In a highly-anticipated decision, Judge Ronnie Abrams of the United States District Court for the Southern District of New York ruled on March 31, 2023, in Melendez v. City of New York, that New York City's Guaranty Law is unconstitutional, violating the Contracts Clause of the United States Constitution. This ruling carries significant implications for commercial landlords and small businesses impacted by the COVID-19 pandemic.­

Background
The New York City Council enacted the Guaranty Law in May 2020 as part of a legislative package aimed at easing financial burdens on small businesses during the pandemic. The Guaranty Law rendered personal guaranties of certain commercial leases unenforceable as to rent defaults for the period from March 7, 2020 through June 30, 2021.

In Melendez, the plaintiffs, a group of commercial landlords, contended that the Guaranty Law unjustly shifted financial burdens onto them without offering legal recourse or compensation. In December 2020, we discussed here Judge Abrams' earlier decision to dismiss the case, holding that the Guaranty Law pursued a legitimate public interest, i.e., the financial survival of small business owners. In November 2021, we reported here on the Second Circuit's review of the decision, in which the Second Circuit expressed concerns about the Guaranty Law's constitutionality under the Contracts Clause, and remanded the case to the district court for further consideration after a more comprehensive factual record.

Following the Second Circuit's guidance, the district court has now concluded that the Guaranty Law is not reasonably tailored to achieve its policy objectives and therefore violates the Contracts Clause and is unconstitutional.

Implications
For commercial landlords who have faced financial challenges due to the restrictions imposed in the wake of COVID-19, the decision to strike down the Guaranty Law represents a significant victory. However, the decision brings uncertainty as to the fate of guarantors who benefitted from the law.

It remains to be seen whether the decision will be appealed and, if so, whether the Guaranty Law will remain in effect pending appeal. We are available to discuss any questions you may have concerning this significant decision and how it may impact you or your business.

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