New York’s Courts Uphold the Letter of New York City’s Guaranty Law
Holland & Knight Retail and Commercial Development and Leasing Blog
New York City enacted Administrative Code Section 22-1005, known as the “Guaranty Law” prohibiting enforcement of personal guaranties and supporting commercial leases, in May 2020. The law applies to defaults that occurred between March 7, 2020, and June 30, 2021. It includes a declaration of legislative intent explaining that the New York City Council enacted the law because of the risk of financial ruin for business owners due to the COVID-19 pandemic. Since the law was enacted, the courts have grappled with numerous legal issues that its enactment raised.
The law bars enforcement of a guaranty for a commercial lease, if the guarantor is a natural person, not the tenant, and the tenant was: 1) required to stop serving food or beverages to be consumed on premises, or to cease operations under former Gov. Andrew Cuomo’s Executive Order 202.3; 2) a nonessential retail establishment that was subject to in-person limits under Executive Order 202.6; or 3) required to close to the public under Executive Order 202.7.1
Under Guaranty Law decisions, a landlord can collect rent for defaults occurring before March 7, 2020, or after June 30, 2021.2 However, accelerated rent that the tenant became liable for during the statutory period cannot be enforced against the guarantor.3 Although the Guaranty Law prevents enforcement of personal guarantees for rent, utilities, taxes or building maintenance fees, it does not prevent enforcement for other guarantied payments, such as a brokerage commission.4
The courts have been careful to apply the Guaranty Law as it was written. In April 2022, the First Department, Appellate Division, determined that the law did not apply to individual guarantors for congregate care facilities that were required to close during the pandemic under Executive Order 100, not under executive orders referred to in the Guaranty Law.5 As the court commented, “while the spirit of the law would appear to include the guarantor, the letter of the law does not include him.”6 This sentiment of upholding the letter of the law appears to underlie decisions to date. The Guaranty Law does not just prohibit enforcement of any individual’s commercial guaranty during the applicable period – it also requires the guarantor to show that the tenant was subject to the specified pandemic-related executive order closures. Recognizing this additional requirement, the Appellate Division, First Department, granted summary judgment to a landlord plaintiff, because the defendants had not even asserted that the subtenant ceased operations or closed to the public under any executive orders.7
In a well-publicized decision, currently under appeal, the New York Supreme Court declined to extend the Guaranty Law where the tenant had leased the space to a subtenant synagogue that failed to vacate the premises at the end of the lease, during the statutory period. 8 The court looked at the tenant’s business, in which it acted as a landlord leasing to the subtenant, and declared that the Guaranty Law did not apply because the tenant/sublandlord’s leasing business as to this lease (i.e., acting as a sublandlord for the subtenant) was not a business that was affected by the applicable executive orders. Accordingly, the guarantors remained liable to the main landlord under the guaranty.
The reticence of the courts to view the Guaranty Law broadly can be explained by the constitutional challenges that have been raised in several cases but remain undecided.9 The Guaranty Law makes applicable commercial lease guaranties permanently unenforceable for rent and other specified fees arising between March 7, 2020, and June 30, 2021.10 Landlords have challenged the Guaranty Law under the Contract Clause to the U.S. Constitution, which prohibits states from passing any laws “impairing the obligations of contracts.”11 Stay tuned for those decisions.