A DIFFERENT APPROACH TO COVID AND THE COMMERCIAL NON-PAYING TENANT AND THE GUARANTOR

Compare this case with COVID AND THE COMMERCIAL NON-PAYING TENANT AND THE GUARANTOR

267 DEV., LLC v. BROOKLYN BABIES & TODDLERS, LLC, 2021 NY Slip Op 30796 - Kings Co. Supreme Court March 15, 2021:

"Plaintiff, 267 DEVELOPMENT LLC, moves this Court for an Order pursuant to CPLR § 3212 (a), CPLR § 3211 (a) (7) and/or CPLR § 3211(a) (1) granting summary judgment in its favor and dismissing the affirmative defenses and counterclaim contained in Defendants' answer. Defendants cross-move for summary judgment pursuant to CPLR § 3212 dismissing Plaintiff's 4th and 5th causes of action and for summary judgment in its favor on their counterclaim for commercial tenant harassment.

BACKGROUND

Plaintiff owns the property that is leased to Defendants and commercial tenant, Brooklyn Babies and Toddlers, LLC ("BB") with Defendant, Mary Ann O'Neil acting as guarantor. Governor Cuomo signed Executive Orders § 202.3, § 202.6 and § 202.7 closing certain businesses throughout New York State in response to the Covid-19 pandemic. BB was one of the businesses forced to close pursuant to these Executive Orders. Additionally, Governor Cuomo initiated a moratorium on residential and commercial evictions and foreclosures in 2020 that has been extended through May 21, 2021.

Plaintiff commenced the instant action against BB, as Tenant, and Mary Ann O'Neil, as guarantor, seeking payment in the amount of $93,554.94 in total as rent arrears and attorneys' fees pursuant to their 10-year lease agreement. In opposition to Plaintiff's motion for summary judgment, Defendants rely in part upon New York City Administrative Code § 22-1005 ("§ 22-1005"), also referred to as Local Law 55. Pursuant to § 22-1005, commercial Landlords cannot seek monies for lease arrears from a non-tenant who personally guarantees a lease agreement on behalf of a business that meets the criteria as set forth in the provision. Specifically, this law refers to businesses that were forced to close as a result of the Executive Orders signed by Governor Cuomo.

However, this newly enacted provision protects only the guarantors of commercial leases and not the Tenant itself. While Governor Cuomo has signed executive orders that establish a moratorium on residential as well as commercial evictions and foreclosures, there is no law preventing a Landlord from seeking arrears from a commercial Tenant. On September 23, 2020 the New York City Council amended § 22-1005 and extended the prohibition against enforcement of guarantor provisions in commercial leases, through March 31, 2021. Additionally, the amendment clarifies its intent by stating that it applies to all personal guarantor agreements, regardless of whether those agreements were contained in the original lease or not.

Defendants contend that Plaintiff's motion must be denied because the lease has been suspended as a result of force majeure, frustration of purpose and/or impossibility of performance. In the case at bar, a force majeure clause was not included in the lease agreement and therefore cannot be asserted as a defense to a breach of contract claim. Gen. Elec. Co. v. Metals Res. Grp. Ltd., 293 A.D.2d 417, 418 (1st Dept 2002). Defendants also argue alternatively that since their business was closed by the Governor's Order, performance under the contract was made objectively impossible.

New York law recognizes the common law doctrine of impossibility as an avenue to excuse performance when there have been extraordinary intervening events. It is not enough to show that an event has rendered performance prohibitively expensive or impractical. Rather, the party invoking the doctrine must prove that the subject matter of the contract or the means of performance have been "destroyed," such that performance is "objectively impossible." Kel Kim Corp.v Central Markets, 70 N.Y.2d 900, 902 (1987). The Court of Appeals explained therein, "the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract." Id. at 902. Impossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Kolodin v Valenti, 115 AD3d 197, 200 (1st Dept 2014).

The doctrine of impossibility was applied after the September 11th terrorist attacks in Bush v. Protravel International, Inc., 192M.2d 743, 747-748 (Civ. Ct., Richmond County 2002). Telephone communications had been disrupted throughout New York City after 9/11. As a result, the Plaintiff in the aforementioned case was precluded from timely canceling travel reservations. The Civil Court found that performance of the travel contract was rendered impossible for a period of time immediately following the 9/11 attack where New York City was in virtual lockdown. Id. at 747.

