New York City to Extend Ban on the Enforcement of Personal Guaranties of Commercial Leases
September 25, 2020
Lauren X. Topelsohn
Earlier this year, New York City passed a broad COVID-19 relief package, which included several amendments to the New York City Administrative Code that relate to commercial landlords and tenants, including Local Law 1932-A. On September 23, 2020, the New York City Council announced it would extend the present moratorium on the enforcement personal guaranties under certain commercial leases from September 30, 2020 to March 31, 2021. Mayor Bill de Blasio is expected to sign the bill into law prior to the expiration of the law.
Who Does 1932-A Cover?
Generally speaking, Local Law 1932-A protects guarantors of commercial leases where the tenant’s underling business was forced to close as a result of the COVID-19 Executive Orders (“EOs”) issued by Governor Andrew Cuomo.
The protections are limited (a) to natural persons (not corporations, LLC’s, etc.), (b) who are not the tenant under the lease, and (c) who would otherwise be liable in the event of the tenant’s default under the lease for failure to pay rent, utilities or taxes, in whole or in part. At present, such personal guaranties, whether memorialized in a separate agreement, or included in as a provision in the lease (a “good guy clause”) are not enforceable if (1) the default arose between March 7 and September 30, 2020; and (2) the tenant’s business is one of following:
- A restaurant, bar, gym, fitness center, movie theater, video lottery facility, or casino gaming facility, that was required to close under EO 202.3;
- A hair salon, barbershop, tattoo or piercing parlor, andrelated personal care services (such as nail salons, laser hair removal centers or other that employ cosmetologists or estheticians) required to close to the public under EO 202.7; or
- A non-essential retail establishment (as designated by New York State Department of Economic Development) that was subject to in-person limitations pursuant to EO 202.6.
Local Law 1932-A is limited to the enforcement of personal guaranties. It does not affect the liability of the tenant on the underlying lease, whom a landlord may still pursue.
Scope of Protection?
Local Law 1932-A does not merely defer, until a later date, a landlord’s ability to hold a guarantor personally liable for defaults that occurred during the current default period (March 7, 2020 to September 30, 2020). Rather, it permanently prohibits enforcement of the personal liability provisions in connection with such defaults.
Current Status of the Law?
As stated, Local Law 1932-A is expected to be extended from September 30, 2020 to March 31, 2021. However, this has not stopped landlords from challenging it as an unconstitutional interference with private contract rights. Central to this issue is the state’s power to protect the public, and a person’s right to contract under the U.S. Constitution. Other challenges may relate to what qualifies as a “retail establishments” under the law.