SDNY Upholds NYC Law Prohibiting Enforcement Of Personal Liability Provisions For COVID-19-Impacted Commercial Tenants

Morrison & Foerster LLP

Morrison & Foerster LLP

On November 25, 2020, the Southern District of New York upheld Section 22-1005 of the New York City Administrative Code, which renders personal guaranties contained in leases unenforceable for commercial tenants impacted by COVID-19. Enacted on May 26, 2020, Section 22-1005 initially applied where a default under a lease had occurred between March 7, 2020, and September 30, 2020, but has since been extended through March 31, 2021. Additionally, the legislation expanded the definition of harassment of commercial tenants of 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.

Both the “Guaranty Law” and the “Commercial Harassment Law” were challenged in court by the owners of small commercial buildings in New York City, who alleged that the laws caused the plaintiffs “severe economic harm by impeding their ability to profit from their properties” by preventing them from pursuing routine paths in collecting rent from their tenants and recovering income pursuant to personal guaranties. The claims were brought under a constitutionality challenge, with alleged violations of the right to free speech, the right to due process, and the Contract Clause.

While the Southern District recognized the plaintiffs’ concerns as “legitimate” and acknowledged that each of the commercial landlords cited the personal guaranty clauses as inducement for entering into leases with small business tenants, it nonetheless upheld both the Guaranty Law and the Commercial Harassment Law. The court concluded that: (i) the Commercial Harassment Law does not “prevent landlords from making routine rent demands” and, accordingly, does not violate the plaintiffs’ free speech; (ii) the Commercial Harassment Law is “sufficiently clear on what constitutes harassment” and, accordingly, does not violate due process; (iii) because the court must give “broad deference to the good-faith efforts of policymakers to regulate in the interest of the public good,” the Guaranty Law does not violate the Contract Clause; and (iv) lastly, the court held that both the Guaranty Law and the Commercial Harassment Law are not preempted by state law.

The court did not address the issue of guaranties that, rather than appearing as a provision of the lease, are executed as a stand-alone contract between the landlord and guarantor. The ambiguity and the uncertainty of how a court would decide the issue of separate guaranty agreements remain. Many legal commentators believe that the reasoning in this decision was faulty, and the case was incorrectly decided. The plaintiffs are expected to appeal the Southern District of New York’s decision.

We will continue to monitor the progress of this litigation and will provide further updates as it develops.

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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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