New York City Bars Enforcement of Personal Guaranties in Commercial Leases of COVID-19-Impacted Tenants

Alerts / June 8, 2020

On May 26, Mayor Bill de Blasio signed New York City Administrative Code Section 22-1005 into law. The new law prohibits the enforcement of personal liability provisions in commercial leases or rental agreements involving tenants impacted by COVID-19.[1] The local law applies to businesses in New York City that were forced to close or limit their services to comply with Executive Orders 202.3,[2] 202.6[3] and 202.7[4] issued by New York State Gov. Andrew M. Cuomo in response to the COVID-19 pandemic (the Executive Orders). Affected businesses include restaurants and bars; gyms and fitness centers; movie theaters; barbershops, hair salons and related personal care services; and nonessential retail establishments subject to in-person workforce restrictions set forth in the Executive Orders.

Under the law, landlords are forbidden from enforcing personal guaranties contained in commercial leases or other rental agreements against persons who guaranteed the obligations of businesses impacted by mandated closures and service limitations enacted by the Executive Orders. Furthermore, the new law amends New York City’s commercial tenant harassment statute to include threatening or attempting to enforce any such provision as a form of harassment.

The bill has been met with criticism from real estate industry professionals from both a practical and a legal point of view.[5] As written, the law does not explicitly ban the enforcement of separate lease guaranty agreements made by individuals that are not contained in the applicable lease or rental agreements. Although there are commercial leases that incorporate personal guaranties within them, guaranty arrangements are commonly made separately and in conjunction with their related lease agreements. In addition, the law does not prohibit enforcement activities against corporate guarantors of commercial leases. Thus, parent companies that guaranty the lease obligations of proprietors would not be protected under the new law, which apparently seeks only to shield individuals from the adverse economic impacts of the pandemic. There is also the likelihood that this law may be challenged as violating the contracts clause of the United States Constitution, which prohibits states from passing any law impairing the rights and obligations of contract parties (Article I, Section 10, Clause 1).

Overall, whether the new law will significantly insulate small-business owners in New York City from the adverse economic impact of COVID-19 as intended remains to be seen. We intend to monitor this closely and provide updates as information becomes available.

Authorship Credit: Michael Iannuzzi and Barbara Hayes


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