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Property owner may enforce third-party personal guaranty of NYC office-space lease

Property owner may enforce third-party personal guaranty of NYC office-space lease

| Mar 29, 2021 | Commercial leases, Nonpayment proceedings

We previously wrote about New York City Local Law 22-1005 that provides permanent financial relief to third-party personal guarantors of certain commercial leases during the public health emergency. In that post, we explained that the regulation prevents legal action for missed rent and related obligations against people (not companies) who guaranteed leases on the premises of particular business types during the height of the pandemic.

(Since that posting, the date range to which the law applies was extended to apply to rent defaults from March 7, 2020, to March 31, 2021.)

Supreme Court says local law does not shield legal action against personal guarantor of office lease

On Jan. 7, 2021, Justice Arlene Bluth of the New York Supreme Court in New York County issued the ruling in 40 X Owner LLC v. Masi in which she entered judgment for the property owner in its suit for missed rent against the personal guarantor of an office lease despite section 22-1005. The judge said that she “decline[d] to expand the reach of this provision to apply to every type of commercial lease.”

The text of the code section (reproduced in the case) applies to attempts to collect rent arrears from personal guarantors during the designated time period for commercial leases for:

  • Restaurants or bars that the governor ordered to stop on-premises food or beverage service on March 16, 2020.
  • Nonessential retail businesses with “in-person limitations” the governor imposed as of March 18, 2020.
  • Personal care service businesses the governor ordered to close to the public on March 21, 2020, including “barbershops, hair salons, tattoo or piercing parlors … nail technicians, cosmetologists and estheticians, and the provision of electrolysis, [and] laser hair removal services …”

City Council meant to protect guarantors of leases for local businesses serving the public to save the community

The court said that a lease for office space does not fall into the covered customer-facing business categories, even if the reason for nonpayment of rent was related to losses related to COVID-19. The personal guarantors of leases of these kinds of neighborhood businesses are often the business owners themselves. The judge wrote that the Council “obviously wanted to avoid a situation where owners/guarantors, to protect their personal assets, had to turn in the keys and walk away from their restaurant or store …” as part of an effort to preserve neighborhoods until the health emergency has passed.

On the other hand, businesses using office space can more easily vacate or move and do not involve the kinds of public interactions the covered establishments do. The Council clearly defined the personal guarantors it wants to protect – and that does not include those who guaranty leases for office space.

Takeaway

Because the City Council did not protect all commercial lease guarantors, New York City property owners analyzing the liability of commercial lease guarantors for missed rent during the covered time period should look closely at the defined categories of businesses in the ordinance.

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