The NYC Guaranty Law

The City of New York passed the Guaranty Law, which made “guaranty clauses” in commercial leases unenforceable for unpaid rent between March 7, 2020 and June 30, 2021. Plaintiffs Elias Bochner and his business, 287 7th Avenue Realty LLC, commercial landlords, brought this action alleging that the law violates the Contracts Clause of the United States Constitution. NYC Guaranty Law Declared Unconstitutional – How Will this Affect New York City Landlords and Tenants? The Second Circuit partially reversed, identifying “five serious concerns” about the Law being a “reasonable and appropriate means” for the City to achieve its public purpose. The City is required to develop the record to “identify . . . circumstances relevant to determining whether the Guaranty Law is [] reasonable and appropriate.” The City has yet to be able to adduce record evidence demonstrating that the Guaranty Law is reasonably tailored to accomplish its legitimate policy goals. So the Court concludes that the Law violates the Contracts Clause. The Court grants the City’s motion to dismiss the Complaint.

The Emergency Rent Relief Act (ERRA)

On June 17, 2020, the Emergency Rent Relief Act (ERRA) was passed, which authorized the state housing commissioner to establish a residential rent relief program for those affected by COVID-19. The act provided for rental subsidies, capped at 125 percent fair market rent, to be paid directly to landlords through a rent voucher. Priority for these vouchers was to be given to those with most significant social and economic needs. The same date, the legislature amended the State Banking Law, adding § 9-x, which required all entities regulated by the New York Department of Financial Services to grant forbearance on all monthly mortgage payments for up to 180 days, subject to certain restrictions. On June 30, the legislature passed the Tenant Safe Harbor Act (TSHA), which prohibits courts from issuing warrants of eviction against those residential tenants who have suffered financial hardship during the COVID-19 period for rent due and owing during that period. The TSHA instructed courts to consider factors such as change in income and liquid assets in determining whether a tenant suffered “financial hardship.” The Chief Administrative Judge of the NY Courts also issued a series of administrative orders, some of which prohibited the initiation of foreclosures on commercial properties and suspended commercial and residential evictions.

The proposed law would relieve small businesses struggling due to the COVID-19 pandemic. Several community stakeholders testified in support of the Law, while others expressed reservations about its efficiency and legality. Council Member Yerger urged that any effort to provide relief for commercial tenants should “go hand in hand with relief for landlords.” Several speakers, however, expressed specific reservations about the Law, including Council Member Yerger who argued that the Law is a “violation of Article I Section 10, the Contracts Clause.” As applicable for the purposes of the present motion, a local landlord, Elias Bochner, claims to have been harmed by the Law.

New York City’s Guaranty Law.

The City of New York has filed cross-motions for summary judgment, and the Court heard oral arguments on the motions on December 19, 2022. The City argues that the Plaintiffs have failed to establish constitutional standing because they have not demonstrated an injury-in-fact, which is traceable to the City’s Guaranty Law. The Court disagrees and finds that the Plaintiffs have demonstrated an injury-in-fact based on invalidating their bargained-for contract rights due to the Guaranty Law. The injury is fairly traceable to the law; therefore, the City has failed to establish causation.

The guarantor’s guaranty covers the guarantor’s obligations, the complaint’s first and second causes of action fail to state a claim for an enforceable liability against the guarantor. The court finds that the guaranty law violates the Contracts Clause and that this action is ripe for judicial review.

The Second Circuit found that the Guaranty Law substantially impairs the contract rights of landlords, such as plaintiff Bochner, whose commercial lease agreements are secured by personal guarantees. The law renders unenforceable any personal guaranties of rent obligations arising under such leases for the proscribed period. The City argues that the law does not impair the contractual rights of landlords, but the Court finds that this argument fails because the practical likelihood of landlords such as plaintiff Bochner recovering rent arrears from delinquent small business tenants appears speculative at best. The Court also finds that the law does not invalidate the first bargain between the principals and the guarantor, but destroys the second for guarantor obligations. On remand, the City emphasizes that the Guaranty Law “easily meets the public purpose test because it is designed to prevent the bankruptcies of small business owners, the firing of their employees, and the broader economic devastation brought on by a raft of business closures.” The Court finds that the means the City employed to advance that purpose were not reasonable in their design, such that the Law fails to survive constitutional scrutiny.

Blaisdell v. United States

The Supreme Court’s decision in Blaisdell v. United States, which upheld a law that deferred a mortgagor’s obligations but did not extinguish them forever. The Circuit noted skepticism at the pleadings stage that the law was an appropriate means to achieve its professed public purpose of helping shuttered small businesses survive the pandemic. The City has relied upon the same record evidence it cited at the motion to dismiss stage to demonstrate that the Council’s legislative determination about the means-ends fit of the Guaranty Law was appropriate. The Circuit cautioned that such deference is only warranted with some record basis to link purpose and means.

Gabriel Stuhlman, the founder of Happy Cooking Hospitality, testified that he is preparing for the possibility of going bankrupt and belly up, is concerned about his landlords taking his security deposits and that the proposed bill is instrumental to his existence and that of most small businesses in the city. The City Council heard testimony from business owners indicating that they could only reopen their businesses if legislation targeting guaranty clauses in commercial leases were passed. The City has failed to point to evidence supporting assumption (a) that “shuttered small businesses are usually owned by the individuals guaranteeing their leases” and assumption (b) that the City will need to “condition the relief” of the Guaranty Law “on guarantors owning shuttered businesses, or, even if they do, on their ever reopening those businesses.” The burden of the Guaranty Law was placed exclusively upon landlords, and the Second Circuit found this to violate the Contracts Clause.

The economic impact on New York City Landlords and Tenants going forward.

The City of New York argues that the economic burden placed on landlords by the Guaranty Law is not easily ascertained and should not be considered when deciding whether to apply the law. The City acknowledges that the law was enacted in response to COVID-19 and designed to help businesses weather the pandemic. The City argues that the law only balanced the burden felt by tenants, guarantors, and landlords and that similar “government pandemic assistance was not accessible to small business tenants.” The City’s arguments are not supported by the record and the Circuit finds that the law violates the Contracts Clause.

The City of New York’s legislation allowed businesses to shut down or reduce operations during the pandemic. However, this was extended without properly tailoring it to small business owners who may have been impacted. The Second Circuit found that the lack of a need condition and the lack of compensation for landlords substantially impaired contracts.

The court has ruled that plaintiffs are entitled to summary judgment, and the defendant’s motion for summary judgment is denied.

Contact us if your entity requires additional assistance navigating this ruling. Our partners at V Global Holdings and Edgemont Financial will assist you.

Contribution author – Victor Jung, Founder and CEO.

V Global Holdings is a global management consulting and financial advisory company. Committed to delivering innovation, V Global Holdings collaborates with its clients to help them become high-performance businesses. With deep industry and business process expertise, broad global resources, and a proven track record, V Global Holdings can mobilize the right people, skills, and technologies to help clients improve their performance. The firm has provided advisory services to more than $2B of business transactions in primarily growth-oriented industries of Consumer Products, Media, Healthcare, Financial Services, and Real Estate.

Verified by ExactMetrics