Ruling On Pandemic Laws Won't End NYC Landlords' Fight

By Kerry Cooperman, Joshua Sohn and Chloe Rosenberg
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Law360 (December 14, 2020, 6:16 PM EST) --
Kerry Cooperman
Joshua Sohn
Chloe Rosenberg
As the COVID-19 pandemic resurges, landlord-tenant relations, already strained by the events of recent months, face new pressures. Critical governmental emergency measures have expired or are sunsetting. The lame-duck Congress and president have not enacted a new federal stimulus package. And states and municipalities are reinstituting shutdown orders that may devastate businesses.

Clashes between landlords and tenants are escalating, as tenants struggle to meet their financial obligations, while landlords face continued declines in rental income without a corresponding reduction in fixed costs.

Recently, a federal court in New York issued a long-awaited decision in Melendez v. The City of New York, rejecting legal challenges to three city ordinances protecting tenants: a law protecting residential tenants from harassment,[1] a law protecting commercial tenants from harassment[2] and a law concerning personal liability provisions in commercial leases, which we will refer to below as the guarantee law.[3]

This article describes the city ordinances, summarizes the court's decision and highlights some of the likely implications for New York City landlords and tenants.

The Court's Rejection of Legal Challenges to the City Ordinances

In the spring of this year, with subsequent modifications, the city enacted the following key protections for tenants impacted economically by the COVID-19 pandemic.

The Commercial Tenant Harassment Law

This law expands prohibited commercial tenant harassment, to include threatening a tenant based on the tenant being impacted by COVID-19 or receiving a rent concession or forbearance for rent owed during the COVID-19 period.[4]

The Residential Tenant Harassment Law

This law expands prohibited residential tenant harassment to include threatening any person lawfully entitled to occupy a dwelling unit based on the person's (1) actual or perceived status as an essential employee, (2) status as a person impacted by COVID-19, or (3) receipt of a rent concession or forbearance for any rent owed during the COVID-19 period.[5] 

The Guarantee Law

This law provides that an individual's personal guarantee of a tenant's obligation to pay rent, utility expenses, taxes or charges relating to routine building maintenance under a commercial lease involving real property in New York City shall not be enforceable against that individual if the commercial tenant (1) was a qualifying tenant impacted by certain of the governor's orders shutting down or limiting the operations of city businesses, and (2) defaulted under its lease in a manner that triggered the guaranteed obligation between March 7, 2020, and March 31, 2021.[6]

Shortly after the ordinances became law, three owners of small commercial and residential buildings in New York City sued the city in the U.S. District Court for the Southern District of New York, alleging that the ordinances impeded their ability to profit from their properties.[7] Specifically, they alleged that the residential and commercial tenant harassment laws violated their free speech rights under the First Amendment by prohibiting them from "communicating with delinquent tenants about past-due rent and pursuing available remedies."[8]

They also claimed that the harassment laws violate the due process clause of the 14th Amendment, because the laws are vague as to what conduct is prohibited or permitted.[9] They claimed that the guarantee law violates the contract clause of the U.S. Constitution, by nullifying certain obligations of commercial lease guarantors.[10] Finally, they claimed that both the harassment laws and guarantee law are preempted by New York state law.[11]

U.S. District Judge Ronnie Abrams dismissed the lawsuit in its entirety. The court found that the harassment laws do not violate free speech rights, because — while they prohibit certain enumerated harassing actions — they "allow for routine rent demand notices and discussions about the consequences flowing from unpaid rent and efforts to collect rent."[12]

The court highlighted that the commercial tenant harassment law specifically provides that tenants are not relieved "of the obligation to pay any rent for which the commercial tenant is otherwise liable,"[13] and that "[a] landlord's lawful termination of a tenancy, lawful refusal to renew or extend a lease or other rental agreement, or lawful reentry and repossession" is not prohibited harassment.[14]

In short, the court explained that "while a landlord may not harass someone because she has been impacted by COVID-19 ... routine demands for rent" are permitted.[15] The court cautioned, however, that rent demands may be harassing in certain contexts, such as when made by a "repeated onslaught of demands," "in a particularly threatening manner" or through "repeated frivolous court proceedings."[16]

