Updated May 28, 2020
The New York City Council is seeking to increase protections for commercial tenants impacted by COVID-19 by enacting Local Law 1932-A. There are two portions of the Local Law: (i) the first portion makes certain personal guaranties temporarily unenforceable and (ii) the second portion deems an attempt to enforce a personal liability provision that the landlord knows or reasonably should know is not enforceable to be tenant harassment. The goal of the Local Law is to lower the risk that business owners who have been forced to close their businesses due to COVID-19 will lose their life savings and other personal assets.
Mayor Bill DeBlasio signed the bill into law on May 26, as part of a package of seven COVID-19-related relief bills. The Local Law took effect immediately and retroactively affects obligations from and after March 7, 2020.
Scope of the Local Law
Jurisdiction. New York City.Applicable Tenants. The Local Law applies to guarantors of leases for which the applicable tenant meets at least one of the following criteria:
- Restaurants/Bars. The tenant was required to cease serving food or beverage for on-premises consumption by patrons or to cease operation under executive order number 202.3, issued by the governor on March 16.
- Nonessential Retail. The tenant was a nonessential retail establishment subject to in-person limitations under guidance issued by the New York State Department of Economic Development pursuant to executive order number 202.6, issued by the governor on March 18. (This executive order applies to businesses and not-for-profit entities that are deemed to be nonessential and were required to reduce the in-person workforce by 50% no later than March 20.)
- Personal Care Services. The tenant was required to close to members of the public under executive order number 202.7, issued by the governor on March 19. (This executive order applies to all barbershops, hair salons, tattoo or piercing parlors and related personal care services, nail technicians, cosmetologists and estheticians, and the provision of electrolysis and, laser hair removal services, as these services cannot be provided while maintaining social distance.)
- Natural Persons. The Local Law applies to guaranties (note the commentary provided below under Applicable Guaranties) executed by one or more natural persons. Guarantors of guaranties executed by entities, as opposed to natural persons, will not receive the benefit of the Local Law.
- Independent Guarantor and Tenant. The Local Law applies to guarantors who are not the tenant under the applicable agreement. Note that a guarantor is not typically also the tenant under a lease.
- Guarantor Liability. The Local Law applies to guarantors who become, upon the occurrence of a default or other event occurring between March 7 and Sept. 30, 2020, wholly or partially personally liable for payment of any of the following items under the applicable agreement: rent, utility expenses or taxes owed by the tenant under such agreement, or fees and charges relating to routine building maintenance owed by the tenant.
- Good Guy Guaranty. There is a question as to whether the reference to being wholly or partially personally liable encompasses liability pursuant to a good guy guaranty. It is unclear whether a good guy guaranty is deemed to be a full or partial guaranty or a different type of guaranty entirely. However, it seems like the spirit of the law would be defeated if good guy guaranties were excluded.
- Alternate Rent Payment Agreements. Some landlords are entering into agreements pursuant to which the landlord, with the tenant’s authorization, applies the security deposit to rent and the tenant replenishes the security deposit over time. Such agreements often provide that the guarantor under the lease, or another individual, will personally guarantee the replenishment of the security deposit. It is unclear whether the guarantor under such an arrangement is subject to the Local Law, although one may look past the arrangement and deem the same to ultimately be an agreement for the payment of rent.
Applicable Guaranties. The Local Law applies with respect to a provision in a commercial lease or other rental agreement involving real property. Typically, guaranties are stand-alone documents. The language of the Local Law leaves it unclear whether the Local Law applies to stand-alone guaranties, as stand-alone guaranties are not provisions in a commercial lease and it is unclear whether a stand-alone guaranty is considered a rental agreement involving real property. Again, however, such a technical reading of the Local Law would seem to undercut and defeat the intent and spirit of the Local Law.
Failure to Comply/Tenant Harassment. The existing tenant harassment statute has been amended to provide that a landlord is prohibited from attempting to enforce a personal liability provision that the landlord knows or reasonably should know is not enforceable. Except as provided in Subdivision b of such statute (which states that a landlord’s lawful termination of a tenancy, lawful refusal to renew or extend a lease or other rental agreement, or lawful reentry and repossession of the covered property does not constitute commercial tenant harassment), commercial tenant harassment is any act or omission by or on behalf of a landlord that (i) would reasonably cause a commercial tenant to vacate covered property, or to surrender or waive any rights under a lease or other rental agreement or under applicable law in relation to such covered property, and (ii) includes one or more of the items set forth in such section (which now includes attempting to enforce a personal liability provision that the landlord knows or reasonably should know is not enforceable pursuant to Section 22-1005 of the code).
Challenges to the Local Law
As noted above, the scope of the Local Law is not clear. It may also be challenged on constitutional grounds, as it amends existing contractual obligations and it is questionable whether the City Council has that power
Challenges for Landlords
Many landlords may be hesitant to enter into a rent deferral or abatement transaction if an integral part of the transaction is a guaranty of repayment (or replenishment of a security deposit) from a principal of the tenant. Additionally, guarantors and tenants are not required to evidence hardship due to COVID-19 as a condition of obtaining relief.
Challenges for Tenants
Family-owned businesses with guarantors that are not natural persons may not obtain the relief the Local Law is intended to provide. Also, lease workout negotiations may be impacted by the inability of landlords to enforce the guarantor’s liability under the applicable guaranty.
For information on the business impacts of COVID-19, please visit our COVID-19 Resource Center, which we continue to update as the situation evolves. If you have questions about COVID-19’s impact on your business, please reach out to your Loeb relationship partner or email us directly at COVID19@loeb.com.