Last week, a New York court ruled that the NY Guaranty Law passed during the pandemic, which prevented landlords from pursuing good guy guarantors and others for commercial property, is unconstitutional. Can you now bring a lawsuit in New York against guarantors, including those who signed good guy clauses?
During the onset of the pandemic, New York City faced a major crisis as Covid-19 cases skyrocketed and business revenues plummeted. In response to this slowdown, New York adopted N.Y.C. Local Law No. 55 of 2020. Local Law 55 prohibited harassment of commercial tenants hurt by the pandemic and included civil penalties of $10,000 to $50,000. Harassment included interrupting or discontinuing essential services for an extended period of time or interfering with a commercial tenant’s business, such as removing personal property or changing the locks. The law also prohibited the enforcement of personal liability provisions in commercial leases or rental agreements involving tenants affected by Covid. And the law protected personal guarantors of commercial tenants affected by Covid for any unpaid rent between March 7, 2020, and June 30, 2021.
Understandably, New York City’s commercial landlords objected to the law.
One landlord legally challenged Local Law 55 in federal court, arguing that it violated the contracts clause of the U.S. Constitution which “prohibits states from passing any laws that impair the obligations of contracts.” The landlord claimed that the law permanently reallocated substantial financial burdens on commercial landlords, leaving them without legal recourse or compensation — even as the pandemic’s effects subside, and without requiring guarantors to demonstrate financial hardship or needing to justify nonpayment.
The court ruled that the law substantially impaired contracts between parties and that it was not a reasonable means to advance the city’s interest. The court found that the city failed to demonstrate that the so-called “Guaranty Law” is a “reasonable and appropriate” means of advancing the city’s legitimate public purpose. The ruling also found that the Guaranty Law was not a “temporary” impairment of the contract.
The court said that while the Guaranty Law pertains only to rent arrears arising between March 7, 2020 and June 30, 2021, the law did not “defer guaranty obligations until the conclusion of the period,” but instead “permanently and entirely extinguishes them.” This is because the landlords are forever barred from recovering rent, which they say they are entitled to during that 16-month period if the commercial tenant is left unable to pay. The court determined that the City Council could have declared the law’s impact as temporary, but chose not to.
The court also found that the Guaranty Law was not an appropriate means for achieving its professed public purpose, which was to help shuttered small businesses survive the pandemic so that they can reopen once the emergency was lifted. In its ruling, the court believed the city made three assumptions:
- That shuttered small businesses are usually owned by individuals guaranteeing their leases
- That these owner-guarantors would be financially ruined if required to pay their businesses’ renter arrears
- That the financially ruined owners would be unlikely to reopen their shuttered businesses
The court viewed, with the “benefit of significant time to address said concerns,” that the city failed to show that it had evidence supporting the three assumptions.
Additionally, the court found that the burden of the Guaranty Law was placed exclusively upon landlords, even though owner-guarantors were equally able to access Covid-19 related government financial relief.
The court also found that the city did not condition the application of the NY Guaranty Law on “need,” in that it permanently absolved all small-business lease guarantors of any responsibility for up to 16 months of rent, regardless of their ability to pay. The court noted that the city was given the opportunity to bring forward evidence of a “need” analysis, but that the city was unable to provide one.
Finally, the court found that the Guaranty Law did not compensate landlords for unpaid rent for damages or losses as a result of their guaranty impairment. The city argued that the landlord could obtain a pandemic relief loan from the U.S. Small Business Administration, which the court found unpersuasive because the landlord was damaged and had not been compensated, and an SBA loan must be repaid with interest.
If you are a landlord who was prevented by the Guaranty Law from pursuing one or more guarantors of a commercial lease, should you begin your action now?
The answer is maybe — if you’re willing to take a chance that the court’s decision will be upheld in the next round.
The decision was declared unconstitutional at the U.S. District Court level, and will likely be appealed to the U.S. Court of Appeals for the Second Circuit.
Should the Court of Appeals also rule in favor of the landlords — presuming the case is not heard before the U.S. Supreme Court — many personal guarantors who thought they were free from liability may find themselves at risk of collection from landlords for outstanding rental liabilities.
It remains to be seen if “the floodgates open” and landlords proceed en masse against guarantors for rental obligations incurred during the pandemic.
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