Effective immediately as of May 26, 2020, individuals may not be personally liable for certain tenant obligations they agreed to guaranty. A new law signed by Mayor Bill de Blasio prohibits the enforcement of “a provision in a commercial lease or other rental agreement” involving real property located within New York City which provides that an individual guarantor is liable for rent, utility expenses, taxes, and/or routine building maintenance fees for which the commercial tenant is responsible if certain conditions are satisfied. These conditions relate to impacts suffered by the commercial tenant as a result of compliance with Governor Andrew Cuomo’s executive orders issued in response to the COVID-19 pandemic.
Accordingly, under the new law, if:
- the tenant was required to cease serving food or beverage for on-site consumption pursuant to executive order 202.3 issued on March 16th; or
- if the tenant is a non-essential retailer subject to in-person limitations pursuant to executive order 202.6 issued on March 18th; or
- if the tenant was required to close to members of the public pursuant to executive order 202.7 issued on March 19th; and
- the tenant’s default occurred between March 7, 2020 through September 30, 2020, then, the individual guarantor will not be personally liable for rent, utility expenses, taxes, and/or routine building maintenance fees for which the commercial tenant is responsible under the lease.
While the new law may seem to present a significant challenge for landlords seeking to enforce their rights against individual guarantors during the pandemic, practitioners have found that the law is ambiguous in a couple of key respects.
First, most guarantees of tenant obligations do not appear in a “commercial lease or other rental agreement”. Rather, it is typical to find a separate document wherein the individual guarantees the tenant’s obligations under the lease. The lease itself may not refer to a guaranty at all. Based on the plain reading of the new law, it is unclear whether the law will apply to prohibit the enforcement of a stand-alone guaranty.
Second, a number of ambiguities arise depending on when and how a landlord chooses to notice a tenant’s default under the lease, including during the time period set forth in the law.
In sum, while the new law may provide for relief to certain tenants during these unprecedented times, the specific application of the law remains unclear at present. The Real Estate and Transactional Department at Cuddy & Feder, led by Partner and Department Chair Michael L. Katz, is monitoring the situation and will continue to provide updates as developments in the new law unfold.