On May 26, 2020, Mayor de Blasio signed a bill that suspended the enforcement of certain personal guaranty provisions for commercial leases impacted by COVID-19. The law, codified as Section 22-1005 of the New York City Administrative Code and also known as the “Guaranty Law”, provides certain protections for retail establishments, restaurants, bars and other small businesses affected by COVID-19’s economic disruptions and blows. The ban against personal guaranties serves to prohibit personal liability for payment of rent, utility expenses, taxes and maintenance fees, and is applicable if the following conditions are met:
The guarantor must be a natural person and:
- The tenant was required to stop serving patrons food or beverages for on-site consumption or to cease operations under Executive Order No. 202.3 (e.g. for bars and restaurants),
- The tenant was a non-essential retail establishment subject to in-person limitations under New York State guidance pursuant to Executive Order No. 202.6 (e.g. for gyms and movie theaters), or
- The tenant was required to close to the public pursuant to Executive Order No. 202.7 (e.g. for barber shops and tattoo parlors).
The tenant's default must have occurred between March 7, 2020 and, as since extended, March 31, 2021.
In addition to the prohibition, if a landlord tries to enforce a personal guaranty in a commercial lease that it knows, or should know, is unenforceable under the provisions Section 22-1005, then the bill also makes such an attempt a form of tenant harassment.
Section 22-1005 of the New York City Administrative Code has since been unsuccessfully challenged by landlords and real estate owners and managers on the basis of constituting an unconstitutional impairment on existing contracts, (see, for example, 204 E. 38th LLC v Sons of Thunder LLC, 155933/2020 (Sup. Ct. N.Y. Co. Nov. 20, 2020). Efforts to challenge the legislation as being unlawfully retroactive have likewise failed, (see 27 Morton, L.P. v. MDS Fashions, Ltd, 155681/2020 (Sup. Ct. N.Y. Co. Nov. 20, 2020). As of now, the courts addressing these issues have determined that the law does not violate the Contracts Clause of the U.S. Constitution since it reflected a good faith effort to advance a legitimate public interest to address a real emergency (i.e. COVID-19 Pandemic). Moreover, the courts have affirmed that Section 22-1005 of the New York City Administrative Code may be enforced for separate lease guaranty agreement made by individuals that are not contained in the body of applicable lease or rental agreements, (see, for example, Three Bros. Chinese Cuisine Inc, 2021, 709446/2020 (Sup. Ct. Queens Co. Jan. 13, 2021).