Tenant Leasing Illustrated September 2020 Neanderthals and Your Lease Guarantee

Hello,

The New York City Administrative Code has been amended to try to relieve the harm to certain retail businesses that have complied with Executive Orders with respect to COVID-19. The law makes certain guaranty provisions unenforceable against natural persons who are liable for payment of a tenant’s rent due to lease defaults between March 7, 2020 and September 30, 2020.

Enforceable? Who knows. But similar laws are undoubtedly cropping up around the country and, if nothing else, can be a helpful bargaining chip when a guarantor is negotiating with its landlord. In today’s issue, we provide four items to keep in mind with respect to these laws.

Sincerely,

Alan

Alan Katz
Mintz & Gold LLP

Neanderthals and Your Lease Guaranty

Neanderthals seem to be everywhere.

No, I am not going to get political, but those prehistoric wunderkinds did not exactly practice safe sex and many of us apparently carry interspecies Neanderthal DNA.

C’mon, you know who you are.

Most tenants probably assume that their landlords are part Neanderthal.

Landlord attorneys? I am pretty certain. Neanderthal.

Mrs. Josephs, my fourth grade teacher? No question. Neanderthal.

And now a study by scientists at the Karolinska Institute in Sweden and the Max Planck Institute for Evolutionary Anthropology in Leipzig claims that a strand of DNA tied to Neanderthals may increase the likelihood of getting a bad case of COVID-19.

Joe Queenan in the Wall Street Journal objected that Neanderthals get blamed for everything in the press, complaining that the other species that dominated the planet before Homo sapiens never get blamed for anything.

I am not sure why Mr. Queenan is so concerned, but I won’t go there.

Anyway, everyone knows Cro-magnons had much better public relations and Homo erectus were the media darlings of the Pleistocene age.

As for our other ancestors who knows, but poor, poor Neanderthals; they cannot seem to get a break.

In today’s COVID-19 world, many tenants cannot get a break as they struggle to meet their expenses and pay their rent.

Neanderthals or not, many landlords respond to payment defaults by going a little prehistoric.

This is particularly a problem for retail tenants, especially small businesses whose leases may be personally guaranteed by one or more of its principals.

Here in New York City, where cavemen roam free, Mayor Bill de Blasio signed a law amending the Administrative Code to mitigate the harm to certain retail (but not office) businesses forced to curtail their operations because of the Executive Orders issued with respect to COVID-19.

The law renders unenforceable guaranty provisions that obligate natural persons (i.e., not entities) to become “wholly or partially personally liable” for a tenant’s “payment of rent, utility expenses or taxes…or fees and charges relating to routine building maintenance” arising from lease defaults between March 7, 2020 and September 30, 2020.

The law applies to (a) restaurants or bars that were required to cease serving patrons food or beverages for on-premises consumption, (b) gyms, fitness centers, movie theaters, video lottery facilities or casino gaming facilities, (c) barbershops, hair salons, tattoo or piercing parlors, or related personal care service establishments required to close to members of the public and (d) other “non-essential retail establishments” subject to in-person limitations.

The law affects all landlords, both institutional and mom and pop operations.

The law also expands the definition of “commercial tenant harassment” adding as a prohibited act “attempting to enforce a personal liability provision that the landlord knows or reasonably should know is not enforceable” based on the legislation.

An improper governmental interference with contracts?

Maybe. But with similar laws springing up across the country, it is worthy of some examination and today we take a closer look at the NYC version.

It is safe to say that this type of legislation will be subject to challenge.

For one thing, the NYC law is drafted in such a confusing manner that it is not explicit as to whether it is meant as a moratorium on enforcement between March 7, 2020 and September 30, 2020 or a blanket prohibition of any enforcement with respect to defaults arising during such period.

The law also references lease provisions that provide for guaranties, even though most guaranties are drafted as separate documents.

Finally, while grocery stores, pharmacies and gas stations are clearly essential businesses, it is not clear what is meant by “non-essential retail businesses” other than those specified under the legislation (yeah, yeah, very funny, attorneys are certainly non-essential).

In addition, there is the constitutional issue that the law could be an improper governmental amendment of valid contracts in violation of the U.S. and New York State constitutions (as suggested by The Real Estate Board of New York, a local real estate trade organization), although some have pointed out that New York case law allows private contracts to be suspended in response to a public emergency.

Tenants and guarantors subject to COVID-19 related defaults, both in New York and around the country, should not act like they live in a cave and be aware of the following four concerns:

  • Stay up to date. Make sure that you are aware of any legislation affecting tenancies in your area and follow any legal challenges so you know where you stand. You can contact local attorneys or real estate brokers to better understand the legislative status.
  • Focus on the type of guaranty involved. Different guaranties will be handled in different ways. Some guaranties are unlimited and cover all of the obligations of the tenant under the lease. Other guaranties are limited, either because there is a specified cap on the guarantor’s obligations or because the guaranty is a “good guy guaranty.”
    • If you have provided an unlimited guaranty in NYC, you may be relieved of your obligations with respect to tenant defaults within the specified March through September period but you will remain obligated with respect to the balance of the lease obligations.
    • If you have provided a “good guy guaranty” in NYC, your tenant may be able to surrender the premises and greatly limit your exposure (of course, the tenant remains liable for the entire term of the lease so surrender is only an option if the tenant entity has no other assets or ongoing businesses). A good guy guaranty is a guaranty of certain obligations under a lease provided by a principal of the tenant, which guaranty stays in effect until the tenant surrenders the premises. This type of guaranty provides an incentive for a tenant’s good behavior by exerting a financial lever over its principal(s), but if you need to terminate your lease it also provides an opportunity for you to limit your personal exposure.
  • Follow the guaranty requirements. If you are obligated under a good guy guaranty and are prepared to surrender your premises, you must be sure to follow all of the surrender requirements of the guaranty. These often include some or all of the following: prior written notice, payment of all rent and additional rent through the date of surrender, delivery of the keys to your landlord, and surrender (sometimes with a formal surrender agreement) of the premises in the condition required under the lease. Your landlord may look for any technical violation of the guaranty terms to void the surrender so follow these terms to the letter.
  • Use the legislation as leverage. We have discussed in recent newsletters that defaulting tenants need to look at all possible angles to either preserve their tenancies through a combination of rent deferral or forgiveness or terminate their tenancies and limit their losses. Whether or not eventually found enforceable, laws such as the NYC law can provide you with some leverage as you negotiate with your landlord. We have recommended that the first step in any negotiation should be reaching out to your landlord in writing to explain how the pandemic has interfered with your business. The possibility that you as guarantor may not be personally liable for this time period is a bargaining chip to be used in your negotiation. A NYC landlord will no doubt point out its expectation that the law will be ruled invalid, but in the interim it adds uncertainty into the process that can work to your advantage. You should also be sure to remind your landlord that attempted enforcement of the guaranty can be considered “commercial tenant harassment” with penalties to your landlord if the NYC law is upheld.

Mike Tyson once said, “I know at times I come across like a Neanderthal or a babbling idiot, but I like that person.” Well, that’s one Neanderthal who will get no argument from this babbling idiot, but if you follow the suggestions above you may be able to make some or all of your guaranty obligations extinct.