Federal Court Upholds New York City’s Recently Enacted “Guaranty Law” And Related Legislation Concerning Non-Payment Of Rent Arising Out Of COVID-19

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In a highly anticipated decision, Judge Ronnie Abrams of the United States District Court for the Southern District of New York, in Melendez v. City of New York, dismissed a challenge to the “Guaranty Law” and related legislation that was enacted by the New York City Council in the wake of the COVID-19 pandemic.

The Guaranty Law (formally entitled “Personal Liability Provisions in Commercial Leases”), which was enacted by the New York City Council in May 2020, currently provides that a personal guaranty (by a natural person who is not the tenant) of a commercial lease involving real property located in New York City shall not be enforceable for the period from March 7, 2020, through March 31, 2021, if certain requirements are met. The Guaranty Law applies in the following circumstances, provided the default by the tenant occurred during the period noted above:

  • the tenant was required to cease serving patrons food or beverage for on-premises consumption or to cease operation pursuant to executive order;
  • the tenant was a non-essential retail establishment subject to in-person limitations under guidance issued by the New York State Department of Economic Development pursuant to executive order; or
  • the tenant was required to close to members of the public pursuant to executive order.

In addition, the default by the tenant must have occurred during the period noted above.

In Melendez, the constitutionality of the Guaranty Law was challenged by one of the plaintiffs, a landlord of a small mixed-use building in Manhattan. The landlord’s principal argument was that the Guaranty Law violated the prohibition against a state’s impairment of contractual obligations contained in Article I, Section 10 of the U.S. Constitution, commonly referred as the Contract Clause.

In her November 25, 2020 Opinion and Order in Melendez, Judge Ronnie Abrams ruled against the landlord in upholding the constitutionality of the Guaranty Law. While conceding that the law did substantially impair the landlord’s contracts with its commercial tenants and their guarantors, Judge Abrams cited U.S. Supreme Court precedents for the proposition that the Contract Clause is subject to a state’s exercise of its police power to promote and protect the public good.

Taking cognizance of the substantial economic harm New York City has been suffering by virtue of the COVID-19 pandemic, Judge Abrams held that the Guaranty Law advanced a legitimate public interest, seeking “to prevent New York’s small business owners from being ‘pushed into both business and personal bankruptcy,’” which the City contends is an undesirable result that would worsen the continuing economic crisis in the City. The Judge found that the Guaranty Law was reasonable and necessary to advance the public interest involved here, and that it was proper for the Court to give deference to the policymaking decision of the City Council that the financial survival of small business owners is critical to the city’s economic recovery from the pandemic.

The plaintiff-landlords in Melendez also challenged two additional local laws enacted by the City Council contemporaneously with the passage of the Guaranty Law, which modified the city’s “Residential Harassment Law” and “Commercial Harassment Law.” The modifications were enacted to add a prohibition of harassment of a tenant or other lawful occupant “impacted by COVID-19” to the existing ordinances that prohibit landlords from harassing tenants out of their lawfully-occupied dwellings or commercial premises. The newly-added inclusion of tenants “impacted by COVID-19,” is defined to include essential workers, individuals diagnosed with COVID-19, caretakers of such individuals, persons unemployed with additional financial responsibilities resulting from the pandemic and businesses closed as a result of the pandemic. Judge Abrams upheld the constitutionality of the modification to the Harassment Laws, refuting the plaintiffs’ arguments that the laws violated free speech and that they were unduly vague and thus violated due process. In so ruling however, the Judge threw landlords “a bone,” holding that a landlord’s mere demand for rent was not prohibited by those two ordinances.

Judge Abrams’ decision in Melendez, which is no doubt a disappointment to landlords, will likely be appealed by plaintiffs to the United States Court of Appeals for the Second Circuit. Accordingly, this may not be the last word on this important issue.

[View source.]

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