Asset Protection Blog

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Asset Protection Blog

UPDATE: Protections for Personal Guarantors of Commercial Leases Extended to March 31, 2021

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On September 28, 2020, the New York City Council amended NYC Admin. Code Section 22-1005, which made personal guaranty provisions in some commercial leases unenforceable.  The protection afforded to some business owners is now in effect until March 31, 2021.

In addition to extending the end date of the default period to March 31, 2021, the City Council clarified that the protections cover personal guaranty provisions that “relate to” to commercial leases or other rental agreements.  The prior version of the law was unclear as to whether the guaranty provision had to be written into the lease document or could be in a separate document.

Now, the guaranty provision can be in the lease itself or in a separate document; both are covered.  

In addition, even after the amendment, the law remains unclear whether the personal guaranty provisions are permanently unenforceable or merely suspended until March 31, 2021.

The legislation renders unenforceable (at least for now) only those guaranty provisions for tenants that were affected by Executive Orders 202.3 (restaurants), 202.6 (non-essential retail establishments), and 202.7 (barbershops, salons, tattoo parlors, etc.).

Please follow our blog for further developments.

For additional information, please contact us.

New York City Council Limits Personal Liability in Commercial Leases

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The New York City Council has attempted to give some business owners additional relief from the economic effects of COVID-19. If a commercial lease provides that a natural person who is not the tenant is personally liable under the lease, the statute prohibits landlords from enforcing that personal liability provision if the tenant has been impacted by COVID-19. Attempts to enforce such a provision against a non-tenant may constitute unlawful harassment. However, many lawyers and commentators argue that the law is unconstitutional and hence unenforceable.

Bill 1932-A, signed by Mayor De Blasio on Tuesday, May 26, 2020, applies to defaults that occur between March 7, 2020 and September 30, 2020, if one of the following conditions is met:

  1. The tenant was required to cease serving patrons food or beverage for on-premises consumption (e.g., restaurants and bars) or to cease operation (e.g., gyms, fitness centers, and movie theaters) under executive order 202.3 issued by the governor on March 16, 2020;
  2. The tenant was a non-essential retail establishment subject to in-person limitations under guidance issued by the New York state department of economic development pursuant to executive order 202.6 issued by the governor on March 18, 2020; OR
  3. The tenant was required to close to members of the public under executive order 202.7 issued by the governor on March 19, 2020 (e.g., barbershops, hair salons, tattoo or piercing parlors, and related personal care services).

In many commercial leases, a person, often the tenant’s principal, will agree to be personally liable for a default by a commercial tenant. Some of these commercial leases contain only a “Good Guy Guaranty,” in which the “guarantor” is personally liable only under limited circumstances, which vary on a lease-by-lease basis from failing to vacate the property after a default, to filing a bankruptcy, to nonpayment of rent before the tenant vacates the premises. The new statute does not appear to make any distinction between full guaranties and Good Guy Guaranties.

The legislation is subject to dispute on two grounds. First, the language of the bill prohibits enforcement of a personal liability provision if it is found in “a provision in a commercial lease or other rental agreement.” If there is a separate guaranty document signed by a natural person who may or may not be the owner of the business, we expect that landlords will argue that the guarantor remains liable because, if read literally, the statute applies only if the personal liability arises in the commercial lease or other rental agreement.

Second, landlords will argue that the municipal legislation is an unconstitutional impairment of the parties’ contract rights. Whether the City of New York, as an instrumentality of the State of New York, has the authority to suspend contract enforcement in times of emergency, as argued by the bill’s prime sponsor, is likely to be ultimately decided by the courts.

A landlord may never be able to recover from the non-tenant guarantor, although the bill is unclear on that issue. The text of the bill appears to extinguish, rather than temporarily suspend, the landlord’s ability to enforce the personal liability provision. As long as the default occurred between March 7, 2020 and September 30, 2020, and one of the above conditions is met, the landlord’s claim against an individual guarantor appears from the bill to be unenforceable permanently. However, comments from the bill’s sponsor suggest that the enforcement of the personal liability provisions is only “temporarily suspended.” All interested parties should continue to monitor the situation for updates.