This just in: the U.S. District Court for the Southern District of New York has issued this Opinion & Order in the case which challenges New York City's rendering "guaranty clauses" in commercial leases unenforceable due to the declared Co-19 emergency.
This is a case we've been following. Earlier, the Second Circuit vacated the district court's dismissal of the case, holding that the city's ordinance rendering forever unenforceable certain provisions in commercial leases:
A provision in a commercial lease or other rental agreement involving real property located within the city 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.
The district court held that the plaintiffs have Article III standing, because they have been permanently barred from ever enforcing these guaranty clauses. Slip op. at 12 ("This kind of 'monetary injury' to the Plaintiffs—permanently barring them from collecting more than a hundred thousand dollars in unpaid rent for a prime commercial tenancy in the heart of Manhattan—plainly establishes that they ha[ve] suffered a concrete injury in fact under Article III.'"). The court also concluded that the remedy the plaintiffs seek -- invalidation -- would redress that injury, because freed of the city's prohibition, plaintiffs could then attempt to enforce the clauses in their leases.
The heart of the ruling starts of page 14 of the slip opinion. The bottom line is that the court concluded the ordinance is a substantial impairment of the commercial owner/tenant contracts, because
Yes, "the City's effort to mitigate the devastating economic impact of the COVID-19 pandemic constituted a legitimate public purpose[,]" slip op. at 16, but that does not get the city off the hook, because "the Court finds that the Law fails to withstand means-ends scrutiny under the final prong of the Sullivan test." Id.
The court concluded that the city failed to support with additional evidence its decision to place the entire burden of alleviating the emergency on property owners. The city argued that the ordinance merely encouraged owners to renegotiate their leases on terms more favorable to their tenants, but the court wasn't buying it: "But it does not explain how the City concluded, with a change to the commercial leases rendering guaranty clauses permanently unenforceable, that guarantors would have any incentive based on the Law to enter negotiations with landlords regarding unpaid rent." Slip op. at 28.
There were four other reasons set out in the Opinion & Order, and the one we're going to focus on is set out starting on page 31. There, the court held that the ordinance does not compensate property owners for unpaid rent. Unlike other laws of this nature which included what we might call "mitigation" provisions (and were temporary), the court noted that New York's ordinance did no such thing, and permanently wiped out the obligation and did not contain any provision mitigating the damage to the owners, or otherwise providing for compensation:
The record now confirms that Plaintiff Bochner has been unable to recover unpaid rent amounts totaling approximately $110,000, and that, via another business account, he paid $35,000 in taxes for the property due July 1, 2020. Dkt. 104, Ex. NN at 46. As neither party disputes, the Guaranty Law itself provides no assistance to landlords like Bochner. The City, however, argues that the Court should concentrate on the fact that Bochner did not pay property takes on 287 7th Avenue from a personal account, see Def. Mem. at 20 n.12, and that Plaintiff 7th Avenue was able to obtain a pandemic relief loan from the SBA, see id. at 24. The City also emphasizes Plaintiffs were able to borrow from other successful business ventures, and that they “weather[ed] the pandemic” in other ways, including because the tenant left behind restaurant fixtures which were then leased along with the commercial space to a different restaurant in October 2020. Def. 56.1 ¶¶ 102–03; Dkt. 104, Ex. NN 34:24–35:18, 55:17–18.Such obfuscation is unavailing. The fact remains that Plaintiffs here were damaged, to the tune of approximately $150,000, and have not been compensated—precisely the concern that the Second Circuit wanted the City to address on remand. As to the SBA disaster loan, Bochner explained that it has not been forgiven, and that he must pay “four [or] five” percent interest until it is fully paid off. Dkt. 104, Def. Ex. VV, at 46–47.
Slip op. at 32.
No way the city quits, so next stop we presume is back with the Second Circuit.
Opinion & Order, Melendez v. City of New York, No. 1:20-cv-05301-RA (S.D.N.Y. Mar. 31, 2023)52
