Help or Harm? New Legislation Aimed at Helping Tenants and Borrowers Impacted by COVID Causes Concern for Landlords and Lenders

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In his recent State of the State Address, New York Governor Andrew Cuomo indicated a desire to stay mortgage foreclosures, commercial evictions and foreclosures through May 1, 2021. On March 9, 2021, the Governor’s desires turned into reality when NYS Senate Bill S471A was signed into law as Chapter 73 of the Laws of 2021, known as the “COVID-19 Emergency Protect Our Small Businesses Act of 2021” (the “Act”).

COMMERCIAL EVICTIONS

Although stays of enforcement for both residential and commercial evictions and foreclosures expired February 26, 2021, residential tenants and mortgagors had the ability to simply submit a standardized hardship declaration form in order to extend the eviction and foreclosure ban through May 1, 2021 -- apparently leaving commercial tenants and mortgagors subject to enforcement. The Act has now changed that and provided commercial tenants with similar protections.

PROTECTIONS FOR TENANTS UNDER THE ACT

With respect to evictions, this legislation expands protections for certain commercial tenants, whether for nonpayment of rent, or for holding over after the expiration of a lease, upon the mere submission of a standardized hardship declaration form, which the landlord must provide. In fact, landlords are now required to include this form “with every written notice required by the commercial lease or tenancy agreement”; as well as prior to the commencement of an eviction proceeding; and with every notice of petition or summons and complaint served on a tenant.

In order to proceed, a landlord has the additional burden of attesting to the court that it has either not received a hardship declaration from the tenant, or if received, that the tenant is “persistently and unreasonably engaging in behavior that substantially infringes on the use and enjoyment of other tenants or occupants, or causes a substantial safety hazard to others.”

A covered tenant, as defined in the Act, is an independently owned and operated commercial tenant that is a New York state resident, with fifty or fewer employees and not dominant in its field. By signing the hardship form, which requires no corroborating or supporting documentation, such a tenant simply declares that it has lost significant revenue, or had significantly increased necessary costs during the pandemic, thereby availing itself of an extended stay of eviction through at least May 1, 2021. Of course, given the monumental backlog of evictions that have been prevented from filing, plus cases that have been pending for months, combined with newly-decreased court capacities, it’s anyone’s guess as to when a landlord might be able to actually recover possession of its property by means of a Sheriff or Marshal, who will eventually face their own tsunamis of warrants to be executed.

While the form does remind tenants that unpaid rent will still be owed, the harsh reality for many landlords will be tenants that simply walk away from their spaces – and their debts – once they have exhausted these legislative gifts. Or some may find it advantageous at that stage to finally abandon the tenant entity altogether and continue operations under a new closely held entity, elsewhere. Meanwhile, landlords, with a significant asset on the line, will be left with no choice but to pay all property expenses, including those that may be temporarily suspended, or risk eventual loss of their properties through foreclosure. While the Act purports to “protect small businesses” and aims to ensure “small businesses can survive in this unprecedented time,” it seems the bills’ sponsors and the Governor fail to recognize that most landlords themselves are small businesses.

The Act also automatically stays any eviction proceedings filed on or before May 7, 2020 or commenced within thirty days of March 9, 2020, for at least 60 days, or to a later date if so ordered by the chief administrative judge. In any case where a warrant of eviction or judgement of possession or ejectment has already been issued, but not yet executed, including those issued prior to May 7, 2020, the Act further provides that the courts must stay execution at least until a status conference has been held with the parties.

This constantly shifting landscape continues to transform the way landlords must deal with defaulting tenants. Each situation is unique and landlords are advised to consult with a knowledgeable attorney, capable of navigating these complex and evolving enforcement requirements and to discuss options and resources that can be utilized to assist in recovering possession of their property and collecting past-due rent.

COMMERCIAL MORTGAGE AND TAX FORECLOSURES

Similar to the protections provided to commercial tenants (and the added burden imposed on commercial landlords), the Act protects mortgagors and landowners operating small businesses from foreclosure actions being commenced or proceeding for a period of sixty (60) days. Specific hardship declaration forms have been created for both mortgage foreclosures and tax foreclosures.

