FEATURED STORY April 24, 2023

A Landlord Win: COVID-Era Guarantor Protection Struck Down

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In the early days of the COVID-19 pandemic, New York City landlords who had leased their properties to business entity tenants and accepted a guaranty of the tenant's lease obligations by an individual owner were out of luck, under NYC Local Law 55 of 2020 (the "Guaranty Law"). As one of a number of local laws enacted by New York City to counter the effects of the pandemic on the economy and local businesses, the Guaranty Law prohibited enforcement of those individual guaranties for any unpaid rent between March 7, 2020 and June 30, 2021. A recent decision by a Federal District Court has declared the Guaranty Law unconstitutional, enabling such landlords to seek to recover under those guaranties for the period of time affected by the law. (Melendez, et. al. v. The City of New York, et. al., decided March 31, 2023). While that time period of the law's impact was limited, the decision could allow for significant economic relief to any affected landlords, a change in their luck for the better. They now have a right to pursue legal action against those guarantors for unpaid rent under those leases for the affected time period…assuming that they have not entered into other agreements with the tenants (because of the Guaranty Law) that prevent them from doing so.

The case was brought in 2020 in Federal District Court in Manhattan by several commercial landlords against the City, challenging both the Guaranty Law and the companion amendments to the City's Residential and Non-Residential Harassment Laws that prohibited "threatening" tenants based on their COVID-19 status. The challenge to the anti-harassment amendments was based on the Due Process and Free Speech Clauses of the Federal and New York constitutions; that was thrown out by the District Court, and an appeal to the Second Circuit Court of Appeals failed, leaving in the case only one landlord plaintiff and the Guaranty Law challenge, which was based on the Contracts clause of the U.S. Constitution ( "no State shall…pass any…law impairing the Obligation of Contracts"). The District Court initially threw out the Guaranty Law challenge as well, but the Second Circuit reversed that part of the decision and sent the case back to the District Court, to determine if the City could show that the Guaranty Law was a reasonable means to achieve its policy goals of combatting the adverse impacts of the COVID-19 pandemic. The District Court examined five "serious concerns" identified by the Second Circuit about the City's passage of the Guaranty Law. Ultimately, the District Court held that the City failed to build a record that the Guaranty Law was a reasonable way to achieve those goals, and so the law was unconstitutional.

Notwithstanding the favorable result for landlords in this case, they should be concerned by the District Court's assertion that the City clearly has the power to override private contracts in order to achieve "policy goals" stemming from the pandemic, but simply failed to support this particular law with the logical cause and effect analysis that was required. It is easy to imagine a future case involving a local law enacted to achieve sweeping "policy goals," impairing the ability to enforce leases and contracts, which the courts find reasonable. Next time, landlords may not be so lucky.

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