On May 26, 2020, New York City Mayor Bill de Blasio signed into law Int.
No. 1932-A, amending the New York City Administrative Code to prohibit
enforcement of personal liability against natural persons for certain
commercial leases. Int. No. 1932-A is intended to protect guarantors of
restaurant, bar and other non-essential retail leases for businesses that
were forced to close under the executive orders issued by Gov. Andrew Cuomo
in the early days of the COVID-19 pandemic.
Below is a discussion of the impact of Int. No. 1932-A on New York City
tenants, landlords and commercial real estate lenders, as well as the focal
points of some likely challenges to the law.
What Does Int. No. 1932-A Cover?
Int. No. 1932-A applies only to the attempted enforcement of a personal
liability provision in a commercial lease or other rental agreement
involving real property located within New York City that provides for one
or more natural persons (but not business entities) who are not the tenant
thereunder to become, upon the occurrence of a default of other event,
wholly or partially liable for the payment of rent, utility expenses or
taxes owed by such tenant.
Under the new law, these personal liability provisions shall not be
enforceable if two conditions are met: (1) the tenant’s business falls
under one of three specified categories, and (2) the default or other event
causing liability arose between March 7 and Sept. 30, 2020.
The three specified categories of tenant businesses protected by Int. No.
1932-A are tenants that were (1) required to cease serving patrons food or
beverages for on-premises consumption, or to cease operations; (2)
non-essential retail establishments subject to in-person limitations under
state-issued guidance; or (3) required to close to members of the public,
in each case pursuant to the March 2020 executive orders and related
Int. No. 1932-A also expands the existing New York City restriction on
“commercial tenant harassment” to include attempting to enforce the
personal liability provisions in a manner prohibited by the new law.
Int. No. 1932-A and Tenants
The New York City Council articulated that the intent behind Int. No.
1932-A is to benefit restaurants, bars, gyms, fitness centers, movie
theaters, barber shops, hair salons, tattoo or piercing parlors and related
personal care services, and other retail businesses that were required to
close and/or were otherwise subject to in-person restrictions. Not all
retail businesses are intended beneficiaries of Int. No. 1932-A. Further,
corporate (and other non-natural person) guarantors of commercial leases
are not protected by Int. No. 1932-A, and personal guarantors of leases for
office space are not intended beneficiaries either.
Int. No. 1932-A and Landlords
Landlords of commercial leases with tenants who benefit from Int. No.
1932-A will face new challenges. Int. No. 1932-A makes no distinction
between the types of landlords affected, as it does for tenants and
guarantors, and applies to all landlords, whether institutional, individual
Landlords will also need to take care when communicating with tenants, to
minimize the risk of unjustified claims of commercial tenant harassment.
This could have a chilling effect on negotiating lease modifications and
forbearances, and other more traditional responses, arising from the
operational challenges presented by COVID-19.
It is important for landlords to understand that, as drafted, Int. No.
1932-A does not simply impose a moratorium on the enforcement of the
personal liability provisions; rather, it permanently prohibits enforcement
of the personal liability provisions in connection with a default or other
event causing liability occurring during the stated timeframe (March
7-Sept. 30, 2020). As discussed below, this cancellation of private
contracts will likely be a fundamental argument in any challenge to the
Int. No. 1932-A and Lenders
Lenders underwriting new loans secured by mortgages on New York City
property should be mindful of the implications that Int. No. 1932-A has
with respect to relying on a lease guarantor’s credit, to the extent that
any natural person’s lease guaranty was a credit risk mitigant.
For existing loans, lenders will need to be careful in exercising consent
rights with respect to lease amendments or enforcement action, proposed by
landlords, to the extent such amendments or actions involve the personal
liability provisions. Further, the impact of Int. No. 1932-A should be part
of the analysis of whether to proceed with a foreclosure or accept a
deed-in-lieu, and whether to seek a receiver during a pending foreclosure.
Challenging Int. No. 1932-A
Challenges to Int. No. 1932-A likely will focus on two arguments: that it
is unconstitutional, and that it is inapplicable to most commercial lease
guaranties due to its imprecise drafting.
Int. No. 1932-A will likely be litigated and otherwise challenged. The Real
Estate Board of New York representing New York City’s real estate owners,
brokers and managers has already argued that Int. No. 1932-A is a
unilateral amendment of existing, valid contracts and that the New York
City Council lacks the authority to amend private contracts. Litigation
concerning the legality of the law will likely focus on the question of
whether the state's police powers to protect the public extend as far as
allowing impairment of private contract rights in contravention of Article
I, § 10 of the U.S. Constitution.
Expect further challenges to Int. No. 1932-A based on the law’s imprecise
The statutory language references “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
have liability. Int. No. 1932-A does not specifically address stand-alone
lease guaranty agreements, yet most lease guaranties are separate
instruments from the underlying leases involved.
The text of Int. No. 1932-A also speaks to persons who “become, upon the
occurrence of a default or other event, wholly or partially personally
liable for payment of rent….” Assuming, for the purposes of this
discussion, that a lease guaranty is included within the words “a
commercial lease or other rental agreement” discussed above, there is an
additional ambiguity here. Typically, lease guaranties provide that the
liability of the guarantor is in effect from the delivery of the guaranty,
and not “springing” upon certain future events.
Challenges may also arise as to what constitutes a “retail establishment.”
For example, are service businesses such as hair and nail salons, gyms,
check-cashing stores, locksmiths, dry cleaners or medical offices included
Given the amounts at stake on commercial leases throughout New York City,
and the well-funded trade organizations advocating on behalf of property
owners, it is likely that landlords will raise these and other challenges
to Int. No. 1932-A.
McGuireWoods’ real estate and land use lawyers represent owners of
commercial space, users of commercial space and commercial real estate
lenders in developing, leasing, purchasing, selling and financing real
property throughout the United States, and enforcing their rights and
remedies in connection with their transactions.
For questions or additional guidance on how tenants, landlords and mortgage
lenders in New York are responding to COVID-19, please contact one of the
McGuireWoods New York real estate team members listed, or any of the
COVID-19 Response Team
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