Federal Court Upholds Freeze on Enforcement of Commercial Lease Guarantees
Ever since the onset of the pandemic, residential and commercial building owners have been frustrated by their inability to use the courts, which have been effectively shuttered for these many months, to address non-payment and other issues. Cases brought both before and since the pandemic have been languishing as moratoria adopted on the State and federal level have prohibited evictions, whether COVID-related or not.
In late May, the City Council passed three laws to protect tenants during the pandemic. Two of the laws – known as the Residential Harassment Law and the Commercial Harassment Law – prohibited harassment of any “person impacted by COVID-19,” which included essential workers, people diagnosed with COVID-19, caretakers of those with COVID-19, and anyone unemployed or with additional financial responsibilities as a direct result of the pandemic.
The third law, known as the “Guaranty Law,” limits the ability of commercial owners to enforce a “personal guaranty” made by an individual to pay rent, utilities or taxes in the event the commercial tenant defaults on those payments. The law covers payments due between March, 2020 and March, 2021 and prohibits the owners from seeking to collect from the personal guarantor for those payments, even after the pandemic ends. The Guaranty Law applies to businesses which, due to various executive orders, are required to cease serving patrons food or beverages for in premises consumption, required to close to members of the public, or deemed a non-essential retail establishment.
The constitutionality of the three laws were challenged by owners in the federal court in the Southern District in New York in Melendez v. City of New York, a case in which RSA submitted an amicus brief in support of the owners. United States District Court Judge Ronnie Abrams rejected the challenge and upheld the constitutionality of all three laws.
With regard to the two harassment laws, Judge Ronnie Abrams rejected the claim that the laws violated free speech rights of owners who, by virtue of serving rent demands and having rent-related discussions, might be subject to liability for harassing their tenants. While rejecting those claims, Judge Abrams made clear that the harassment laws do allow for “routine rent demand notices and discussions about the consequences flowing from unpaid rent and efforts to collect rent…. In other words, while a landlord may not harass someone because she has been impacted by COVID-19, the landlord may demand rent because the rent is due.”
The Guaranty Law was challenged on the grounds that it violates the Contract Clause of the Constitution. Judge Abrams concluded that although the Guaranty Law “does in fact impose a substantial impairment” of the contract between owners and tenants, it was “reasonable, necessary and passed to advance a legitimate public interest.” Thus, owners who entered into leases with commercial tenants based upon the fact that the lease payments were personally guaranteed have been left unprotected and denied the opportunity to seek compensation from guarantors.
RSA was represented in Melendez by Jeffrey Turkel, Esq., from Rosenberg & Estis. We will keep you apprised of any further developments in Melendez, including whether the decision is appealed to the Second Circuit Court of Appeals.