In a recent article entitled, "New York Contract Law Remedies in the Face of Disruption Caused by COVID-19", Ropes & Gray Newsletter 200:100, 2020 by Gregg Weiner, Adam Harris, Christian Reigstad, Dielai Yang and Andrew Todres, the issues before this Court were discussed and the authors concluded:

In the context of the coronavirus outbreak, impossibility may provide grounds for excusing performance if, for example, government responsive measures such as shutdowns, travel bans, or quarantines entirely preclude a party from performing its contractual obligations. However, even then, the party invoking the doctrine must show that the measures were unforeseeable and the risk associated with them could not have been built into the contract. The sheer magnitude of COVID-19's impact has left businesses large and small scrambling in search of relief from contractual obligations. Affected parties to contracts governed by New York law may be able to use the doctrines of force majeure, impossibility, or frustration of purpose to exit contracts or protect themselves from liability for non-performance.

In the case at bar this Court finds that the shutdown of BB's business has precluded it from performing its contractual obligations. The government shutdown was unforeseeable and could not have been built into the contract. Under the circumstances presented, this Court finds that performance under the subject lease was made impossible.

Defendants cross-move for summary judgment on their counterclaim for "commercial tenant harassment." New York City Administrative Code § 22-902(a) was also amended to define commercial tenant harassment. The amendment sets forth that a landlord may be held liable for "commercial tenant harassment" for attempting to enforce a personal liability guarantee that they know or reasonably should know is not enforceable pursuant to § 22-1005. § 22-902(a)(11)(14). Defendants claim that Plaintiff's inclusion of the 4th and 5th causes of action in their complaint against Ms. O'Neil constitutes commercial tenant harassment under the law. After review of the submissions in the instant motion, this Court agrees and finds that Defendants are entitled to summary judgment on their counterclaim for commercial tenant harassment."

COVID AND THE COMMERCIAL NON-PAYING TENANT AND THE GUARANTOR

1140 BROADWAY LLC v. BOLD FOOD, LLC, 2020 NY Slip Op 34017 - NY: Supreme Court December 4, 2020:

".....As an initial matter, the Court grants plaintiff's motion as to liability and rejects defendants' reliance on the doctrines of impossibility and frustration of purpose. The Court empathizes with the many business that have been adversely affected by the ongoing pandemic; here, both the landlord and the tenant have undoubtedly faced significant hardship.

The doctrine of frustration of purpose requires that "the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense"(Crown IT Services, Inc. v Koval-Olsen, 11 AD3d 263, 265, 782 NYS2d 708 [1st Dept 2004]). "[T]his doctrine is a narrow one which does not apply unless the frustration is substantial"(id.). Here, the lease was for office space in a building and the tenant's business was devastated by a pandemic. That does not fit into the narrow doctrine of frustration of purpose. Simply put, defendants could no longer afford the rent because restaurants no longer needed the management help that the tenant provides.

This is not a case where the office space leased was destroyed or where a tenant rented a unique space for a specific purpose that can no longer serve that function (such as a factory that was condemned after the lease was signed or a agreeing to rent costumes for a specific play to be performed at a specific theater on specific dates but the theater burned down before the first rental date). To be clear, the Court takes no position on what circumstances might permit the implication of a frustration of purpose doctrine under a generic office lease. The Court merely concludes that it does not apply here, where the tenant rented office space, the tenant's industry experienced a precipitous downfall and the tenant to no longer be able pay the rent.

Similarly, the Court finds that the impossibility doctrine does not compel the Court to deny the motion. "Impossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract" (Kel Kim Corp. v Cent. Markets, Inc., 70 NY2d 900, 902, 524 NYS2d 384 [1987]).

It is critical to point out that the tenant merely provided restaurants with consulting services. It was not shut down by any public health directives. In other words, the tenant was one step removed from the governor's public health orders relating to restaurants because their business assists restaurants.^[1] It appears that restaurants no longer needed assistance with human resources, payroll or accounting, not because of anything plaintiff did (or failed to do). Sometimes that happens in business—an industry changes overnight.

