Blog Post 04.17.20
As the COVID-19 pandemic continues to impact New York, Governor Cuomo extended the state’s stay-at-home order until June 13, 2020. This extension and the pandemic generally will continue to exacerbate the cash flow issues of struggling commercial tenants for yet another month. Governor Cuomo previously attempted to provide tenants some relief by issuing Executive Order 202.28. This Order provides a number of tenant protections, including (i) a prohibition on landlords’ ability to charge a penalty or fee for late payment of rent between March 20, 2020 and August 20, 2020, and (ii) a moratorium on tenant evictions. Other rent relief legislation has been introduced in the New York State legislature, but not adopted.
With the reality that many commercial tenants cannot pay their rent, the New York City Council is proposing to expand protections to commercial lease guarantors.
On May 13, 2020, the New York City Council adopted Int. No. 1932-A, which, if signed into law by Mayor De Blasio, would amend the Administrative Code of the City of New York in relation to personal liability provisions of commercial leases.
Proposed Instrument No. 1932-A
The proposed legislation seeks to provide relief for individual guarantors (who are not themselves tenants under the applicable leases) that would become personally liable under a commercial lease due to a tenant default related to the COVID-19 pandemic. Under proposed Section 22-1005, a provision in a commercial lease that provides for an individual to become liable for a tenant default shall not be enforceable if both of the following conditions related to the COVID-19 pandemic are satisfied:
Additionally, the proposed amendment would expand the definition of commercial tenant harassment under Subdivision A of Section 22-902 of the administrative code to include a landlord attempting to enforce a personal liability provision that the landlord knows or reasonably should know is not enforceable pursuant to Section 22-1005.
The proposed legislation provides for unprecedented tenant and guarantor protections and goes beyond the existing state protections. While the proposed amendment seeks to protect struggling tenants and their respective guarantors, it could create a number of issues for commercial landlords and their lenders, who underwrote loans based upon the creditworthiness or such tenants and guarantors. The guarantor’s ability to avoid liability under the new legislation could also impact lease workout negotiations.
The proposed legislation is not completely clear in its reach. It applies to a “commercial lease or other rental agreement,” but many guaranties are standalone documents and thus arguably are not covered. These separate guaranties presumably include so-called “good guy guaranties,” where the guarantor is liable until the tenant vacates its premises. Some entities create liability for their equity owners (e.g., general partners) without a separate document. Some non-natural persons (e.g., family businesses) might be equally worthy of protection, but are not expressly protected. The time period affected is also unclear: if a rent payment for the month of March 2020 is not paid, did it “occur” only on March 1, or any time during the month?
Finally, whether the City of New York can enact legislation effectively voiding contractual obligations will undoubtedly be challenged on constitutional grounds. Presumably, the legislation will be defended, inter alia, as a proper exercise of governmental police powers. While such constitutional challenges will only come in to play if the proposed amendment becomes law, we note that Mayor De Blasio has never vetoed a bill enacted by the New York City Council. The proposed legislation was passed by the New York City Council by a 44-6 vote, indicating widespread approval by the City Council.
For more information, please reach out to your regular Pillsbury contact or the authors of this alert.
Pillsbury’s experienced, multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.