The court likewise determined that the harassment laws do not violate due process, because they are "sufficiently clear on what constitutes harassment."[17] The court noted that these laws "surely could have [been] written ... more clearly to explicitly state ... that the[y] ... do not bar routine rent demands," but decided that they nevertheless give persons of ordinary intelligence "a reasonable opportunity to know what is prohibited" and do not authorize or encourage "arbitrary and discriminatory enforcement."[18]

The court recognized the burden that the guarantee law imposes on landlords, and agreed with the plaintiffs that the law causes a substantial impairment of their contract rights.[19] The court also acknowledged that the law's limitation on the enforcement of personal guarantees is permanent, and that "[landlords subject to the restriction] will never be able to collect from the personal guarantor money due and owing between March 2020 and March 2021, even after the pandemic ends."[20]

Nevertheless, the court emphasized that the contract clause "does not give private parties the unconditional right to contract without government interference," and that "all contracts are subject to the police power of the State."[21] The court found that the guarantee law "advances [the] legitimate public interest" of preventing New York's small business owners from suffering personal financial ruin and being pushed into bankruptcy.[22]

And, on what it deemed the "closest question," the court concluded that the guarantee law is both necessary and reasonable to advance this public interest.[23] The court noted its obligation to be "extremely deferential to the decisions of policymakers."[24] It reasoned that COVID-19 is a "real emergency," that the city "is in crisis," that ensuring the financial survival of small businesses "seems critical to [the] City's economic recovery," and that the guarantee law is sufficiently "tailored" to achieve the identified public interest.

Specifically, the court observed that the law applies only to a certain subset of leases, only prohibits enforcement of guarantees made by individuals who are not the tenants, is temporally limited, and leaves landlords with other potential means to recoup lost rental income — e.g., nonpayment lawsuits, lease termination and eviction proceedings.[25]

The court recognized that the guarantee law reflects a policy decision by the city "to shift the economic impact of the pandemic from commercial tenants and their guarantors to landlords," and that collection of unpaid rent may prove impossible without an enforceable personal guarantee.[26] But the court explained that it is not its role to opine on whether the city's policy determination is wise or unwise.[27]

Finally, the court determined that none of the challenged ordinances directly conflict with any state statute — i.e., there is no conflict preemption — and that there is no evidence of a state legislative intent to exclusively occupy this area of law — i.e., there is no field preemption.[28]

Implications for New York City Tenants and Landlords

Tenant Considerations

The Melendez decision upheld the validity of the city's key ordinances protecting tenants impacted by COVID-19. It makes clear that landlords may not threaten or harass tenants based on the impacts of COVID-19, and that, if they do, tenants likely have a remedy.

Individuals who personally guaranteed payment obligations under a qualifying commercial lease for the period from March 2020 through March 2021 remain permanently shielded from personal liability for such obligations. And the decision may deter certain conduct by landlords that is inconsistent with the challenged laws — e.g., rent demands made in an explicitly threatening manner, and court claims seeking to enforce personal guarantees protected by the guarantee law. The decision is a victory for New York City tenants.

Nevertheless, both the harassment laws and guarantee law will face further legal challenges. The plaintiffs in Melendez will likely appeal Judge Abrams' decision to the U.S. Court of Appeals for the Second Circuit, and other federal and state courts will likely analyze these laws in other lawsuits over the coming months.

Different courts may well reach different conclusions. Indeed, the Melendez court acknowledged that the "[p]laintiffs have expressed some legitimate concerns," that the City "surely could have written the [harassment laws] more clearly," that landlords' perception of the guarantee law as inequitable is understandable, and that certain legal issues are close calls and "difficult to discern."[29]

In addition, while the Melendez court declined to entertain claims brought under the New York State Constitution,[30] a state court may entertain those claims, and could, under the state constitution or on other grounds, declare the laws invalid. Similarly, the Melendez court's expansive reasoning and explanation may provide guidance for how future plaintiffs that challenge these ordinances may better plead their claims.

Tenants should also be mindful that, while the harassment laws and guarantee law offer some protections, they do not bar landlords from issuing routine rent demands, terminating leases, declining to renew leases, bringing nonpayment proceedings, pursuing evictions when the current eviction moratorium expires, and exercising other rights under their leases.

