On May 26, 2020, New York City Mayor Bill DeBlasio signed a new law addressing the liability of personal guarantors for the debts of commercial tenants that defaulted due to COVID-19. Governor Andrew Cuomo had previously issued Executive Orders which prohibited the imposition of late charges and temporarily halted evictions of commercial tenants. As a result, many landlords turned to personal guarantors seeking compensation from them because they could not obtain it directly from tenants. The New York City law steps in to extend protections to such guarantors.
Individual guarantors of commercial leases who become liable when a commercial tenant impacted by the pandemic defaults in the payment of rent or other charges under the lease are being relieved of this personal obligation by the new legislation. The guaranty is, by virtue of the legislation, deemed unenforceable under the following circumstances:
- A guarantor is a natural person who is not the tenant named in the lease;
- The default giving rise to liability under the guaranty occurred between March 7, 2020, and September 30, 2020; and
- The tenant was:
- Required to stop serving customers food or beverage for onsite consumption or otherwise cease operation pursuant to Governor Cuomo’s Executive Order 202-3, which applied to bars, restaurants, gaming operations, gyms, movie theaters, and fitness centers;
- A non-essential retail establishment subject to in-person limitations, pursuant to Executive Order 202-6, which restricted the workforce of non-essential businesses to 50%; or
- Required to close to members of the public under Executive Order 202.7, which applied to personal care services such as barbershops, hair salons, and tattoo or piercing parlors.
Pursuant to the new legislation, any attempt by a landlord to enforce a personal liability provision contained in a commercial lease which the landlord knew, or should have known, is rendered unenforceable by the legislation, would constitute commercial tenant harassment, for which the landlord could be held liable.
The one potential loophole in the New York City law which landlords may be able to utilize is that many personal guarantees in commercial lease situations are contained in separate guaranty documents and not within the lease itself. The plain language of the new legislation states that in order for the personal liability provision to be unenforceable the same must be contained in the commercial lease. While it appears that the intent of the legislation is to cover the separate guaranty as well, it is possible that litigation will ensue over whether such separate guaranties are enforceable.
If you are a commercial tenant in New York City and have any questions regarding the enforceability of a personal guaranty, please contact one of our real estate attorneys.