Recent Update Regarding Limitations on Enforcement of Personal Guaranties in Commercial Leases

On May 26, 2020, the New York City Council enacted Local Law 2020/55 in response to the financial hardships related to the COVID-19 Pandemic. Local Law 2020/55 limits the right of landlords to enforce a personal guaranty in a commercial lease made by a natural person, other than the tenant, for sums that come due under the lease between March 7, 2020 and September 30, 2020. The original timeframe in Local Law 2020/55 was extended to cover sums coming due under the lease through March 31, 2021 by the subsequently enacted Local Law 2020/98 (collectively, Local Law 2020/55 and Local Law 2020/98 shall be referred to as the “Guaranty Law”).

Under the Guaranty Law, the landlord cannot enforce a personal guaranty in a commercial lease against a natural person other than the tenant related to sums coming due under the lease between March 7, 2020 through March 31, 2021 if the business was: (i) a gym, movie theatre or required to cease serving patrons food or beverages for in-premises consumption [Executive Order 202.3], (ii) required to close to members of the public [Executive Order 202.7], or (iii) deemed a non-essential retail establishment, subject to in-person occupancy limitations [Executive Order 202.6].

In response to the enactment of the Guaranty Law, a lawsuit was commenced against the City of New York in the United States District Court for the Southern District of New York by a group of landlords under the caption Melendez, et al., v. The City of New York, et al. The lawsuit challenged the constitutionality of the Guaranty Law on various grounds, including that the law violates the Contract Clause of the U.S. Constitution (the “Contract Clause”), which prevents states from passing laws which impair private contractual obligations. By Opinion and Order dated November 25, 2020 (“Order”), Hon. Ronnie Abrams, United States District Judge, dismissed the case. In her Order, Judge Abrams held that that while the Guaranty Law does substantially impair commercial leases, since it reasonably advances the legitimate public interest of preventing bankruptcies of small businesses and their owners, who employ roughly half of New York City’s employees, it is not a violation of the Contract Clause. In her Order, Judge Abrams also held that the Guaranty Law was not pre-empted by New York State Law.

Although the parties to the Melendez case are reportedly still considering whether to appeal Judge Abrams’ Order and other cases challenging the Guaranty Law are likely to be filed, for now the Guaranty Law stands. Accordingly, if a business subject to a commercial lease falls under one of the three (3) categories noted above, the landlord is prohibited from enforcing its rights against the guarantor under the personal guaranty for sums coming due under the lease from March 7, 2020 through March 31, 2021, so long as the personal guarantor is a natural person and not the individual tenant.

The attorneys at Turek Roth Grossman LLP are available to answer any questions related to the rapidly changing commercial leasing landscape.