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 guidance.
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 or other.
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 law.
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 wording.
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 as “retail”?
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 McGuireWoods COVID-19 Response Team members.
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