And although restaurants were required to scale back certain operations (such as indoor dining) because of the pandemic, they were not fully shut down. Many food establishments decided to shut down because of the financial consequences from both the pandemic and the public health orders, but that does not mean there was a "destruction of the subject matter" contemplated in the contract at issue here, which was for office space on the twelfth floor of an office building. The Court is unable to find that the doctrine of impossibility has any application here.

The undisputed fact is that the lease was for office space in a building and the tenant stopped making payments. Nothing in the lease provides a remedy for a situation like this. The landlord never agreed to make paying the rent contingent on the tenant being able to afford it. The Court declines to step in and unilaterally modify the parties' contract and tell the landlord that it should not be able to enforce the agreement it signed with a tenant.

And the parties included a safeguard: this landlord agreed to a good guy guaranty, thus lessening the guarantor's risk if the tenant went out of business so long as certain obligations were satisfied. The guarantor is only responsible for rent for the time the tenant is actually in possession and had the power to return the premises to the landlord. Here, the tenant waited five months to return the premises to the landlord — yet the tenant and guarantor ask this Court to absolve them of their obligations. The Court declines to ignore a clear contractual provision designed to address the situation at issue here—where the tenant stops paying the rent and retains possession of the premises.

......"

IN NYC - GUARANTY TO COMMERCIAL LEASE AND COVID

204 E. 38th LLC v. SONS OF THUNDER LLC, 2020 NY Slip Op 33862 - NY: Supreme Court November 20, 2020:

".....

The subject provision provides that:

Personal liability provisions in commercial leases.

A provision in a commercial lease or other rental agreement involving real property located within the city, or relating to such a lease or other rental agreement, that provides for one or more natural persons who are not the tenant under such agreement to become, upon the occurrence of a default or other event, wholly or partially personally liable for payment of rent, utility expenses or taxes owed by the tenant under such agreement, or fees and charges relating to routine building maintenance owed by the tenant under such agreement, shall not be enforceable against such natural persons if the conditions of paragraph 1 and 2 are satisfied:

1. The tenant satisfies the conditions of subparagraph (a), (b) or (c):

(a) The tenant was required to cease serving patrons food or beverage for on-premises consumption or to cease operation under executive order number 202.3 issued by the governor on March 16, 2020;

(b) The tenant was a non-essential retail establishment subject to in-person limitations under guidance issued by the New York state department of economic development pursuant to executive order number 202.6 issued by the governor on March 18, 2020; or

(c) The tenant was required to close to members of the public under executive order number 202.7 issued by the governor on March 19, 2020.

2. The default or other event causing such natural persons to become wholly or partially personally liable for such obligation occurred between March 7, 2020 and March 31, 2021, inclusive.

(Administrative Code of City of NY § 22-1005).

The Court finds that the above provision applies to a stand-alone personal guaranty for a commercial lease. The phrase "relating to such a lease" implicates a guaranty signed as a separate agreement.

The Court finds that the subject provision does not violate the contracts clause of the U.S. Constitution. "The principle is firmly established today that all contracts are subject to the police power of the State, and, when emergency arises and the public welfare requires modification of private contractual obligations in the public interest, the question is not whether legislative action affects contracts incidentally, or directly or indirectly, but whether the legislation is addressed to a legitimate end and the measures taken are reasonable and appropriate to that end" (Twentieth Century Assoc. v Waldman, 294 NY 571, 580, 63 NE2d 177 [1945] [upholding a commercial rent control statute in the midst of World War" II]).

The Court of Appeals emphasized that "In the light of the emergency which called into play the police powers of the State in this case, we are unable to say that the measures taken in the public interest were unreasonable or inappropriate to curb the evils arising from the emergency and to accomplish the public purposes declared in the statute" (id.).

There is no doubt that the instant pandemic, which has taken the lives of tens of thousands of New Yorkers, implicates the police powers of this state. The Court funds that the instant provision, which was intended to alleviate the personal financial burden on guarantors, is not unreasonable or inappropriate to curb the pain caused by Covid-19. The fact is that many businesses in New York City faced (and continue to face) dire financial situations due to mandated closures and restrictions. The New York City Council decided it was reasonable to enact a law to protect the personal assets of guarantors for these establishment. To be clear, the Court takes no position on the wisdom of this particular provision, it only finds that it was permissible under the relevant case law.

