Local Law addressing personal liability provisions in commercial leases raises constitutional law discussion. On May 26, 2020, Mayor Bill de Blasio signed seven COVID-19 relief bills into law during New York City’s first ever virtual bill signing. Among the laws, Local Law 55 of 2020, sponsored by Council Member Carlina Rivera, temporarily prevents the enforcement of personal liability provisions in commercial leases or rental agreements involving COVID-19 impacted tenants. The law also makes it a form of harassment to attempt or threaten to enforce personal liability provisions on the COVID-19 impacted tenant. Several of the bills were heard by their respective committees on April 29, 2020 and all were approved by their committees and the full Council on May 13, 2020. To read CityLand’s prior coverage of the other COVID-19 Relief Bills and Local Law 55 at public hearing, click here. For the coverage of the Third Party Delivery Service bills and the Stated Meeting click here.
Local Law 55 applies to the personal liability provisions of four types of COVID-19 impacted businesses. First, business that were required to stop serving food or beverages on-premises, such as restaurants and bars. Second, businesses that were required to cease operations altogether, like gyms, finesses centers and movie theaters. Third, retail businesses that were required to close and/or subject to in-person restrictions. Fourth, businesses that were required to close to the public such as barbershops, hair salons and tattoo/piercing parlors.
Within the real estate industry, these personal liability provisions are often referred to as “good guy guarantees.” Under normal circumstances, these provisions permit commercial tenants to terminate the lease prior to the end of term, if they provide their landlord the required notice and agree to be liable for the unpaid rent while they were still in possession of the premises. Some real estate industry leaders and local legislators have questioned the constitutionality of the bill under the Constitution’s “Contracts Clause,” while others believe the pandemic and the current economic state are conditions that necessitate and constitutionally legitimize the bill.
The Contracts Clause, Article 1, Section 10 of the United States Constitution, states in relevant part “[n]o State shall…pass any… Law impairing the Obligation of Contracts.” However, in the face of catastrophe, state and local legislatures have previously passed legislation affecting the contract rights of private parties. A notable case arose during the Great Depression when the Minnesota State legislature passed a Mortgage Moratorium Act to prevent a wave of farm foreclosures. Supreme Court, Chief Justice Charles Evans Hughes in Home Building & Loan Association v. Blaisdell, held that even though the statute retroactively impaired contract rights, the State’s interest in exercising its police power made the law valid. The decision essentially provides that the law must be proportionate to, and not last longer than the emergency. In other words, the Minnesota law only temporarily modified the mortgage contracts for the Great Depression’s duration.
The Supreme Court would clarify the requirements for a Contracts Clause challenge in Energy Reserves Group v. Kansas Power & Light (1982) but lawyers and academics still quarrel over clause’s interpretation, and how the interpretation might be applied under differing circumstances. Many have likened this COVID-19 relief law and its application to Great Depression legislation, but others argue this pandemic is a different circumstance or the bill should simply be read with an originalist approach.
At the signing, Mayor de Blasio stated “one of the other crucial elements of today is the focus on tenants, the focus on tenants who are dealing with some unprecedented problems because of the coronavirus, dealing with some landlords- and they are not the majority- but some landlords who unfortunately are taking advantage of this crisis and using it as a time to harass or mistreat tenants. Legislation today also addresses that crucial issue.”
Sherwin Belkin, founding partner at the law firm Belkin, Burden & Goldman LLP stated the bill would “void the ‘good guy’ guaranty in a retail lease where the retailer has suffered an economic hardship due to the COVID-19 pandemic… It is a negotiated term and provides the lessor with assurance of rent payment in the event the entity that is the lessee goes belly up.” Belkin added, “The Council’s bill, while presumably well intentioned, has a number of legal problems, not the least of which is found in the Contract Clause of the United Sates Constitution. Article I, section 10 of the Constitution puts a clear restriction on government passing any law that might cause the impairing of a private contractual obligation. But that is exactly what this bill would do by stripping away a negotiated rent protection found in the contract…Obviously, we are in a difficult period and government wants to help; but ‘helping’ while trampling upon constitutionally protected rights is not the path for government to take.”
Council Member Carlina Rivera stated “With the signing of my bill, any small business owner with a personal liability clause in their lease will see that provision temporarily suspended and they will no longer have to fear their landlord going after their personal life savings and assets because of a disaster no one saw coming.” A spokesperson for Council Member Carlina Rivera’s office added, “the legal team at the Council feels confident that the bill is constitutional and will be upheld by any court if someone were to challenge it.”
Samantha Keitt, spokesperson for Department of Small Business Services, stated, “Rent is a critical issue for small business owners and we are supportive of the Council’s measures to strengthen commercial tenant protections through Int. 1914 and int. 1932. (Local Law 55)”
Council Member Kalman Yeger, who voted in the negative, stated “The United States Constitution prohibits states from passing a ‘law impairing the obligation of contracts.’ In its attempt to render unenforceable contractual terms entered at arm’s length, Int. 1932 (Local Law 55) unconstitutionally impairs contractual obligations. Int. 1932(Local Law 55) goes even further by deeming an attempt to enforce contractual terms as ‘harassment,’ thus hindering the right to challenge the constitutionality of the law. No matter how well-intention, no legislature may step on the Constitution to achieve its purpose.”
For New York City-specific COVID-19 updates, the City has established an information site with updates from all major administrative agencies. Agencies include the Department of Buildings, City Planning, Citywide Administrative Services, the Department of Finance and the Department of Transportation among others. You can find that page here.
By: Jason Rogovich (Jason Rogovich is the CityLaw Fellow and New York Law School Graduate, Class of 2019)