This legislation is expected to be challenged as a violation of the Contracts Clause of the United States Constitution.
On May 26, 2020, New York City Mayor Bill de Blasio signed into law NYC Council Int. No. 1932-A and NYC Council Int. No. 1914-A, which provide greater protections for commercial tenants affected by the COVID-19 pandemic.
Int. No. 1932-A
Effective immediately, Int. No. 1932-A addresses two primary concerns. First, the legislation provides that a personal guarantee of a commercial lease is unenforceable if the tenant defaults due to COVID-19. Second, any attempt by a commercial landlord to enforce personal liability against a tenant in default as a result of the COVID-19 pandemic will be deemed commercial tenant harassment.
With respect to the legislation’s personal guarantee relief, City Council amended the New York City Administrative Code section 22-1005 to add: “A provision in a commercial lease or other rental agreement involving real property located within the city that provides for one or more natural persons who are not the tenant under such agreement to become, upon the occurrence of a default or other event, wholly or partially personally liable for payment of rent… shall not be enforceable against such natural persons if the conditions of paragraph 1 and 2 are satisfied[.]” The legislation does not only apply to rent default, but also other monetary defaults on utility expenses, taxes, or fees and charges related to building maintenance.
To qualify for personal guarantee relief under the legislation, the default must occur between March 7, 2020, and September 30, 2020, and the tenant must meet at least one of the following three conditions:
- The tenant must have been required to cease serving patrons food or beverages on-premises or the tenant must have otherwise been required to cease business operations under Executive Order 202.3, including businesses such as gyms, fitness centers and movie theaters;
- The tenant must be a nonessential retailer subject to in-person limitations under the guidance issued by the New York State Department of Economic Development pursuant to Executive Order 202.6; or
- The tenant must have been required to close to the public under Executive Order 202.7, which prohibited barbershops, hair salons, tattoo or piercing parlors and related personal care services from serving the public.
NYC Council Int. No. 1932-A’s commercial tenant harassment protections amended section 22-902 of the New York City Administrative Code. Prior to the New York City Council’s recent actions, section 22-902 set forth 13 landlord acts that constitute commercial tenant harassment. NYC Council Int. No. 1932-A added a 14th act of “attempting to enforce a personal liability provision that the landlord knows or reasonably should know is not enforceable pursuant to section 22-1005 of the code.” Section 22-1005 refers to the amendment on personal guarantee relief for individuals affected by the COVID-19 pandemic.
Int. No. 1914-A
NYC Council Int. No. 1914-A amended section 22-902 of the New York City Administrative Code to prohibit threatening a commercial tenant based upon “the commercial tenant’s status as a person or business impacted by COVID-19, or the commercial tenant’s receipt of a rent concession or forbearance for any rent owed during the COVID-19 period[.]” The COVID-19 period is defined as March 7, 2020, through the last of either (a) the end of the first month after the eviction moratorium expiration; (b) the end of the first month after the residential eviction moratorium expires as per section 4024 of the CARES Act; or (c) September 30, 2020.
NYC Council Int. No. 1914-A defines a person “impacted by COVID-19” to mean one of the following:
- An individual diagnosed with COVID-19 or an individual experiencing symptoms of COVID-19 and seeking a medical diagnosis;
- A member of an individual’s household who was diagnosed with COVID-19;
- An individual providing care for a family member or a member of such person’s household who was diagnosed with COVID-19;
- A member of an individual’s household who had primary caregiving responsibility and was unable to attend school or another facility that was closed as a direct result of the state disaster emergency declared under Executive Order 202 and such school or facility care was required for the individual to work;
- An individual who was unable to reach their place of business due to a quarantine imposed as a direct result of the COVID-19 state disaster emergency or because such person was advised by a healthcare provider to self-quarantine due to concerns related to COVID-19;
- An individual who became primarily responsible for providing financial support for his or her household because the previous head of the household died as a direct result of COVID-19; and
- An individual whose business was forced to closed as a direct result of the COVID-19 state disaster emergency.
Under NYC Council Int. No. 1914-A, a business “impacted by COVID-19” is defined as an institution that:
- Was subject to seating, occupancy or on-premises service limitations due to government action; or
- Experienced revenues during any three-month period occurring within the COVID-19 period that was less than 50 percent of its revenues for the same three-month period in 2019 or less than 50 percent of its aggregate revenues for the months of December 2019, January 2020 and February 2020 and such revenue loss was a direct result of the COVID-19 pandemic.
This legislation is expected to be challenged as a violation of the Contracts Clause of the United States Constitution. Generally, the Contracts Clause of the U.S. Constitution prohibits state governments from interfering with private contracts and their corresponding contractual obligations.
Finally, it should be noted that the legislation is not intended to limit any of the rights or obligations of landlords or commercial tenants under the existing harassment law as set forth in chapter 9 of title 22 of the New York City Administrative Code, including the right of a landlord to terminate a tenancy, to refuse to renew or extend a lease or to reenter and repossess a leased premises.
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