NYC EnactsLaw Prohibiting Enforcement Of Personal Liability Provisions For COVID-19-Impacted Commercial Tenants

Morrison & Foerster LLP

Morrison & Foerster LLP

On May 26, 2020, New York City enacted a law that renders personal guaranties unenforceable for commercial tenants impacted by COVID-19. Section 22-1005 of the Administrative Code of the City of New York states that a provision in a commercial lease or rental agreement that provides for an individual to be personally liable for a tenant’s default will not be enforceable if two conditions are met:

1. The tenant was:

a. Required to cease serving food or beverage for on-premises consumption or to cease operation under Executive Order 202.3 issued by the governor on March 16, 2020;

b. 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 202.6 issued by the Governor or March 18, 2020; or

c. Required to close to members of the public under Executive Order 202.7 issued by the governor on March 19, 2020.

2. The default causing such person to become wholly or partially personally liable for such obligation occurred between March 7, 2020 and September 30, 2020.

Additionally, the law expands the definition of harassment of a commercial tenant under Section 22-902 of the Administrative Code to include attempting to enforce a personal liability provision that the landlord knows or reasonably should know is not enforceable pursuant to Section 22-1005.

This legislation aims to provide relief to commercial tenants who have been impacted by the government regulations in response to the COVID-19 pandemic and individuals who have provided personal guaranties to a landlord. However, the text of the legislation specifically addresses guaranty provisions in “commercial lease[s] or other rental agreement[s].” A personal guaranty, however, does not generally appear as a provision in the lease itself, but instead is usually a separate, standalone contract between the guarantor and landlord. A guaranty agreement is itself not a rental agreement – its purpose is to assure a tenant’s obligations under a lease. This ambiguity could lead to challenges of the legislation, and it is unclear how a court would decide the issue of separate guaranty agreements. Additionally, the legislation may be challenged on constitutional grounds as violating the Contracts Clause by impairing the parties’ contractual relationship.

[View source.]

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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