New NYC Law Limits Personal Liability of Guarantors of Restaurant Leases
In response to the COVID-19 pandemic, the New York City Council has passed legislation that gives significant relief to restaurant owners. If a commercial lease provides that a natural person who is not the tenant (e.g., the guarantor) is personally liable under the lease, the new 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.
Int. No. 1932-A provides that a guarantor of a commercial lease cannot be held personally liable for the payment of rent, utility expenses, or taxes owed by the tenant under the commercial lease, so long as certain conditions are met. For restaurants, the following two conditions must be satisfied:
- The tenant was required to cease serving food or beverage to patrons for on-premises consumption or to cease operation under executive order number 202.3 issued by the governor on March 16, 2020; and
- The default or other event causing such natural persons to become wholly or partially personally liable for such obligation occurred between March 7, 2020, and September 30, 2020, inclusive.
Prior to the new legislation, restaurant owners were often sued personally by landlords for unpaid commercial rent. One notable restaurateur has written an impassioned plea to the city in support of the new legislation, fearing that restaurant owners would face personal bankruptcy if such guaranties were enforced. The issues that these restaurant owners face are not unique, and many business owners around the city face similar problems.
Currently, even though restaurants may be in default of their leases, and their guarantors are unable to comply with the provisions of the “Good Guy” Guaranties that otherwise would have exposed the guarantors to personal liability, landlords will be unable to enforce the guaranties against the guarantors.
Restaurant owners should know that the new law 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 new statute applies only if the personal liability provision is contained in the written 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 Council 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.
The legislation, signed into law by Mayor De Blasio on May 26, 2020, 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 statute to be unenforceable permanently. However, comments from the bill’s sponsor suggest that the enforcement of the personal liability provisions is only “temporarily suspended.”
We will continue to monitor the situation for updates. Contact us with any questions.