May 26, 2020
On May 13, without much fanfare, the New York City Council quietly approved Instrument Number 1932-A. The bill amends New York City’s Administrative Code by forever canceling personal guarantees executed in conjunction with commercial leases if the tenant has defaulted in rent resulting from the COVID-19 pandemic.
According to Councilwoman Carlina Rivera, who sponsored the legislation, the impetus behind its passage was due to “the federal government[‘s] continuing to stall further relief for small businesses … that are an important part of the fabric of our neighborhoods.”
Specifically, under the legislation, all guarantees signed by individuals would be annulled insofar as the tenant’s monetary default happened during the period covering March 7 to Sept. 30 and the tenant was, inter alia, deemed nonessential, a restaurant or otherwise forced to shut down pursuant to the governor’s executive orders.
Beyond this, the bill enlarges tenant harassment to apply to cases where a landlord subsequently seeks to collect against an individual guarantor who is protected under the bill. As anticipated, Mayor Bill de Blasio virtually signed the bill into law on May 26, rendering it effective immediately.
Potential Constitutional Infirmities of Bill
The contracts clause to the U.S. Constitution provides that no state may pass a “Law impairing the obligation of Contracts.” According to well-established U.S. Supreme Court precedent, “law” refers to a statute, municipal ordinance or administrative regulation.
Deeply rooted case law has codified the term “obligation,” as used under the contracts clause as “[t]he laws which exist at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of it.” In Trustees of Dartmouth College v. Woodward, Chief Justice Thurgood Marshall explained that to determine whether an obligation of contract, exists, one must ask the following two questions:
1. Is this contract protected by the constitution of the United States?
2. Is it impaired by the acts under which the defendant holds?
Moreover, the obligation of a private contract, which is derived from the municipal law in existence when the contract is made, is explicitly covered under the contracts clause.
As Chief Justice Charles Evans Hughes announced in Home Building & Loan Association v. Blaisdell, contractual obligations “are impaired by a law which renders them invalid, or releases or extinguishes them … and impairment, as above noted, has been predicated of laws which without destroying contracts derogate from substantial contractual rights.”
In Home Building & Loan Association, the Supreme Court held that a Minnesota law imposing a moratorium over the foreclosure of mortgages and execution sales during a financial crisis that was enacted under the state’s emergency police powers did not offend the contracts clause because the moratorium was merely temporary.
The Emergency Police Powers
When originally conceived, the state’s police powers were deemed to extend to matters affecting the public health or the public morals, and a great body of the case law regarding the development of the police power involved matters where states compelled railroad companies to install grade crossings to protect life safety.
Additionally, a state’s police powers have been held constitutionally valid even though they have impaired contractual obligations when, among other things, they were utilized to shut down lotteries which constitute a nuisance and in riparian rights cases.
When employing the framework used for determining whether Instrument No. 1932-A offends the contracts clause, once passed, one must first determine whether the legislation impairs the obligation under a private contract. Clearly, the personal guaranty that a guarantor issues in favor of the landlord to induce landlord’s entry into the underlying lease with the tenant constitutes a private contract, and in the commercial setting, both parties are generally sophisticated business entities negotiating at arms-length.
Further, cancellation of the guaranty for all time, foreclosing landlords’ ability to pursue collection (which, if pursued, will actually now subject landlord to harassment penalties) for a monetary default under the lease equates to an impairment of contractual obligations under the prevailing authority.
Predictably, local politicians will argue that the legislation is sanctioned by the broad sweeping police powers that allow the impairment of contracts where necessary to protect the health and welfare of the city’s businesses that have been financially damaged by the governmental closures caused by the COVID-19 pandemic.
Conversely, however, the guarantees under the city’s law, are being annulled, as if they never existed, thereby extinguishing the parties’ rights and obligations vis-à-vis the contract until the end of time.
In prior cases, the emergency police powers were only permitted when needed to prevent nuisance type conduct, or, alternatively, when the impairment of the contract was temporary. If the council’s legislation enacted a moratorium over the enforcement of the guarantees for a specified time period to allow for the alleviation of the financial strains resulting from COVID-19 closures, then the law would be more likely to withstand constitutional scrutiny.
Although the COVID-19 pandemic has borne unprecedented loss of human life, along with a capitulation of the economy, particularly in New York City, the pandemic’s epicenter, the legislation’s cancellation of certain commercial personal guarantees is equally unprecedented in our legal history.
In fact, since the foundation of our nation, we have lived through great crises ranging from Vietnam to large-scale financial collapses, but never have individual guarantees been canceled. Given the passage of the litigation, it will be interesting to see whether the police powers of the city trump the impairment of the parties’ contract obligations under the contracts clause.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 See United States Constitution, Article I, § 10. Emphasis supplied.
 Wood v. Lovett , 61 S.Ct. 983, 987 (1941).
 17 U.S. 518, 627 (1819).
 Ogden v. Saunders , 25 U.S. 213, 217 (1827).
 54 S.Ct. 231, 237 (1934).
 Wabash R. Co. v. City of Defiance , 17 S.Ct. 748, 752 (1897).
 City of New Orleans v. Houston , 7 S.Ct. 198 (1886); see also Manigault v. Springs, 26 S.Ct. 127 (1905).