Most small businesses have leases in the name of a corporation or limited liability corporation. This functions to shield the business owner from personal liability for the business’s debts and obligations in the event the business gets into financial trouble. The business goes bust and its creditors are left with little or nothing.
To prevent being left with a worthless legal entity as a tenant, commercial landlords long ago adopted the practice of requiring personal guarantees from business owners. With a guaranty a business owner cannot escape personal liability for rent and other obligations [though it might be limited by a “good guy” clause].
With thousands of small businesses now facing major losses and possible closure, similar thousands of small business owners are facing personal liability for unpaid rent and staring at likely bankruptcy.
Last week, however, Mayor DiBlasio signed Local Law 1932-A to provide some relief for guarantors. The bill bars enforcement of personal guarantees contained in commercial leases for a “COVID-19 impacted tenant.” The latter include:
- businesses that were required to stop serving food or beverages on-premises (restaurants and bars);
- businesses that were required to cease operations altogether (e.g., gyms, fitness centers, movie theaters);
- retail businesses that were required to close and/or subject to in-person restrictions;
- businesses that were required to close to the public (e.g., barbershops, hair salons).
To qualify, the lease default triggering the guaranty – almost always nonpayment of rent – must have occurred between March 7, 2020 and September 30, 2020.
The law leaves several key questions unanswered. What about tenants who were in default prior to March 7 but the default continued past March 7? What about defaults that occur after September 30? Does a default within the Covid period negate the entire guaranty, even for the post-Covid period? It’s also likely that landlords will challenge the constitutionality of the legislation on due process or other grounds.
While there are probably more questions than answers at this point about Local Law 1932-A, for the time being it gives commercial tenants some leverage in renegotiating no-longer-viable leases.
And, as always, stayed tuned …
