Second Circuit Decision Revives Landlord's Fight For Rights Amid Pandemic Ordinances

• Published date: 08 November 2021
• Subject Matter: Real Estate and Construction, Landlord & Tenant - Leases
• Law Firm: Jenner & Block
• Author: Andrew W. Vail, Adam G. Unikowsky and Connor S.W. Rubin

The Second Circuit Court of Appeals issued a potentially far-reaching decision reviving New York City's commercial landlords' fight against a sweeping ordinance enacted to combat the COVID-19 pandemic's economic effects, though possibly creating precedent for future local, state and federal government responses to economic and other crises.

New York recently passed the so-called "Guaranty Law," which forbids commercial landlords from enforcing "personal liability guarantees" for the 16 month period when the city was under some form of COVID-19 executive order if the order had the effect of limiting business occupancy, mandating social distancing, or otherwise restricting operations. ¹ Landlords argued the ordinance "re-writes [landlord's] contracts with their tenants, stripping [them] of remedies to enforce personal guarantees that were a material benefit of" the contracts. ² The guaranty agreements make a third party - generally the owner of the business (though this isn't a requirement) - personally liable for rent that the business fails to pay. However, under the law enacted by the New York City Council, such agreements are void for any rent not payed between March 7, 2020 and June 30, 2021. ³ The law's purpose, as determined by the Second Circuit, was to help small business owners recovering from economic losses due to the pandemic and allow them to recover without the threat of being wiped out by personal debt, which threatened to create "ghost towns" in neighborhoods which could take years to recover.

The landlords challenged the law on the grounds that it violated their rights to privately contract. The District Court for the Southern District of New York applied a three-part test to determine (1) whether the law substantially impaired the plaintiff's contract rights, (2) whether the law serves a significant and legitimate public purpose, and (3) whether the law is appropriate and reasonable to advance the purpose. ⁴ The district court found that the plaintiffs' contract rights were substantially altered. However, it also found that the law served a significant and legitimate public interest, and did so in an appropriate and reasonable manner. Thus, the landlords failed to state a claim on which relief could be granted and the case had to be dismissed.

While not reaching a judgment on the merits or constitutionality of the law - which the plaintiffs asked the Second Circuit to do ⁵ - the Court of Appeals did reverse the dismissal and find that the...