Certain guarantors of restaurant, retail, and other commercial leases in New York City may soon be off the hook for tenant defaults occurring during the COVID-19 pandemic, thanks to a bill recently passed by the New York City Council. Here are the top three things you should know about the new legislation:
The New York City Council passed a bill (“Int. No. 1932-A”) on May 13, 2020 that would prohibit enforcement of personal liability against non-tenant guarantors that are natural persons (i.e., not business entities) for certain commercial leases. The full text of the bill can be found here.
Int. No. 1932-A applies to commercial leases where guarantor liability is caused by a tenant default or other trigger occurring between March 7, 2020 and September 30, 2020. The commercial tenant must also meet one of the following requirements:
a) The tenant was required to cease serving food or beverage for on-premises consumption or was required to cease operation under Executive Order 202.3 (which restricted operations for restaurants, bars, gyms, casinos and movie theaters effective as of March 16, 2020);
b) The tenant was a “non-essential retail establishment” subject to in-person limitations under guidance issued by the New York Department of Economic Development, pursuant to Executive Order 202.6, dated March 18, 2020; or
c) The tenant was required to close to the public under Executive Order 202.7 (which restricted operations for barbershops, hair salons, tattoo or piercing parlors and related personal care businesses (e.g., nail salons) effective as of March 21, 2020).
The bill targets small retail businesses by providing liability protections only to natural persons – limited liability companies and other business entities are not covered. Specifically, the bill prohibits enforcement of personal liability, in whole or in part, for the payment of rent, utility expenses or taxes, or fees and charges relating to routine building maintenance.
The bill also makes it a form of commercial tenant harassment if a landlord attempts to enforce a personal liability provision that the landlord knows or reasonably should know is not enforceable.
Notably, individual owners of venture and start-up companies that have provided guaranties for office space in New York City do not appear to be covered by the bill. While these office tenants have also been unable to use their space during the COVID-19 pandemic due to Executive Orders, and may also be struggling financially, they would not satisfy the requirements summarized above that concentrate on retail operations.
Int. No. 1932-A passed the City Council by a vote of 44-6 as a part of the City Council’s “COVID-19 Relief Package”. The bill is currently before the Mayor, who can sign, veto, or take no action on the bill. If the Mayor signs the bill, or takes no action for 30 days, the bill will become a part of the New York City Administrative Code. If the Mayor vetoes the bill, it will be sent back to the Council, who can override a mayoral veto with a two-thirds vote. Any action by the Mayor, either way, will happen by June 12. If the bill becomes law, it would be effective immediately.
The Mayor has expressed support for some portions of the City Council’s COVID-19 Relief Package, and we understand that this bill was negotiated beforehand with the Mayor’s office. As a result, we anticipate the Mayor will likely sign this bill or, as he has commonly done, take no action for 30 days and let the bill “lapse” into law. It is also worth noting that Mayor de Blasio has never vetoed a bill from the City Council.
If the bill becomes law, it is likely to face a legal challenge. Industry groups such as the Real Estate Board of New York have argued that the bill is an impermissible impairment of existing contracts, beyond the authority of the City Council. However, a co-sponsor of the bill has argued back that the City Council has broad authority to suspend contractual enforcement temporarily during a state of emergency, and the bill’s protections are short-lived, expiring for defaults occurring after September 30, 2020.
Additionally, the bill may face litigation to clarify if it covers standalone guaranties. While commercial lease guaranties are commonly executed as separate documents apart from a lease (e.g., so-called “good guy” guaranties that are common practice in retail and restaurant leasing in New York City), the bill applies to personal liability provisions “in a commercial lease or other rental agreement” and does not specifically reference standalone guaranty agreements. Although standalone commercial guaranty agreements appear to be captured within the overall intent of the bill, the City Council heard testimony, while considering the bill, that the language might be unclear and could lead to litigation to clarify the issue.