Federal Court Upholds New York’s COVID-19 ‘Guaranty Law’

In a decision dated November 25, 2020, the United States District Court for the Southern District of New York upheld the constitutionality of three laws enacted by the City of New York in response to the COVID-19 pandemic. The three laws expanded a pre-existing prohibition on ‘harassment’ of commercial and residential tenants to include harassment based upon the tenant’s status as “impacted” by the COVID-19 pandemic. Notably, for many New York City restaurants, the laws also prohibited the enforcement—or threat of enforcement—of personal guaranties in commercial leases in certain circumstances, namely: (i) where the guarantor is a natural person in a commercial lease and is different from the tenant; (ii) the guarantor is personally responsible for the commercial tenant’s payment of rent, utilities, expenses, taxes, fees and charges related to building maintenance in the event of a default by the tenant; (iii) the commercial tenant was affected by New York State’s Executive Orders that required the tenant to close its business during the pandemic; and (iv) the guaranty would have been triggered by the commercial tenant’s default if the default occurred during the period from March 7, 2020 to March 31, 2021.

A group of New York City landlords collectively sued the city in Melendez v. The City of New York (Case 20-CV-5301), arguing that these laws were unconstitutional because they violated free speech and the inviolability of contracts. With respect to the “Guaranty Law,” the court found that while the law did interfere with preexisting contracts, such interference was justified because the City of New York enacted the law to benefit the public interest, and the law was reasonable and necessary to advance that interest. The court held that the law was narrowly tailored as it: (i) was limited to a subset of businesses impacted by specific pandemic-related closure or lockdown orders; (ii) was limited temporally in that it only foreclosed recovery on guaranties from March 2020 through March 2021; and (iii) does not prohibit landlords from seeking to recover rent through other means, e.g. suing the commercial tenant. Most significantly, however, the court held that the prohibition on recovery through guaranties from March 2020 to March 2021 was permanent. Until this ruling, many landlords had taken the position that the prohibition of enforcement of personal guaranties was temporary, such that they could wait and sue guarantors after March 2021. With the federal court’s ruling, however, the protection against personal liability for a default that occurs between March 7, 2020 and March 31, 2021 is permanent; a landlord can never come after a personal guarantor for the rent (or other articulated expenses) for which it would otherwise be responsible in the event of a tenant’s default. This is a major victory for the New York City restaurant community, which constitutes a significant percentage of the city’s commercial tenant population and many of which have personal guarantors. While these businesses still face an uphill battle with rent forgiveness and lease negotiations with truculent landlords, the court has made clear that tenants are protected from personal liability under New York City law for COVID-19 related defaults.

Additionally, the court found that the laws do not impair a landlord’s First Amendment free speech rights, because they do not prohibit legitimate, routine demands for rent. The court distinguished between routine rent demands and those that were “improper,” coercive, or based upon a tenant being impacted by COVID-19. The court also held that the laws were not void for vagueness as there was no basis to conclude that a “person of ordinary intelligence” would believe that the laws prohibited routine rent demands.

While it is yet unknown whether the plaintiff-landlords will appeal to the Second Circuit, this ruling is a clear victory for commercial tenants in New York and may make the difference in the survival of many restaurants and small businesses.