Next, the Court must consider whether the provisions, which clearly have retroactive effects, are permissible. "Retroactive legislation is viewed with great suspicion. This deeply rooted presumption against retroactivity is based on elementary considerations of fairness [that] dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly" (Regina Metro. Co., LLC v New York State Div. of Hous. and Community Renewal, 35 NY3d 332, 370, 130 NYS3d 759 [2020] [internal quotation and citations omitted]).

"It takes a clear expression of the legislative purpose ... to justify a retroactive application of a statute which assures that [the legislative body] itself has affirmatively considered the potential unfairness of retroactive application and determined that it is an acceptable price to pay for the countervailing benefits" (id. [internal quotations and citations omitted]).

Here, the Court finds that the Administrative Code provision at issue is permissible and justified. The New York City Council was well aware of the potential unfairness to landlords when it enacted this law. And the language of this code provision (as amended in September 2020) states that it applies to defaults between March 7, 2020 and March 31, 2021. That is evidence of conscious and deliberate decision to apply this law retroactively.

Having found that the law is permissible, the Court fords that it justifies dismissal of the claims against Kim. There is no dispute that defendant Sons of Thunder operates a restaurant in the building and that it was ordered to cease serving patrons pursuant to various pandemic-related restrictions in March 2020.

The Court observes that Mr. Kim attached checks that he claims prove that no rent was owed for March, April and May 2020 (NYSCEF Doc. No. 8). Plaintiff did not dispute this assertion in opposition. Therefore, the Court finds that the default (if one actually occurred) took place well after March 7, 2020 and § 22-1005 applies. The Court stresses that it is not making a finding about how much plaintiff might be due from defendant Sons of Thunder; it is merely concluding that the alleged default took place within the time period required to implicate the law.

Summary

The Court recognizes that there was some confusion about whether the initial version of this code provision applied to personal guarantees. Apparently, that is why it was amended. That amendment clarified the intention of the rule and the Court rejects plaintiff's assertions that the law should only apply to cases commenced after its enactment. The language of it suggests is applies to defaults from the beginning of the pandemic."

IS THE PERSONAL GUARANTY AMBIGUOUS?

82-90 Broadway Realty Corp. v New York Supermarket, Inc., 2017 NY Slip Op 07233, Decided on October 18, 2017, Appellate Division, Second Department:

"Contrary to the defendants' contention, the typographical error in the guaranty relating to the year of the lease did not render the guaranty unenforceable. "Where there is no mistake about the agreement and the only mistake alleged is in the reduction of that agreement to writing, such mistake of the scrivener, or of either party, no matter how it occurred, may be corrected" (Born v Schrenkeisen, 110 NY 55, 59; see Nash v Kornblum, 12 NY2d 42, 47; Simek v Cashin, 292 AD2d 439, 440). In such a case, there is no need to reform the contract (see Castellano v State of New York, 43 NY2d 909, 911; Simek v Cashin, 292 AD2d at 440). "[I]n the absence of a claim for reformation, courts may as a matter of interpretation carry out the intentions of the parties by transposing, rejecting, or supplying words to make the meaning of the contract more clear" (Hickman v Saunders, 228 AD2d 559, 560; see Ross v Sherman, 95 AD3d 1100, 1100).

Here, the Supreme Court did not err in finding that the date of the lease in the guaranty should have read "January 15, 2000," rather than "January 15, 2001," notwithstanding the fact that the plaintiff did not seek to reform the contract. The plaintiff's president asserted in his affidavit that, pursuant to the lease, Long Deng was required to execute a guaranty of the lease when he purchased NY Supermarket from its previous owner in March of 2001. The guaranty refers to the same parties and premises as are set forth in the lease, and the same date of the lease except for the incorrect year. Moreover, Long Deng acknowledged that he is the president of NY Supermarket and did not provide a copy of any lease dated January 15, 2001, to which the guaranty could apply. As such, the court correctly interpreted the lease and the guaranty to carry out the intentions of the parties (see Ross v Sherman, 95 AD3d at 1100-1101; Hickman v Saunders, 228 AD2d at 560)."