On
May 13, 2020, the NYC Council approved Int.
No. 1932-A,
which makes substantial changes to personal guaranties in commercial leases.
The bill is on the Mayor’s desk to be enacted.
The
bill’s purpose is to provide relief to NYC commercial tenants impacted by
COVID-19. It temporarily prohibits the enforcement of personal liability
provisions in commercial leases or rental agreements. It would amend the
Administrative Code of the City of New York by adding Section 22-1005 and
adding Paragraph 14 to Subdivision a of section 22-902 of the NYC Administrative
Code.
If
enacted, the bill would render guarantee provisions unenforceable against
natural persons who are not a tenant in commercial leases or other rental real
property. The law would only impact liability for the payment of rent and other
charges caused by an occurrence of default, and subject to the following conditions:
1. The tenant must satisfy at least one of the following:
a) The
tenant was required to cease serving patrons food or beverage for on-premises
consumption or to cease operation under EO 202.3;
b) The
tenant was a non-essential retail establishment subject to in-person
limitations under guidance issued by the NYS Department of Economic Development
pursuant to EO 202.6; or
c) The
tenant was required to close to members of the public under EO 202.7; and
Under
the bill, an attempt to enforce a personal liability provision that the
landlord knows or reasonably should know is unenforceable, pursuant to the
above, shall be deemed commercial tenant harassment, which could result in
compensatory and punitive damages and attorneys’ fees and court costs. See
N.Y.C. Admin. Code § 22-903.
Sounds
too good to be true for many tenants and often when it’s too good to be true,
it’s untrue. Expect this law to be challenged on constitutional grounds should
it be enacted. Specifically, the bill seems to impair the Contracts Clause of
the United States Constitution because it retroactively affects personal
guaranties entered into prior to the bill’s passing. For such a claim to
succeed, the initial inquiry under the impairment of contracts clause contains
three components:
- Whether there is a contractual relationship;
- Whether a change in law impairs that contractual relationship; and
- Whether the impairment is substantial. U.S.C.A. Const. Art. 1, § 10, cl. 1; American Economy Ins. Co. v. State, 30 N.Y.3d 136 (2017).
While
tenants will surely argue that the bill doesn’t substantially impair the
parties’ contractual relationship, as the bill only covers rent and payments
for the period of March 7, 2020 to September 30, 2020, landlords will counter
that the personal guarantee was a material term of the lease and a substantial
reason that the landlord agreed to enter into the contract.
For
analogy, the Court of Appeals has previously struck down similar government
interference in contacts. In Patterson v. Carey, the Court of Appeals
struck down a law which curtailed toll authority bondholders’ ability to
increase their tolls for Jones Beach State Parkway on constitutional grounds.
41 N.Y.2d 714 (1977).
If
the NYC bill passes, it would likely undergo similar challenges and review as
the law in Patterson and be deemed unconstitutional. The bill’s
impairment to contractual rights agreed upon by landlords and guarantors would
be substantial, especially considering that the bill does not merely delay a
landlord’s right to enforce the guarantee during the period stated in the bill,
it extinguishes it altogether.
Mayor
DeBlasio has until June 12, 2020 to either sign, veto, or do nothing. If the Mayor
signs the bill or does nothing, the bill will automatically become law. If the Mayor
vetoes the bill, it is sent back to the Council. The Council can then override
the Mayor’s veto with a 2/3 vote.
In
the meantime, both landlords and tenants should contact their attorneys to
ensure that their interests are protected and to prepare for expected lawsuits
to follow. For ideas on how to creatively resolve lease issues due to
coronavirus and for tips on important lease provisions when renegotiating,
listen to our podcasts HERE
and HERE.
