While the COVID-19 pandemic has caused numerous problems in all financial sectors throughout the world, New York City has been hit uniquely hard. Financially, perhaps no groups have been more affected by the pandemic than commercial landlords and tenants.
The moratorium on evictions for tenants who claim hardship caused by the pandemic, which has been extended to January 15, 2022, has landlords fighting these rules at every relevant level of our court system and on numerous legal grounds.
Questions about the constitutionality and legality of the City’s Restrictions on Landlord’s Rent Collection Rights
However, one issue that seems to be gaining traction arises out of the decision by the United States Court of Appeals for the Second Circuit in the case of Melendez v. City of New York. As reported by JDSUPRA online, this case involves a constitutional challenge to restrictive rent collection measures imposed by the New York City Council against New York City landlords. The first issue dealt with the restriction on landlords “threatening” tenants with eviction which the legislature defined as harassment..
The plaintiff landlords challenged the harassment portion of the legislation on two fronts:
- First, they argued that the legislation passed by the City created an unconstitutional restriction of their free speech rights that takes place in the normal collection of rents.
- Second, they argued that the statute violated their due process rights by not giving adequate notice of what constitutes “threatening” conduct under the law.
Both the District Court and the Second Circuit rejected the landlord’s arguments on these grounds and upheld that provision of the statute finding that the law did not prohibit a landlord from lawfully demanding past due rent. Landlords were therefore prohibited from improperly threatening tenants with unlawful actions.
The Guaranty Law Challenge
However, another portion of the City law (NYC Admin Code 22-1005) which permanently barred landlords form enforcing certain personal guaranties signed in connection with commercial leases was not upheld.
While it was not held to be unconstitutional, the Court sent the matter back to the district court to determine whether the statute was a reasonable and necessary response to the pandemic. The landlords alleged that not allowing enforcement of contractually agreed personal guarantees was a violation of the contracts clause of the U.S Constitution.
The contracts clause challenge explained
The contracts clause of the United States Constitution prohibits states from passing any law “impairing the Obligation of Contracts.” The lower court and the Circuit found that while the law, as enacted, was a substantial impairment of contract, it found that the desire to protect businesses from covid related financial disaster was a valid purpose for the law. However, the question left for determination was whether the law was a reasonable and necessary approach to solve that problem.
The Court noted concern that the guaranty law was a permanent waiver of the right to collect rents, not just a deferment until a later time. It also voiced concern that not all business qualified for the relief, that the business did not need to show that they would not reopen if the guarantor had to pay the arrears or that the guarantor was financially impacted by the guarantee if enforced. The question as to whether these restrictions were reasonable and necessary were left to the lower court.
There is still hope for landlords
The result of all this is that there is still hope for landlords in its ability to enforce the bargained for guarantees. The contracts clause challenge has strong arguments in its favor, and it is entirely possible that upon district court review that commercial landlords will be able to pursue personal liability claims for commercial tenants on rent arrearages. It is not known when this issue will be decided.
Our attorneys will keep a close eye on these issues as they work their way through the court system.