The challenged laws do not reduce tenants', as opposed to guarantors', payment or other obligations under their lease agreements. And, while the guarantee law shields individual guarantors from personal liability for certain tenant payment defaults occurring between March 2020 and March 2021, those guarantors will remain personally liable for all tenant defaults occurring outside of the legislatively-prescribed scope.

Landlord Considerations

The Melendez decision upholds the key COVID-19-related constraints imposed on landlords by the city: (1) enhanced anti-tenant-harassment rules, albeit with a less-than-clear definition of prohibited harassment, and (2) a limitation on enforcement of personal guarantees of commercial lease obligations, which, for many landlords, is the only practical remedy to collect money owed by an insolvent tenant.

To mitigate the risk of a violation or alleged violation of the harassment laws, landlords should exercise caution to ensure that the tone, timing and form of their rent demands to, and related communications with, tenants are not unlawful threats. Particularly when tenants are unable to pay rent as a direct result of the COVID-19 pandemic, landlords should formulate their demands in a manner designed to avoid the perception that the landlord is seeking to capitalize on the tenants' COVID-19-related economic hardships.

Nevertheless, the Melendez court confirmed that routine demands for rent, and other routine communications, are not unlawful.[31] Accordingly, landlords who wish to preserve their legal rights through routine and nonharassing demands and notices to tenants should not hesitate to do so.

While landlords cannot, under current law, enforce personal guarantee obligations that are shielded by the guarantee law, that law does not bar landlords from enforcing tenant obligations against tenants directly, or from enforcing personal guarantees that fall outside of the law's scope. Landlords should carefully review their leases and guarantee agreements to determine whether, or the extent to which, such agreements are subject to the guarantee law.

Finally, landlords and tenants are encouraged to track future developments concerning the legal status of the harassment laws and the guarantee law, as other federal and state courts are likely to adjudicate additional challenges to them over the coming months. To the extent possible, landlords and tenants, and their counsel, should seek to identify ways to use these ongoing legal developments to promote amicable resolutions of landlord-tenant disputes.

Kerry T. Cooperman is an associate, Joshua Sohn is a partner and Chloe F. Rosenberg is a law clerk at Stroock & Stroock & Lavan LLP.

Stroock partner Trevor T. Adler contributed to this article.

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.

[1] N.Y.C. Admin Code § 27-2004(a)(48)(f-7).

[2] Id. at § 22-902(a)(11).

[3] Id. at § 22-1005.

[4] See id. at § 22-902(a)(11)(ii). The term "impacted by COVID-19" means (1) a person diagnosed with COVID-19 or experiencing symptoms of COVID-19 and seeking a medical diagnosis; (2) a person who lives in a household with a person diagnosed with COVID-19; (3) a person who is providing care for a family member or a member of such person's household who was diagnosed with COVID-19; (4) a person who lives in a household for whom such person had primary caregiving responsibility and was unable to attend school or another facility that was closed as a result of COVID-19 and such school or facility care was required for the person to work; (5) a person who is unable to reach their place of business because of a quarantine imposed as a direct result of COVID-19 or because such person was advised by a health care provider to self-quarantine due to concerns related to COVID-19; (6) a person who became primarily responsible for providing financial support for his or her household because the previous head of the household died as a direct result of COVID-19; and (7) a person whose business is closed as a direct result of COVID-19. Id. at § 22-902(a)(11)(b). And a business is "impacted by COVID-19" if (1) it was subject to seating, occupancy or on-premises service limitations pursuant to an executive order issued by the governor or mayor during the COVID-19 period, or (2) its revenues during any three-month period within the COVID-19 period were less than 50% of its revenues for the same three-month period in 2019 or less than 50% of its aggregate revenues for the months of December 2019, January 2020 and February 2020, and such revenue loss was the direct result of COVID-19. Id. at § 22-902(a)(11)(c).

