NYC's Guaranty Law Violated The Contracts Clause Of The U.S. Constitution

• Jurisdiction: United States,Federal,New York
• Law Firm: Holland & Knight
• Subject Matter: Real Estate and Construction, Landlord & Tenant - Leases
• Author: Ms Francesca Morris
• Published date: 10 July 2023

Last summer, we wrote about New York City Administrative Code Section 22-1005, known as the Guaranty Law.¹ This was a pandemic-era prohibition on enforcement of personal guaranties supporting commercial leases for defaults that occurred between March 7, 2020, and June 30, 2021. At the end of that article, we pointed out that landlords had challenged the Guaranty Law under the Contracts Clause of the U.S. Constitution.² Now, the U.S. District Court for the Southern District of New York has decided the Contracts Clause dispute in favor of the landlords.³

The District Court had previously dismissed the landlords' Contracts Clause claim.⁴ Deciding the appeal of that decision, the U.S. Court of Appeals for the Second Circuit instructed the District Court, on remand, to address five specific concerns "about that law being a reasonable and appropriate means to pursue the professed public purpose."⁵

In its recent decision, the District Court recognized "the Guaranty Law advanced a legitimate general interest of mitigating a staggering economic crisis brought about by a once-in-a-lifetime pandemic."⁶ However, the city failed to show the Guaranty Law was a reasonable and appropriate means to achieve "the City's legitimate public purpose," and the court decided that the Guaranty Law violated the Contracts Clause.⁷

First, the Second Circuit was concerned that the Guaranty Law did not merely defer guaranty obligations, but permanently and entirely extinguished them. As it had to - given the clear terms of the Guaranty Law - the city conceded that the Guaranty Law permanently extinguished personal guaranties for the relevant period.⁸ This concession weighed in favor of finding that the Guaranty Law violated the Contracts Clause.

Next, the Second Circuit reasoned the Guaranty Law was based on three assumptions: 1) shuttered small businesses are usually owned by the same person who guarantees the lease; 2) the owner-guarantors would face financial ruin if they had to pay business rent arrears; and 3) financially ruined owners would be unlikely to reopen the business. For the Second Circuit, the city's solution addressed the second concern about financial ruin, but the relief was not conditional on the small business owner also being the guarantor with at least the intention of reopening the business. Ultimately after examining the evidence, the District Court decided that because the Guaranty Law did not apply only to those able to demonstrate need based on a...