For those interested in knowing whether the New York City “Guaranty Law,” which was enacted by the City Council in May 2020 in the wake of the COVID-19 pandemic, will survive a challenge to its constitutionality, the wait continues. In December 2020 we wrote here about the decision by Judge Ronnie Abrams of the United States District Court for the Southern District of New York, in Melendez v. City of New York, which dismissed a challenge to the Guaranty Law and related legislation. On appeal by the landlord-plaintiffs, the Second Circuit, in a lengthy decision issued on October 28, 2021, has handed the case back to Judge Abrams for further development of the facts and decision on the constitutional challenge.

The Guaranty Law (formally entitled “Personal Liability Provisions in Commercial Leases”) 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 the extended date of June 30, 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 the executive order.

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, primarily on the ground 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 Contracts Clause. In her November 25, 2020 Opinion and Order in Melendez, Judge Abrams ruled against the landlord and upheld the constitutionality of the Guaranty Law, finding that although the law did substantially impair the landlord’s contracts with its commercial tenants and their guarantors, the Contracts 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 suffered by virtue of the COVID-19 pandemic, Judge Abrams held that the Guaranty Law advanced a legitimate public interest, i.e., the financial survival of small business owners, which is critical to the city’s economic recovery from the pandemic.

On appeal, the Second Circuit held that plaintiffs alleged a plausible Contracts Clause challenge to the Guaranty Law and, accordingly, that the complaint should not have been dismissed by the district court. The Second Circuit found that the Guaranty Law significantly impairs personal guaranty agreements and that although the record thus far demonstrates a plausible significant public purpose for the impairment, the record also raises several serious concerns about whether the law is reasonable and appropriate. Among other things, the Second Circuit noted that the law permanently deprives a landlord of the protection of a lease guaranty for up to sixteen months of rent arrears and without regard to the guarantor’s financial condition, without compensating the landlord or mitigating its damages. Rather than holding that the Guaranty Law is unconstitutional as a matter of law, the Second Circuit remanded the case to the district court to allow the parties to further develop the factual record and for the district court to thereafter decide whether the constitutional challenge is “likely to succeed,” which is a prerequisite for the injunctive relief sought by plaintiffs.

In its October 28, 2021, decision, the Second Circuit clearly anticipated a further appeal after the facts are more fully developed, noting that “any appeals from further rulings by the district court in this case shall return to this panel.” So stay tuned as we continue to follow for the last word on this important issue.

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