Collecting Arrears Just Got Easier

Co-op and condo boards have just been handed a new legal tool for clawing back rent that they were unable to collect from their commercial tenants during the pandemic. A recent court ruling centers on the role of guarantors — third-party individuals that agree to be held responsible for the tenant’s obligations under a lease, including the timely payment of rent and other monetary obligations.

In a significant win for co-op and condo boards, a federal court has ruled that New York City’s Guaranty Law, a COVID-era protection for guarantors of commercial leases, is unconstitutional because it violates the Contracts Clause of the U.S. Constitution. That clause prevents states from passing laws that impair the obligation of contracts. Based on the ruling, co-op and condo boards can now seek to recoup previously unenforceable arrears from certain guarantors that accrued from March 7, 2020 to June 30, 2021.

What was the New York City Guaranty Law?

The New York City Guaranty Law, enacted on May 26, 2020, was intended to protect guarantors from the economic fallout of the COVID pandemic. To protect the guarantor, the tenant had to meet one of the following conditions: it was required to cease serving customers food or beverages for on-site consumption, or to cease operation; it was a non-essential retail establishment subject to in-person limitations; or it was required to close to the public.

As long as one of the conditions was met, a commercial landlord, including a co-op or condo board, was barred from seeking unpaid rent from a guarantor if the default occurred between March 7, 2020 to June 30, 2021. 

What was the lawsuit about?

The plaintiffs in the case, owners of small commercial and residential buildings in Brooklyn, Queens and Manhattan, filed a lawsuit known as Melendez v. City of New York, arguing that the Guaranty Law was unconstitutional. The U.S. District Court initially granted New York City’s motion to dismiss the suit, concluding that it failed to state a claim under the Contracts Clause. The Second Circuit of the U.S. Court of Appeals reversed that decision, in part, and sent the case back to the District Court to reconsider the Guaranty Law’s constitutionality.

How does the repeal of the Guaranty Law affect cooperatives and condominiums?

Many cooperatives and condominiums with commercial tenants have a “good guy” personal guaranty clause in their leases. These clauses are designed to protect a commercial landlord against a default if a commercial tenant does not have significant financial assets.

These clauses typically require the guarantor (who is usually the owner or principal of the commercial tenant) to notify the landlord within a minimum amount of time that the tenant intends to vacate a space and that the guarantor will be personally liable for any unpaid rent and other charges that accrue until the tenant vacates. If the money doesn’t get paid, the landlord can then sue both the commercial tenant and the guarantor for the unpaid rent.

A cooperative or condominium may also have a “limited personal guaranty” in a commercial lease. In addition to being on the hook with the tenant for all rental payments and other performance obligations, the personal guarantor may also be held liable for all attorneys’ fees that a commercial landlord may incur to enforce the tenant’s lease obligations, including any non-payment of rent.

Both types of guarantees ensure that the commercial landlord has another — and usually deeper — pocket to collect from if the tenant defaults on rent or any other lease obligations.

With the repeal of the Guaranty Law, cooperatives and condominiums now have viable claims for unpaid sums against certain guarantors, and they may pursue those claims in the courts. Which will require co-op and condo boards to answer a question: Is it worth our time and expense to go after that money?

Andrew I. Bart, Esq., is an attorney at the law firm Borah, Goldstein, Altschuler, Nahins & Goidel.