[5] See id. at § 27-2004(a)(48) (defining the scope of offending acts and omissions); id. at § 27-2004(a)(48)(f-7)(4) (defining a person "impacted by COVID-19" to include a person who (1) was diagnosed with COVID-19 or is experiencing symptoms of COVID-19 and seeking a diagnosis; (2) lives in a household with someone diagnosed with COVID-19; (3) was providing care for a family or household member diagnosed with COVID-19; (4) became unemployed, partially unemployed, or could not start employment as a direct result of COVID-19; or (5) became primarily responsible for providing financial support for his or her household because the previous head of the household died as a direct result of COVID-19).

[6] Id. at § 22-1005. Specifically, the law applies with respect to commercial tenants who were (1) required to cease serving patrons food or beverages for on-premises consumption or otherwise cease operation due to the governor's March 2020 executive order 202.3; (2) a nonessential retail establishment subject to in-person limitations under guidance issued pursuant to the governor's March 18, 2020, executive order 202.6; or (3) required to close to members of the public under the governor's March 19, 2020, executive order 202.7. The guarantor must also be a natural person who is not the tenant under the lease. Id.

[7] See Melendez v. The City of New York , Index No. 20-CV-5301 (RA), Opinion and Order (S.D.N.Y. Nov. 25, 2020) ("Melendez"), at 2.

[8] Id. at 17-18.

[9] Id.

[10] Id. at 2-3.

[11] Id. at 33.

[12] Id. at 19.

[13] See N.Y.C. Admin Code § 22-903(b).

[14] Id. at § 22-902(b).

[15] Melendez, at 21-22. The court recognized that in cases in which the impact of COVID-19 on a tenant has been exclusively economic in nature (e.g., because she "became unemployed, partially unemployed, or could not commencement employment as a direct result of COVID-19," or received "a rent concession or forbearance for any rent owed during the COVID-19 period) it may be more difficult to distinguish that tenant's failure to pay rent from her "status as a person impacted by COVID-19." Id. But the court noted its confidence in state courts' "ability to differentiate those cases in which the but-for impetus for a rent demand is, for example, the tenant's loss of employment due to COVID, and those in which it is simply because the tenant has not paid her rent." Id. at 22.

[16] Id. at 20.

[17] Id. at 3, 17.

[18] Id. at 22, 24 (internal citations omitted). The court also noted that the city's Department of Housing Preservation & Development has provided guidance as to what constitutes harassment. See id. at 24 n.10.

[19] Id. at 25-27.

[20] Id. at 26-27.

[21] Id. at 25 (internal citations omitted); see Manigault v. Springs , 199 U.S. 473, 480 (1905) ("It is the settled law of this court that the interdiction of statutes impairing the obligation of contracts does not prevent the [S]tate from exercising such powers as are vested in it for the promotion of the common wealth, or are necessary for the general good of the public, though contracts previously entered into between individuals may thereby be affected"); Energy Reserves Grp. v. Kan. Power & Light Co. , 459 U.S. 400, 410 (1983) (permitting contract interference so long as it is in furtherance of the "inherent police power of the State 'to safeguard the vital interests of its people'").

[22] Melendez, at 27-28.

[23] Id. at 28-29.

[24] Id. at 28; see Condell v. Bress , 983 F.2d 415, 418 (2d Cir. 1993); see also U.S. Trust Co. of N.Y. v. New Jersey , 431 U.S. 1, 22-23 (1977) ("As is customary in reviewing economic and social regulation ... courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure").

[25] Melendez, at 31. The court found the guarantee law similar, in its temporal scope, to the laws upheld in several others. Id. at 31-32; see Sullivan v. Nassau Cnty. Interim Fin. Auth. , 959 F.3d 54, 58-60 (2d Cir. 2020) (noting that the relevant statute allowed wage freezes "for one year"); Buffalo Teachers Fed'n v. Tobe , 464 F.3d 362, 366-67, 371 (noting that a wage freeze was "temporary").

[26] Melendez, at 30-32.

[27] Id.

[28] Id. at 33-37.

[29] Id. at 3, 24, 28, 30. Certain protections under the challenges ordinances (e.g., the limitation on enforcement of personal guarantees) are likely to face new challenges and enhanced scrutiny by courts if the scope of protections is broadened (e.g., if the March 2020–March 2021 covered period under the guarantee law is extended).

[30] Id. at 17 n.8.

[31] Id. at 20.

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