The recent legal tsunami of executive and administrative orders in New York State and New York City has fueled a wave of litigation between commercial landlords, tenants, and lease guarantors. As a recent case illustrates, the disputes raise issues as to the constitutionality of those orders.
204 E. 38th LLC leased space to Sons of Thunder LLC, under a ten-year lease signed in 2014, for a restaurant in Murray Hill specializing in Hawaiian and Californian beach-inspired food. Thunder stopped paying rent (and additional rent) in March 2020. John Kim signed a guaranty in connection with the lease. E.38th LLC sued Thunder and Kim.
Kim moved to dismiss on the ground that a recently passed provision in the New York City Administrative Code barred E. 38th LLC from seeking recovery based on a personal guaranty. He argued that this law sought to protect natural persons from liability arising from government-mandated closures due to the ongoing pandemic.
E. 38th LLC argued that the specific provision on which Kim relied was inapplicable to the guaranty he signed–because the new law only applied to a provision in a commercial lease that provided for personal liability and did not apply to a separate agreement like a guaranty. E. 38th LLC also argued that the provision violated the contracts clause of the United States Constitution if it were to apply to a stand-alone guaranty. E. 38th LLC pointed out that the ambiguity in the provision led to an amendment in September 2020 to cover stand-alone guarantees but maintained that the amendment could not have retroactive application.
Kim contended that the amendment merely clarified the previous law and, therefore, did not have a retroactive effect. And that the provision did not violate the U.S. Constitution.
The provision provides that:
Personal liability provisions in commercial leases. A provision in a commercial lease or other rental agreement involving real property located within the city, or relating to such a lease or other rental agreement, that provides for one or more natural persons who are not the tenant under such agreement to become, upon the occurrence of a default or other event, wholly or partially personally liable for payment of rent, utility expenses or taxes owed by the tenant under such agreement, or fees and charges relating to routine building maintenance owed by the tenant under such agreement, shall not be enforceable against such natural persons if the conditions of paragraph 1 and 2 are satisfied:
- 1. The tenant satisfies the conditions of subparagraph (a), (b), or (c):
(a) The tenant was required to cease serving patrons food or beverage for on-premises consumption or to cease operation under executive order number 202.3 issued by the governor on March 16, 2020;
(b) The tenant was a non-essential retail establishment subject to in-person limitations under guidance issued by the New York state department of economic development pursuant to executive order number 202.6 issued by the governor on March 18, 2020; or
(c) The tenant was required to close to members of the public under executive order number 202.7 issued by the governor on March 19, 2020.2. The default or other event causing such natural persons to become wholly or partially personally liable for such obligation occurred between March 7, 2020, and March 31, 2021, inclusive.
The Court found that the provision applied to a stand-alone personal guaranty for a commercial lease. The phrase “relating to such a lease” implicated a guaranty signed as a separate agreement.
The Court also found that the provision did not violate the contracts clause of the U.S. Constitution. The principle is firmly established today that all contracts are subject to the police power of the State. And, when an emergency arises, and the public welfare requires modification of private contractual obligations in the public interest, the question is not whether legislative action affects contracts incidentally, or directly or indirectly, but whether the legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to that end.
There Court held that there was no doubt that the pandemic, which had taken the lives of tens of thousands of New Yorkers, implicated the police powers of this state. The provision, which was intended to alleviate the personal financial burden on guarantors, was not unreasonable or inappropriate to curb the pain caused by Covid-19. The fact was that many businesses in New York City faced (and continued to face) dire financial situations due to mandated closures and restrictions. The New York City Council decided it was reasonable to enact a law to protect the personal assets of guarantors for that establishment. The Court took no position on the wisdom of the provision, and it only found that it was permissible.
The Court next considered whether the provisions, which clearly had retroactive effects, were permissible. Retroactive legislation is viewed with great suspicion. The deeply rooted presumption against retroactivity is based on elementary considerations of fairness that dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly.
It takes a clear expression of the legislative purpose to justify a retroactive application of a statute, which assures that the legislative body itself has affirmatively considered the potential unfairness of retroactive application and determined that it is an acceptable price to pay for the countervailing benefits.
Here, the Court found that the Administrative Code provision was permissible and justified. The New York City Council was well aware of the potential unfairness to landlords when it enacted this law. And the language of the code provision (as amended in September) stated that it applied to defaults between March 7, 2020, and March 31, 2021– evidence of conscious and deliberate decision to apply the law retroactively.
Having found that the law was permissible, the Court found that it justified dismissal of the claims against Kim. There was no dispute that Thunder operated a restaurant in the building and that it was ordered to cease serving patrons pursuant to various pandemic-related restrictions in March 2020.
Mr. Kim submitted checks that he claimed proved that no rent was owed for March, April, and May 2020. E. 38th LLC did not dispute that assertion in opposition. Therefore, the Court found that the default (if one actually occurred) took place well after March 7, 2020, and the provision applied. The Court stressed that it was not making a finding about how much E. 38th LLC might be due from Thunder–it was merely concluding that the alleged default took place within the time period required to implicate the law.
The Court recognized some confusion about whether the initial version of the code provision applied to personal guarantees. Apparently, that was why it was amended. That amendment clarified the rule’s intention, and the Court rejected E. 38th LLC’s assertions that the law should only apply to cases commenced after its enactment. The language suggested that it applied to defaults from the beginning of the pandemic.