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NYC Prohibits Enforcement Of Personal Guarantees in Commercial Leases Impacted By COVID-19
On May 26, 2020, New York City enacted Administrative Code Section 22-1005 prohibiting the enforcement of personal guarantees in commercial leases or rental agreements involving tenants impacted by COVID-19. Specifically, the new law applies to businesses in New York City that were forced to close or limit their services to comply with Executive Orders 202.3, 202.6 and 202.7 issued by Governor Andrew Cuomo. Application of the law is limited to defaults that occurred between March 7, 2020 and September 30, 2020 causing such a person to become wholly or partially personally liable for such obligation.
Under the law, landlords are forbidden from enforcing personal guarantees contained in commercial leases or other rental agreements against persons who guarantee the obligations of businesses impacted by mandated closures and service limitations enacted by the Executive Orders.
However, the law does not protect enforcement of guarantees against corporate guarantors of commercial leases. Owners of businesses that stand to benefit from this new legislation include owners of restaurants/bars; gyms/fitness centers; and other nonessential retail establishments subject to restrictions set forth in the Executive Orders.
Despite the apparent foregoing protections, the new law may be challenged due to certain ambiguities contained within the legislation. As written, the law applies to guaranty provisions within a commercial lease or other rental agreements. Therefore, an ambiguity exists if the law applies to guarantees that are separate and apart from the actual lease agreement.
Furthermore, there are questions as to whether the new law violates the Contracts Clause of the United States Constitution, which prohibits states from passing any law impairing the rights and obligations of contract parties (Article I, Section 10, Clause 1).
Clause 1 from constitution.congress.gov:
“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”
Both this restriction protecting business owners, and other newly enacted legislation in New York City based upon landlord harassment, may provide a defense to renters arising out of closures forced by COVID-19.
If you would like more information on this issue or if you are a small business owner in need of legal guidance, please contact Santomassimo Davis LLP.
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