Legal Update
Dec 4, 2020
Recent Federal Court Decision Upholds the Constitutionality of NYC Pandemic-Related Legislation Affecting Commercial Leases
The United States District Court for the Southern District of New York recently found that three laws enacted by the City of New York in response to the COVID-19 pandemic were constitutional, and dismissed a challenge to the laws brought by a group of New York City landlords. You can read more about the New York City laws in our prior article here. Briefly, the laws expand a pre-existing prohibition on “harassment”—i.e., “any act or omission . . . that is intended to cause [the tenant] to vacate covered property, or to surrender or waive any rights under a lease,” if such an act is coupled with an improper threat—of commercial and residential tenants by landlords to include harassment based upon the tenant’s status as having been “impacted” by the COVID-19 pandemic.1The laws also prohibit enforcement of personal guarantees in commercial leases under certain circumstances, namely where: (1) the guaranty was given by a natural person in a commercial lease; (2) the guaranty would make the natural person liable for the commercial tenant’s “payment of rent, utility expenses or taxes owed by the tenant . . . or fees and charges relating to routine building maintenance”; (3) the commercial tenant was subject to certain specified New York State Executive Orders that required the tenant to close its business during the pandemic; and (4) the guaranty was triggered by the commercial tenant’s default during the period from March 7, 2020 to March 31, 2021.2
In Melendez v. The City of New York,3three landlords brought suit, alleging that these New York City laws were unconstitutional.
Anti-Harassment:
The landlords argued that the separate anti-harassment laws applicable to commercial and residential tenants were both unconstitutional for two reasons. First, the landlords argued that the laws violated the landlords’ right to freedom of speech under the First Amendment by prohibiting the landlords from sending “routine rent demand notices and discussions about the consequences flowing from unpaid rent and efforts to collect rent.”4Second, the landlords argued that the anti-harassment laws were so vague and ambiguous about whether routine rent demands constituted “harassment” that they violated the landlords’ Due Process rights.5One of the three landlords also challenged the guaranty law as an unconstitutional impairment of his contractual rights, in violation of the Contracts Clause of the US Constitution.6
The court stated that the landlords had “expressed some legitimate concerns” and “recognize[d] the toll the pandemic has taken on them, in addition to their tenants, all New Yorkers, and millions more around the world.”7The court nonetheless rejected the landlords’ arguments, held that the New York City laws were constitutional, and dismissed the landlords’ lawsuit.
The court held that the landlord’s First Amendment rights to free speech were not impaired by the laws. The court relied in part upon the fact that New York City’s attorneys “unequivocally” stated during oral argument in the case that the anti-harassment laws do not prevent landlords from making routine rent demands.8The court further held that the anti-harassment law applicable to commercial tenants explicitly provides that the law does not relieve commercial tenants of legitimate rent obligations and thus, “by extension,” permit landlords to make routine rent demands.9
Although the anti-harassment law applicable to residential tenants did not have comparable language, the court held that it, too, permits routine rent demands.10The court reasoned that the residential anti-harassment law requires a “threat,” which the court construed as meaning an “improper threat[] or coercion,” as opposed to “permissible warnings of adverse but legitimate consequences.” The court found that this type of “threat” would not include a routine rent demand, as opposed to an “onslaught” of rent demands or rent demands made “in a particularly threatening manner.”11The court’s conclusion was reinforced by the fact that the law requires that the harassment be “based upon” the tenant being “impacted” by COVID-19. The court took that phrase to mean that the landlord would not have made the demand “but for” the tenant’s status as having been “impacted,” as opposed to making the demand simply because the tenant is not paying rent regardless of the reason.12In short, because the court found that the anti-harassment laws did not prohibit legitimate, routine demands for rent, the court held that the laws did not violate the First Amendment.13
The court further found the landlords failed to state a claim that the anti-harassment laws were void for vagueness insofar as the landlords’ argument, which was essentially that the laws were unclear about whether routine rent demands were “harassment,” failed for the same reasons as the landlords’ First Amendment argument.14The landlords had pointed to an allegation by a commercial tenant in an unrelated case in New York state court in which the commercial tenant alleged that rent demands were “harassment” as an example of “confusion” arising from the vagueness of the laws. The court found that this example did not help the landlords because the New York state court in that case directed the tenant to pay rent without even mentioning the anti-harassment laws.15Accordingly, although the Court acknowledged that “[t]he City surely could have written the laws more clearly,” there was no basis to conclude that a “person of ordinary intelligence” would believe that the laws prohibited routine rent demands.16
Guaranties:
The court found that the law was a substantial impairment of contractual rights because “the contractual impairment is permanent” in that affected landlords “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.”17The court nonetheless held that the law was constitutional.
