COVID-19: NYC Suspends Enforcement of Lease Guaranties for Restaurants, Retail Establishments, and Other Small Businesses | Practical Law

COVID-19: NYC Suspends Enforcement of Lease Guaranties for Restaurants, Retail Establishments, and Other Small Businesses | Practical Law

New York City has enacted legislation prohibiting the enforcement of personal liability provisions and guaranties in certain commercial leases affected by COVID-19. The new law is meant to provide relief to retail establishments, restaurants, and other small businesses suffering economic impacts from COVID-19-related closures and service limitations.

COVID-19: NYC Suspends Enforcement of Lease Guaranties for Restaurants, Retail Establishments, and Other Small Businesses

by Practical Law Real Estate
Published on 04 Dec 2020 • New York
New York City has enacted legislation prohibiting the enforcement of personal liability provisions and guaranties in certain commercial leases affected by COVID-19. The new law is meant to provide relief to retail establishments, restaurants, and other small businesses suffering economic impacts from COVID-19-related closures and service limitations.
Update: On November 25, 2020, the Southern District of New York upheld Section 22-1005 of the New York City Administrative Code against constitutional challenges brought by the owners of small commercial buildings in Brooklyn, Queens, and Manhattan (Melendez v. City of New York, No. 20-CV-5301 (S.D.N.Y. Nov. 25, 2020)). The court did not address whether the prohibition applies to stand-alone guaranties between a landlord and guarantor.
On May 26, 2020, New York City Mayor Bill de Blasio signed a bill (Introduction No. 1932-2020) suspending the enforcement of personal guaranty provisions in certain commercial leases affected by COVID-19. Effective immediately, the new law aims to protect owners and third-party guarantors of small businesses, including restaurants and bars, retail establishments, and barbershops, hair salons, and other personal care service providers, impacted by state-mandated closures and limitations related to COVID-19.

Details of the Legislation

The legislation adds a new Section 22-1005 to the New York City Administrative Code barring the enforcement of personal guaranty provisions in commercial leases for premises in the city if all the following conditions are met:
  • The guarantor is a natural person.
  • The tenant was:
    • required to stop serving food or beverages for on-premises consumption or to cease operations under Executive Order No. 202.3;
    • a non-essential retail establishment subject to in-person limitations under guidance issued by the state Department of Economic Development (Empire State Development Corporation) pursuant to Executive Order No. 202.6 (reducing in-person workforces); or
    • required to close to the public under Executive Order No. 202.7 (relating to personal care services).
  • The tenant's default occurs any time from March 7, 2020 through September 30, 2020 inclusive.
On September 28, 2020, Mayor de Blasio signed into law an extension passed by the New York City Council. Section 22-1005 now applies to tenant defaults occurring through March 31, 2021.
The bill specifically prohibits the enforcement of personal liability for the payment of:
  • Rent.
  • Utility expenses.
  • Taxes.
  • Maintenance fees.
The bill also amends Section 22-902 of the New York City Administrative Code to make it a form of tenant harassment for a landlord to attempt to enforce a personal guaranty in a commercial lease that it knows (or should know) is unenforceable under these provisions.

Practical Implications

Counsel for commercial landlords, tenants, and lease guarantors should review their leases and the current facts to determine if they are affected by the new law. All parties to a lease should confirm their rights and remedies if the tenant defaults based on the COVID-19 mandates cited in the legislation.
A commercial tenant default occurring at any point on or after March 7, 2020 through March 31, 2021 because of a covered COVID-19 restriction may not expose a guarantor to personal liability. A landlord faced with a defaulting tenant during this period should closely examine the circumstances before seeking recourse under any personal guaranty provisions.
The new law will likely face court challenges as real estate industry groups claim it is an unconstitutional impairment on existing contracts. While the city is confident it has the authority to enact this type of legislation during a state of emergency, counsel should monitor any potential litigation.
For a collection of resources related to COVID-19, pandemics, and business interruption content, see Real Estate Global Coronavirus Toolkit.