No Personal Responsibility For Commercial Leases

Written By: Morrell I. Berkowitz

commercial lease document on table

One recent development arising from the COVID-19 pandemic has been a dramatic change affecting the previously traditional requirement in commercial lease transactions in New York City, for an individual to personally guarantee the obligations of the tenant.

A basic part of commercial lease transactions has been the utilization of either a “Good Guy Guaranty”-where a guarantor is only liable up and until the time that the tenant vacates the property or the basic “Unconditional” guaranty of all obligations of the tenant.

Thanks to a recently enacted special section of the Administrative Code enacted by the New York City Council in May 2020 and given retroactive effect in September 2020, known as the “Personal Guaranty Law”, the enforceability of such guarantees are in doubt.

NYC, in short, eliminated any liability for a person for any rent due from a commercial lease for the period March 7, 2020, through March 31, 2021, PERMANENTLY. The elimination does not apply to any entity (such as an LLC, or other corporation, or partnership) that signs such a guaranty; or for time periods either before, or after, the dates set forth; nor does it prevent any legal action against a tenant under a lease.

In the last two weeks, two different courts have applied and upheld this statute. New York County Supreme Court Justice Arlene Bluth in 204 E. 38th St. LLC v. Sons of Thunder LLC, concluded that the section was reasonable, “permissible and justified”, notwithstanding the substantial loss it would inflict on a landlord. Similarly, Judge Ronnie Abrams of the U.S. District Court in the Southern District of New York, in Melendez, v. The City of New York,, upheld the constitutionality of the above law, as well as other tenant protection statutes enacted by NYC, concluding it was “reasonable and necessary, and entitled to “substantial deference”, due to the exceptional effects of the pandemic on the population and the economy. As of this writing, no notice of appeal has been filed in either case.

For owners and landlords of commercial properties, those decisions, if not reversed on appeal, or differentiated or challenged by other courts, can be a “game-changer” in the economics of existing leases of commercial property in NYC. 

To repeat, these rulings and the statute, apply only to leases in New York City.

These events are now part of the ever-changing legal landscape directly resulting from the effects of the pandemic, with the State, City, and courts addressing the economic aftermath of the same, and even the procedures relating to the litigation of such claims.

Practical strategies for both landlords and tenants are beyond the scope of this article but will need to be addressed by parties to such transactions. Our firm is prepared to assist in such efforts.

For further information, please visit GDB’s Coronavirus Blog.

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