As we all know, the Covid-19 pandemic has hurt many businesses, especially those that were forced to close their doors or provide limited services for long stretches of time. Although New York City, the State, and the federal government have offered some relief to suffering businesses, the courts – with some exceptions – have generally held tenants liable for all rent payments during the pandemic, despite being forced to limit their business operations due to government mandates. In New York City, most commercial leases provide for a guaranty (often a “good guy” guaranty”) whereby the guarantor is personally responsible for all or some portion of the tenant’s lease obligations plus other costs. However, as we have previously discussed in May 2020, the City provided relief for guarantors by passing NYC Administrative Code § 22-1005.
If certain conditions are met, § 22-1005 relieves personal guarantors who, due to a “default or other event”, become liable for payment of rent, utility expenses, taxes, or fees owed by the commercial tenant. In order to qualify for relief, the guarantor must be a natural person and the tenant must be: a restaurant or bar which served food on-premises, a non-essential retail store subject to in-person limitations during the pandemic or a business required to close (mostly relating to personal care services). In addition, the default or other event must have occurred between March 7, 2020, and June 30, 2021, inclusive, known as the “Covid Period.”
Litigation surrounding the enforcement of personal guaranties is taking place at a frenetic pace. Landlords and tenants have anxiously waited for judicial interpretation of § 22-1005 and a recent New York County decision, decided by Judge Lebovits, sheds some light on the position courts may take. 45-47-49 Eighth Avenue, LLC v. Conti involves a landlord attempting to recover unpaid lease obligations owed by the tenant, a restaurant, from the guarantor, Conti. The court first concluded that § 22-1005 applies to provisions involving guarantors both in the commercial lease agreement and separate agreements relating to the lease agreement.
In 45-47-49 Eighth Avenue, LLC v. Conti the landlord made several commonly held arguments: namely that the statute was unconstitutional, could not be applied retroactively, and that the guarantor was, in any event, liable for all future rent and additional rent due beyond the Covid Period. The last argument and the court’s ruling are notable. Given the drafting of the statute, it is not clear whether guarantors are excused from liability for only the Covid Period or for the life of the lease. Here, the lease ran through 2027, and thus, even if the guaranty was unenforceable for the Covid Period, but enforceable thereafter, significant liability would attach to the guarantor.
This Court held that the guarantor is not liable for these payments under § 22-1005. Judge Lebovits held that the tenant’s alleged failure to perform occurred during the Covid Period, which placed the guarantor within the protection of § 22-1005, despite the fact that some rent payments would be for a period outside of the Covid Period. This is a notable ruling for guarantors embroiled in, or facing the prospect of, similar litigation: according to at least one New York County judge, if acts giving rise to the guarantor’s liability occurred during the Covid Period, any liability that results from those acts is covered by § 22-1005, regardless of the time period the liability covers such as rent payments due after the Covid Period.
This case is only a single trial court’s decision on the issue and other judges may interpret the statute in different ways, but for now, the decision is one that tenants and guarantors may be able to use as leverage in negotiations with landlords both prior to and during litigation.
The case does not address alternative factual scenarios, for instance where a tenant stopped paying rent during the Covid Period but remained in the space and was never actually given a notice of default. BFK will continue to provide updates and notifications of any changes to the law or interpretation of § 22-1005.