On May 26, 2020, two bills recently passed by the New York City Council were signed into law by New York City Mayor Bill de Blasio. The new laws, among other things, restrict Landlord’s rights under existing commercial leases for property in New York City under certain conditions. However, because the laws purport to change landlords’ rights under existing agreements, they will likely be subject to legal challenges.
ENFORCEMENT OF PERSONAL LIABILITY PROVISIONS
On May 13, 2020, the New York City Council passed bill number Int. 1932-2020 by a vote of 44-6.1 The law amends the NYC Administrative Code to prohibit enforcement of personal guarantees in commercial leases under certain circumstances, but the law has a number of important limitations:
- The law is limited to personal guarantee “provision[s] in a commercial lease or other rental agreement.”2
- Although the language is somewhat ambiguous, it appears to be limited to rental agreements for commercial properties in New York City.
- The law may also be limited only to provisions actually in a lease or rental agreement, rather than in a separate, standalone guarantee contract, although again, the language of the law is not clear.
- The law is limited to personal guarantees by “natural persons” who are not tenants under the lease.3 Accordingly, guarantees providing for liability to non-tenant entities, as opposed to natural persons, are not covered by the new law.
- The law only applies to guarantees that would make the natural person(s) liable for “payment of rent, utility expenses or taxes owed by the tenant . . . or fees and charges relating to routine building maintenance owed by the tenant.”4 Accordingly, the law does not appear to cover personal guarantees that would require the guarantor to pay other expenses owed by the tenant, e.g., non-routine construction or renovation costs.
- The law covers only commercial tenants that fall into one of three specific categories:5
- First, businesses that were required to stop serving food or beverages on their premises, or otherwise required to cease operations, by virtue of New York Governor Andrew Cuomo’s Executive Order 202.3, which applies to restaurants, bars, video lottery gaming facilities, casinos, gym, fitness centers or classes, and movie theaters.6
- Second, businesses that were defined as “non-essential retail establishment[s]” under Governor Cuomo’s Executive Order 202.6 and guidance from New York Empire State Development, i.e., retailers that are not grocery stores, pharmacies, convenience stores, farmer’s markets, gas stations, restaurants or bars, hardware, appliance or building materials stores, pet food stores, or telecommunications stores serving existing customers.7
- Third, businesses that were “required to close to members of the public” under Governor Cuomo’s Executive Order 202.7, which applies to barbershops, hair salons, tattoo or piercing parlors, and related personal care services.8 There is some ambiguity, however, because Executive Order 202.7 also required all non-essential businesses in New York to reduce their in-person workforces by at least 75%.9 It is unclear whether businesses that closed to the public as a result of those restrictions are also covered.
- The new law is limited to guarantees that would have otherwise been triggered by tenant defaults that occurred only from March 7, 2020 through September 30, 2020.10
Accordingly, the law only applies to certain types of guarantees and certain types of liability, to specific categories of commercial tenants, and only to tenant defaults that arose during a limited, defined time period. Where the law does apply, however, it appears to preclude landlords from seeking to enforce personal guarantees based on defaults that arose during the March 7 to September 30, 2020 period.
HARASSMENT OF COMMERCIAL TENANTS IMPACTED BY COVID-19
Also on May 13, 2020, the New York City Council enacted bill number Int. 1914-2020 by a vote of 47-3.11 This law expands an existing provisions of the NYC Administrative Code that prevent landlords from engaging in “harassment” of commercial tenants.12 "Harassment” is defined in the Administrative Code as “any act or omission . . . that is intended to cause a commercial tenant to vacate covered property, or to surrender or waive any rights under a lease,” if such an act is coupled with an improper threat, like the threat of physical force or threats based upon age, race, creed, color, national origin, gender, and so forth.13 “Harassment” does not include “[a] landlord’s lawful termination of a tenancy, lawful refusal to renew or extend a lease or other rental agreement, or lawful reentry and repossession of the covered property.”14
Under the new law, “harassment” would also include threatening a commercial tenant based upon its “status as a person or business impacted by COVID-19 or [its] receipt of a rent concession or forbearance for any rent owed during the COVID-19 period.”15 The new law defines “impacted by COVID-19” as including individuals diagnosed with COVID-19, businesses “subject to seating, occupancy or on-premises services limitations” pursuant to COVID-19-related governmental orders, and businesses whose revenue declined by more than 50% during “the COVID-19 period” as a proximate result of the pandemic.16
The “COVID-19 period,” in turn, is defined as running from March 7, 2020 through the later of: (a) the end of the first month that commences after the expiration of New York’s “moratorium on enforcement of evictions” under the New York governor’s executive orders; (b) the end of first month that commences after the expiration of “certain residential evictions” under the federal CARES Act; or (c) September 30, 2020.17
POTENTIAL CONSTITUTIONAL CHALLENGES TO THE LAWS
Because the new laws purport to limit some landlords’ rights under existing commercial leases, the laws may be subject to constitutional challenges. With respect to the personal liability provisions law, it may be subject to a challenge under the Contracts Clause of the US Constitution,18 as it represents an impairment of existing contractual rights.
As we have previously written, however, state legislatures “retain the power to safeguard the vital interests of their people,” and therefore retain the ability to abrogate preexisting contractual obligations in certain, limited circumstances.19 Under well-established principles, set forth by the United States Supreme Court, where there is a “public emergency,” and where the “relief afforded was temporary and conditional,” the legislative impairment of contractual obligations is typically upheld by the courts.20 Courts will not uphold contractual impairments where the impairment is not limited in duration, where there is no emergency, and where the impairment is not “reasonable and necessary” to achieve an “important public purpose.”21
Relying upon these principles, the New York Court of Appeals upheld a World War II-era emergency law that temporarily set a cap on commercial rents, and held that landlords with leases that pre-dated the emergency law could not collect rent in excess of the new statutory maximum.22 Courts in New York and elsewhere upheld similar laws precluding parties from collecting rent and certain mortgage fees during the fiscal crises of the 1970s.23 Would-be guarantors will likely rely upon these and similar cases to argue that the new law is similarly constitutional. Landlords may argue in response, among other things, that this law is distinguishable from those earlier cases because this law is not truly temporary, in that it appears to forever preclude enforcement of a personal guarantee for defaults arising from March 7 through September 30, 2020, and is not “reasonable and necessary” to achieve the City’s apparent purpose of providing protections for tenants and individuals affected by COVID-19.
The anti-harassment law presents different issues and may be subject to challenge on First Amendment grounds. As we have elsewhere written, a federal court in Massachusetts recently enjoined on First Amendment grounds the enforcement of COVID-19-related regulations that prevented debt collectors from communicating with debtors via telephone and from threatening to file a lawsuit to collect the debts.24 Landlords in New York may raise similar arguments here. Commercial tenants will likely contend in response that the New York law is not as broad as the Massachusetts regulation, and thus does not present the same First Amendment concerns.
10. See supra note 1.
13. NYC Admin. Code § 22-902.
15. See fn. 11, supra.
18. US Const. Art. I, Section 10, cl. 1.
19. 162 A.D.3d 1169, 1176 (3d Dep’t 2018).
20. 290 US 398, 440-42 (1934).
21. See, e.g., 79 N.Y.2d 39, 43-48 (1992).
22. 294 N.Y. 571 (1945).
23. 79 Misc. 2d 852 (N.Y. Dist. Ct. 1974); 366 Mass. 203 (1974); see also 44 N.Y.2d 101 (1978).
24. Seyfarth Shaw represented the plaintiff in that case.