On May 26, 2020, New York City’s City Council passed three local laws designed to combat the economic impact of COVID-19 on small business owners. One of these laws, known as New York City’s “Guaranty Law” precluded enforcement of personal guarantees executed by individuals for particular types of commercial tenancies between March 7, 2020 and June 30, 2021.
On November 25, 2020, the Honorable Ronnie Abrams of the Southern District of New York in Melendez v The City of New York dismissed various property owners’ constitutional challenge to the Guaranty Law on grounds the City was entitled to great deference under their “police powers” to pass legislation responsive to the pandemic notwithstanding the questionable breadth of the Guaranty Law and the substantial impact the law had on private contracts.
On October 28, 2021, the U.S. Second Circuit Court of Appeals in Melendez v. City of New York reversed the District Court decision as prematurely decided at the pleadings stage and remanded the case back to the District Court for further discovery on specified issues and for the District Court to make a determination on the property owners’ motion seeking to temporarily enjoin enforcement of the Guaranty Law.
The majority in Melendez held “Plaintiffs state a plausible Contracts Clause challenge to N.Y.C. Admin. Code § 22-1005, which renders permanently unenforceable certain personal guaranties of commercial lease obligations. Reviewing that claim by reference to balancing principles identified in the Supreme Court’s most recent Contracts Clause jurisprudence, this court concludes that: (a). the challenged Guaranty Law significantly impairs personal guaranty agreements; (b) the record thus far demonstrates a plausible significant public purpose for the impairment; but (c) the same record raises at least five serious concerns about that law being a reasonable and appropriate means to pursue the professed public purpose, and, thus, that determination cannot now be made in favor of defendants as a matter of law.”
The practical import of this decision is sure to reverberate throughout the City as property owners and commercial guarantors (who believed they had been relieved of potential liability during the period covered under the Guaranty Law) continue to litigate, and negotiate significant liabilities under their respective guaranty agreements.
If you need any guidance or advice on how best to pursue either a commercial tenant or guarantor for collection of rent please feel free to contact the attorney you work with at BBG LLP.