PROTECTIONS FOR MORTGAGORS AND PROPERTY OWNERS UNDER THE ACT

With respect to commercial foreclosures of mortgages, the courts have been directed to provide defendants in commercial foreclosures with a copy of the hardship declaration to be returned and filed in the pending case. Notwithstanding this provision, it is suggested that practitioners provide the hardship declaration to all commercial defendants in pending cases; this will provide grounds for demonstrating that the hardship declaration was actually sent. If a borrower is in default but a foreclosure case is not pending, mortgagees must send a hardship declaration to defaulted mortgagors with every notice sent to the mortgagor prior to filing. The Act provides that in order to commence a foreclosure action, the mortgagee must provide an affidavit stating that the hardship declaration was served, and the manner that it was served, together with an affidavit that the hardship declaration was not returned.

As with the eviction hardship declaration, the foreclosure hardship declaration does not require the mortgagor to demonstrate an actual hardship as a result of COVID-19.

Mortgage Foreclosures

Part B, Subpart A of the Act applies to “any action to foreclose a mortgage relating to commercial real property, provided the owner or mortgagor of such property owns ten or fewer commercial units whether directly or indirectly and is a business that is a resident in New York State, independently owned and operated, not dominant in its field and employs fifty or fewer persons.” Unlike the act staying residential foreclosures that does not apply to vacant and abandoned properties, there is no corresponding provision in the Act for vacant commercial properties. Apparently there is no requirement that the business is operating, or had been operating prior to the onset of the pandemic.

A confusing aspect of the new legislation is that the Act stays all commercial foreclosures for “at least sixty days” from the effective date of March 9, 2021; but that if a hardship declaration is returned, the case is stayed until at least May 1, 2021 (which is less than 60 days). The Act provides that in cases where the judgment of foreclosure and sale has been issued but not executed, the case is stayed until the court has held a status conference with the parties. If a hardship declaration is returned, the execution will be stayed until at least May 1, 2021.

Notably, the hardship declaration creates a rebuttable presumption of financial hardship; the failure to submit a hardship declaration “does not create a presumption that a financial hardship is not present.”

Tax Foreclosures

Part B, Subpart B of the Act applies to “any action to foreclose on delinquent taxes or sell a tax lien relating to commercial real property, provided the owner or mortgagor of such property owns ten or fewer commercial units whether directly or indirectly and is a business that is a resident in New York State, independently owned and operated, not dominant in its field and employs fifty or fewer persons.” This applies to the same owner or mortgagor as the mortgage foreclosure actions.

The Act’s treatment of tax foreclosure cases is significantly different than mortgage foreclosures. In tax foreclosures, the enforcing officer or person/entity conducting the tax lien sale or tax foreclosure is required to notify the property owner of the owner’s rights under the Act and of the availability of a hardship declaration. The hardship declaration for tax foreclosures will be available on New York State Department of Tax and Finance’s website. The notice of the availability of a hardship declaration is to be provided at least 30 days prior to a sale of a tax lien or upon the filing of the petition of foreclosure of a tax lien.

If a hardship declaration is submitted, it acts as a stay of all tax lien sales and tax foreclosure actions that have been commenced or could have been commenced prior to May 1, 2021. This also acts as a stay against the commencement of future proceedings to recover delinquent taxes. The statute of limitations to commence an action or sell a tax lien is tolled until the stay expires.

As with mortgage foreclosures, it is recognized that the hardship declaration creates a rebuttable presumption of financial hardship; the failure to submit a hardship declaration “does not create a presumption that a financial hardship is not present.”

Prohibited Discrimination

Part B, Subpart C of the Act prohibits lending institutions from (a) discriminating against owners of commercial real property in determining whether to extend credit; or (b) reporting negative credit to any credit reporting agency, if the owner has been granted a stay of a mortgage foreclosure proceeding or tax foreclosure proceeding, or tax lien sale. The section also contains a hardship declaration that will be made available to commercial owner/mortgagors on the New York State’s department of financial services website, and while not provided for in the Act, should be made available by lending institutions. If a hardship declaration is filed with the lender, the lender is prohibited from (a) discriminating against owners of commercial real property in determining whether to extend credit; or (b) reporting negative credit to any credit reporting agency.

The Act is one of many statutory efforts taken to protect New York businesses from the significant adverse impacts of the COVID-19 pandemic. It is strongly recommended that lenders, municipalities and private mortgagees consult a knowledgeable attorney, capable of navigating these complex and evolving enforcement requirements and to discuss options and resources that can be utilized to assist in enforcing various rights to commercial real property.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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