Guest Post by Danielle C. Lesser of Morrison Cohen LLP:
The COVID-19 pandemic has only accelerated the challenges surrounding brick-and-mortar retail. Today, with travel restricted, employees working from home and consumers minimizing their time in stores while social distancing, the financial stability of New York City’s retailers is even more uncertain. In a measure to protect businesses, the New York City Council amended the New York City Administrative Code to protect some tenants from the impact of the COVID-19 pandemic in two very important ways. The new legislation protects guarantors who are “natural persons” from the reach of landlords for unpaid rent and expands the protection of commercial tenants from landlord harassment.
The City Council Gives Guarantors a Break
Under the guaranty provision, guarantors are not financially liable for tenant defaults under certain circumstances. There are several applicable scenarios that would excuse the guarantor from being responsible. These circumstances tie to the executive orders of Governor Cuomo which sought to help small businesses. Specifically, the guarantor is off the hook if:
- the default happened between March 7, 2020 and September 30, 2020;
- the tenant is a bar, restaurant, gym, movie theatre or the like and the tenant ceased operating as a result of Executive Order 202.3;
- the tenant is a non-essential retail establishments (unlike pet stores, markets, gas stations, hardware or appliance stores which are essential businesses) and ceased operating as a result Executive Order 202.6;
- the tenant is a hair salon, barbershop, tattoo parlor or other personal care place of service and ceased operating as a result of Executive Order 202.7.
The law is not perfectly applicable to typical lease guaranties and these differences should be carefully reviewed.
Tenant Harassment is Even Broader than Before
Under the tenant harassment provision, the definition of harassment has been expanded. Under the new law, a landlord cannot threaten a commercial tenant based upon its status as a business impacted by COVID-19 between March 7, 2020 through the end of any moratorium on tenant evictions, including any extensions. A business is impacted by COVID if:
- it had to close as a result of an executive order of the governor or the mayor during the pandemic; or
- its revenues for any three month period during the pandemic were less than 50% of its revenues for the same period in 2019 (or other revenue targets set by the regulation).
Although tenants have these added tools, it is also important to note that Landlords still retain their right to terminate a tenancy, to refuse to renew or extend a lease, to re-enter or repossess property and to collect rent. Though the new legislation is aimed at providing protections to tenants during the pandemic, landlords continue to question these new provisions.
What have the Courts Said About these Provisions?
Case law interpreting these new provisions is scant. In one recent case, the Court found that the landlord in question had resorted to “shenanigans.” The harassment included commencing successive eviction proceedings against the tenant, a landscaping design business, and serving multiple lease notices that the Court held were frivolous. The court found that the landlord’s conduct had interfered with the tenant’s business and resulted in financial injury arising from business disruption, loss of time away from clients, legal fees and the waiver of legitimate contractual rights. The judge ultimately awarded damages to the tenant.
Does the City Council Have the Power to Interfere with Contracts Between the Landlord and Tenant?
Landlords have questioned whether the government has the power to enact these new laws and whether they are constitutional. Executive orders that are issued by the Governor or the Mayor are issued in order to manage a disaster, like the Covid-19 pandemic. Important legislation in New York and case law from courts, including the Supreme Court of the United States, protect the City’s “police power” to protect its citizens. One Supreme Court case stated that “This power is … paramount to any rights under contracts between individuals.” Another recognized that the state may exercise its police power to impair contracts where necessary to protect the economic order of society for the protection of a basic interest of society.
What are Landlords Doing About These New Provisions?
The constitutionality of these new sections of the Administrative Code is the subject of at least one challenge in the Southern District of New York. Interestingly, another judge in the Southern District recently came to the opposite conclusion for an executive order issued by Governor Cuomo. The plaintiffs in both cases argue that provisions of the United States Constitution require the court to find the legislation unconstitutional. In the second case, the Southern District judge upheld Governor Cuomo’s right to issue Executive Order 202.28. This executive order temporarily permits tenants to apply their security deposit funds to rents and temporarily prevents landlords from initiating eviction proceedings against tenants affected by the pandemic.
For the time being, while the constitutionality of these new laws winds its way through the courts, commercial tenants of any size may add them to their arsenal of defenses to use in order to weather the onslaught of landlord actions for unpaid rent.
Danielle C. Lesser is a partner and chair of the Business Litigation department at Morrison Cohen LLP.