First, the court found that the City enacted the guaranty law “to benefit the public interest, not itself or any special interest,” which was effectively undisputed.18Second, the Court found that the guaranty law was reasonable and necessary to advance that public interest. The court held that the United States Court of Appeals for the Second Circuit had instructed courts to be “extremely deferential to the decisions of policymakers seeking to advance a legitimate public interest.”19 Applying that standard, the court found that the “reasonableness of the Guaranty Law is . . . difficult to discern,” but that “[i]t is not the role of this Court . . . to opine on the wisdom of the policy decision at issue here—that is, the decision [by the City] to shift the economic impact of the pandemic from commercial tenants and their guarantors to landlords.”20Instead, the court focused on “the law’s tailoring” and found that the law was “tailored in several ways.” In particular, the court found that the law: (a) was limited to a subset of businesses impacted by specified, pandemic-related closure orders; (b) is temporally limited in that it permanently forecloses recovery on guarantees only from March 2020 through March 2021; and (c) does not prohibit landlords from seeking to recover lost rent through other means, e.g., suing the commercial tenant for damages.21
Notably, the court also stated that none of the foregoing “is said to minimize the Guaranty Law’s harm to Plaintiff or others he seeks to represent, which the Court recognizes is substantial.” But because of the law’s “limitations as to time, amount, circumstances, or need,” the court held that the law “is reasonable, necessary, and passed to advance a legitimate public interest,” and therefore did not violate the Contracts Clause.22
According to press reports, as of this writing, the landlords are still determining whether to appeal.23If the landlords do opt to appeal, the Second Circuit’s decision will be closely watched by commercial tenants and landlords in New York City.
1. NYC Admin. Code § 22-902; https://legistar.council.nyc.gov/LegislationDetail.aspx?ID=4424937&GUID=EA82E496-2E94-43A6-8C1D-4D279AE425FD&Options=ID%7cText%7c&Search=1914-2020; Case No. 20-cv-5301 (S.D.N.Y.), ECF No. 71 at 7-11.
2. https://legistar.council.nyc.gov/LegislationDetail.aspx?ID=4424954&GUID=C2A4AC16-7409-465E-B5A4-3. Case No. 20-cv-5301 (S.D.N.Y.), ECF No. 71 at 11-14.
3. Case No. 20-cv-5301 (S.D.N.Y.)
4. Case No. 20-cv-5301 (S.D.N.Y.), ECF No. 71 at 17.
5. Id.
6. Id. at 24; US Const. Art. I, Section 10, cl. 1 (“no State shall . . . pass any . . . Law impairing the Obligations of Contracts.”).
6. Case No. 20-cv-5301 (S.D.N.Y.), ECF No. 71 at 3.
7. Id. at 18.
8. Id. at 19.
9. Id. at 19-20.
10. Id. at 20.
11. Id. at 20-21.
12. Id. at 21-22.
13. Id. at 23.
14. Id. at 23-24.
15. Id. at 24 (internal brackets omitted).
16. Id. at 25-26.
17. Id. at 27-28.
18. Id. at 28-29.
19. Id. at 30.
20. Id. at 31-33.
21. Id. at 33 (internal quotation marks omitted). The court also rejected a separate argument by the landlords that the City’s laws were pre-empted by New York state laws and Executive Orders regarding the pandemic on the grounds that those State laws and orders permitted non-conflicting local laws like the ones at issue here. Id. at 33-37.
23. See, e.g., https://therealdeal.com/2020/12/03/landlords-lose-challenge-against-pandemic-renter-protections/.
