What Happens If You Can’t Pay Your Commercial Lease in NYC Due to COVID-19

photo of new york city to represent commercial lease during COVID-19As the COVID-19 infection rate in New York decreases, the focus has turned to reopening the state and returning to work. The “New York State on PAUSE” executive order went into effect on March 22, 2020, closing all non-essential businesses statewide. While necessary from a public health perspective, the effect of the COVID-19 pandemic on many small businesses in New York City has been catastrophic, and affected their ability to pay their commercial lease.

Many New York City commercial tenants are now in a dire situation, having brought in no income since the executive order was implemented. A major concern is how commercial landlords will approach their tenants as monthly rent comes due. Another concern is the liability of personal guarantors of the commercial leases who assumedly are just as affected by the COVID-19 pandemic as the company they guaranteed.

Bills to Protect Commercial Tenants Hurt by the COVID-19 Pandemic

On April 29, 2020, the City Council’s Committee on Small Business and Committee on Consumer Affairs and Business Licensing held a joint public hearing on the impact of COVID-19 on small businesses in New York City. A number of bills were discussed to assist business owners. Two, Intro 1932 and Intro 1914, will have a major impact on commercial landlords that wish to be paid for their outstanding rent.

Intro 1932 prohibits the enforcement of personal liability provisions in commercial leases or rental agreements involving COVD-19 impacted tenants if the default or trigger happened during the state of emergency (after March 22). Personal guarantees enable a landlord to enforce the terms of a lease with a corporate tenant against the tenant’s owner should the corporate tenant not be able to pay. Said guarantees are often a commercial landlord’s only recourse.

Intro 1914, simply put, would make it a form of harassment to threaten commercial tenants based on their status as a “COVID-19 impacted business.” The harassment would be punishable by a civil penalty from $10,000.00 to $50,000.00.

Both bills went into effect immediately when they were passed on May 14, 2020.

Is Your Commercial Lease Covered by the COVID-19 Statutes?

Under Intro 1914, a company is a “COVID-19 Impacted Business” if:

  1. It was subject to seating, occupancy, or on-premises service limitations pursuant to an executive order issue by the governor or mayor during the COVID-19 period or
  2. Its revenues during any three-month period within the COVID-19 period were less than 50 percent of its revenues for the same three-month period in 2019 or less than 50 percent of its aggregate revenues for the months of December 2019, January 2020, and February 2020 and such revenue loss was the direct result of the COVID-19 state disaster emergency. A revenue loss shall be deemed to be the direct result of the COVID-19 state disaster emergency when such disaster emergency was the proximate cause of such revenue loss.

For now, the protections of this statute extend to commercial tenants through March 31, 2021.

Commercial landlords may be wondering if the statute prevents them from seeking normal payment of outstanding rent against COVID-19 impacted businesses. The legislature’s own report states that nothing in this bill is intended to limit any of the rights or obligations of landlords or commercial tenants under the existing harassment law as set forth in chapter 9 of title 22 of the Administrative Code. The new statute shall not affect:

  1. The right of a landlord to terminate a tenancy, refuse to renew or extend a lease or other rental agreement, or reenter and repossess property under section 22-902(b) of the NYC Administrative Code and
  2. The obligation of a commercial tenant to continue paying rent owed under section 22-903(b), which states that a commercial tenant shall not be relieved of the obligation to pay any rent for which the commercial tenant is otherwise liable.

What Constitutes Harassment

The term “harassment” for purposes of Intro 1914 is “threatening a commercial tenant based on”:

  1. Their perceived age, race, creed, color, national origin, gender, disability, marital status, partnership status, caregiver status, uniformed service, sexual orientation, alienage or citizenship status, status as a victim of domestic violence, or status as a victim of sex offenses or stalking, or
  2. The commercial tenant’s status as a person or business impacted by COVID-19, or the commercial tenant’s receipt of a rent concession or forbearance for any rent owed during the COVID-19 period.

Intro 1932 amended section 22-902 to define “harassment” as any act or omission by or on behalf of a landlord that causes a commercial tenant to vacate the property or surrender or waive any rights under a lease or other rental agreement, as well as one or more of the following:

  1. Using force or threatening to use force against a tenant,
  2. Interrupting or discontinuing essential services repeatedly or for an extended period of time,
  3. Interrupting or discontinuing essential services in a way that interferes with a commercial tenant’s business,
  4. Repeatedly commencing frivolous court proceedings against a commercial tenant,
  5. Removing personal property belonging to the tenant, or
  6. Removing the door or changing the lock on a property.

Filing a proper lawsuit for outstanding rent is not one of the aforesaid items. Therefore, commercial landlords can still file suit against tenants for lawful payments owed.

What Personal Guarantors Need to Know

Regarding the liability of personal guarantors, Intro 1932 and it’s extension were specifically defined to prevent commercial landlords from seeking enforcement of a personal guarantee. Guarantors are only provided protection for rent that accrued between March 7, 2020, and March 31, 2021. Rents that accrued prior (and accrue subsequent) to these dates may still be sought against the guarantors.

Further state legislation will likely be passed to help both landlords and tenants navigate the coming months. A major item that could affect how both landlords and tenants proceed is further stimulus legislation from both the federal and state governments. It remains to be seen what that legislation, if passed, will provide.

For more information about navigating debt collection issues during this time, contact Frank, Frank, Goldstein and Nager for a consult.

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