayor’s press release on the subject: “offer[s] sweeping protections for New Yorkers in a time of unprecedented financial insecurity.”

Personal lease guaranties are designed to provide landlords additional security in the event that tenants are unable to fulfill monetary or other lease-based agreements, such as maintenance, but they are also used in other situations such as large-scale construction projects to ensure that a contractor will carry the project to completion.

The new ordinance, Int. No. 1932-A, only applies to commercial leases and vitiates the expectations of landlords and tenants by making unenforceable all personal guaranties for the complete or partial payment of rent, utility expenses, or taxes, if the tenant was:

  1. a foodservice business which was required to cease operations for on-premises consumption pursuant to Governor Andrew Cuomo’s Executive Order 202.3 issued on March 16, 2020;
  2. a non-essential retail establishment subject to in-person limitations under guidance issued by the New York State Department of Economic Development pursuant to Governor Cuomo’s Executive Order 202.6 issued on March 18, 2020; or
  3. required to close to members of the public pursuant to Governor Cuomo’s Executive Order 202.7 issued on March 19, 2020 which closed all personal service facilities, such as barbershops, hair salons, and tattoo or piercing parlors.

Under ordinary practice, personal guaranties do not extend liability to the guarantor immediately, but only become operative upon a default of the underlying contract. The New York City ordinance limits itself to voiding all personal guaranty liabilities that would have been triggered by a default of any nature, related to COVID-19 or not, that occurred between March 7, 2020 and September 30, 2020.

Finally, the legislation deems any attempts to enforce a personal liability provision as “commercial tenant harassment” which would impose a mandatory civil penalty of between $1,000 and $10,000, injunctive and equitable relief, compensatory damages, punitive damages and reasonable attorneys’ fees.

This legislation will be surely contested in the courts over the coming months, both as effective policy (guaranties often provide landlords the comfort and security they require before leasing to an entity), and as potentially unconstitutional under the federal Contract Clause. In short, the Contract Clause prohibits states (or their subdivisions like municipalities) from enacting laws that “operate as a substantial impairment of a contractual relationship.” American Economy Insurance Co. v. State of New York, 30 N.Y.3d 136, 136 2017) (citing Energy Reserves Group, Inc. v. Kansas Power & Light, Co., 459 U.S. 400, 411 (1983)) (requiring the law to have a “significant and legitimate public purpose” and it be based on “reasonable conditions and . . . of a character appropriate to the public purpose justifying the [legislation’s] adoption”).

Businesses of all sizes, especially restaurants and non-essential retail businesses, have taken an immeasurable and in many instances irreparable hit during the COVID-19 pandemic. This legislation aims to ease the burden on individual business owners (who normally operate as lease guarantors) but may eventually serve simply to reallocate the damage and loss to property owners, managers, and borrowers. Because the Contract Clause has been strictly interpreted to prevent states or their municipalities from passing laws that retroactively impair contractual rights, Int. No. 1932-A squarely implicates the Framers’ concerns against states granting “private relief” laws that eradicate some contracts (or elements thereof) to allow particular persons to be relieved of their obligations to repay a debt at the expense of other persons. Int. No. 1932-A has as many proponents as it does detractors and it remains to be seen whether the law will withstand scrutiny.  The only certainty in this situation is that we will not have to wait long to find out.

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