When the Covid-19 pandemic ravaged New York City in March, 2020, then-Governor Cuomo issued a series of Executive Orders aimed at curbing the spread of the disease by restricting, or mandating the closure of, certain enumerated non-essential businesses. Because of the restrictions, temporary suspensions of retail operations, and loss of consumer sales, many stores, restaurants, bars, and gyms experienced significant downturns in business and loss of revenue.
New York City’s Guaranty Law
In response to the pandemic and in an effort to minimize the personal exposure of guarantors
of these commercial leases, the New York City Council enacted Administrative Code §22-1005,
better known as the “Guaranty Law,” designed to permanently exempt personal guarantors
of commercial leases for specified businesses from liability for tenant rent arrears and other
monetary obligations if two conditions are satisfied. First, the payment default or other event
causing the guarantor to become liable must have occurred during the period starting March
7, 2020 and ending June 30, 2021. Second, the commercial tenant must fall within one of
the following enumerated categories: (a) the tenant was required to cease serving patrons
food or beverages for on-premises consumption or to cease operation under Executive Order
202.3, which enumerated and provided restrictions for restaurants, bars, video lottery gaming
facilities, gyms, fitness centers and movie theaters; (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 202.6; or (c) the tenant was required to close to members of the public under Executive Order 202.7, applicable to barbershops, hair salons, tattoo or piercing parlors and related personal care services, including nail technicians, cosmetologists and estheticians, and electrolysis and laser hair removal services.
Limitations to the Guaranty Law Protections
A recent case brought by BBG on behalf of its client, Margules Properties ownership entity Tompkins Square Partners, LLC, against a former retail tenant, Big Gay Ice Cream (“Big Gay”), and its individual lease guarantor for breach of the lease and guaranty relating to Big Gay’s tenancy at its original East Village location at 125 East 7th Street, demonstrates important limitations to the Guaranty Law’s protections. The lease guarantor had claimed that he was protected from liability for the tenant’s rent obligations because Big Gay qualified as a restaurant protected under the Guaranty Law.
BBG successfully argued that Big Gay was not a restaurant under the Guaranty Law, because it lacked seating for customers within the premises. Years before, Big Gay had removed tables and chairs in the small retail location in order to accommodate more customers, and therefore did not have in-premises consumption of food or drinks during the period in which it had defaulted in paying rent. Without on-premises consumption, Big Gay did not technically qualify for protection under the Guaranty Law as a restaurant as it was never subjected to Executive Order 202.3’s restrictions requiring it to cease onpremises consumption. BBG further argued that because Big Gay served food, it was considered under the law to be an essential business, not subject to any in-personworkplace reductions pursuant to Executive Order 202.6.
New York County Supreme Court Justice Suzanne Adams agreed with BBG’s argument and held that the Guaranty Law was inapplicable to the Big Gay lease and guaranty, and granted summary judgment to Tompkins Square Partners and against Big Gay and its individual guarantor. The Court awarded judgment to Tompkins Square Partners for all back rent owed plus an assessment of attorneys’ fees to be determined at a separate hearing. Justice Adams reasoned that “defendants have provided no factual support for their contention that tenant’s business had indoor dining, in-person seating, or on-premises consumption at the leased premises.”
While the constitutionality of the Guaranty Law is currently being challenged by a coalition of New York City landlords in a pending Federal Court lawsuit [Melendez v. City of New York, Case No. 20-4238 (S.D.N.Y. 2020)] as violating the Contract Clause of the U.S. Constitution, the Guaranty Law for now remains legal and enforceable in New York City. However, as the above case demonstrates, the Guaranty Law is not a blanket shield for commercial lease guarantors, and each case must be carefully scrutinized and analyzed to determine if the particular lease and guaranty fall within the law’s explicit parameters.