New York City Council Passes Small Business Legislation Response to the COVID-19 PandemicMay 18, 2020
On May 13, 2020, the New York City Council passed a set of bills aimed at assisting small businesses affected by the COVID-19 Pandemic. The package addresses: (i) personal liability provisions in certain commercial leases; (ii) harassment of commercial tenants impacted by COVID-19; (iii) a cap on fees charged by third-party delivery services; and (iv) waivers of sidewalk café fees. While the Council’s actions represent an effort to aid some of the businesses most affected by the Pandemic, the lack of clarity regarding the scope of the personal liability legislation and commercial tenant harassment legislation as well as the uncertainty regarding the Council’s authority to legislate changes to existing commercial lease provisions means that it is difficult to assess the practical implications of the legislation. The legislation now awaits the Mayor’s signature before becoming law.
Personal Liability Provisions Under Covered Leases Unenforceable
To protect individuals who have personal liability under certain commercial leases for defaults by the tenant, the City Council passed legislation making such provisions unenforceable for rent and other payment defaults occurring before September 30. Specifically, pursuant to City Council No. 1932-2020 A, a “provision in a commercial lease or other rental agreement” that provides for “one or more natural persons who are not the tenant” to become personally liable for rent, utilities, taxes or maintenance fees is not enforceable if the default occurs between March 7, 2020 and September 30, 2020.
The legislation covers commercial leases involving businesses:
- required to cease on-premise consumption of food or beverages or cease operations pursuant to the Governor’s Executive Order 202.3 (March 16, 2020), which includes restaurants and bars;
- considered non-essential retail establishments subject to in-person limitations under guidance issued by Empire State Development pursuant to the Governor’s Executive Order 202.6 (March 18, 2020); and
- required to close to the public pursuant to Executive Order 202.7 (March 19, 2020), which includes hair salons, barbershops and tattoo parlors.
The legislation adds attempting to enforce such a personal liability provision to the list of actions considered “commercial tenant harassment” under the City’s commercial tenant harassment law.
The legislation is unclear as to whether it covers personal guaranties such as “good guy guaranties”. The text of the legislation states that it applies to “a provision” found within the commercial lease or other rental agreement but makes no reference to guaranties. Having said this, to support the commonplace nature of such personal liability provisions, the Council’s Committee on Small Business Report cites the NYC Small Business Services “Comprehensive Guide to Commercial Leasing”. The Guide itself discusses the possibility of a landlord requiring a full guaranty or “good guy guaranty” and focuses on how a tenant can limit personal liability. The Guide does not speak to the prevalence of personal liability requirements and notes that such requirements depend on factors such as the amount of any required security deposit. As a result, it remains unclear whether a person with liability under a guaranty can avail themselves of the legislation’s protection.
Additionally, a question exists as to the authority of the City Council to legislate contractual provisions in existing leases. The City Council needs to derive its authority to legislate from a source such as the State Constitution, City Charter or enabling legislation. The source of the Council’s authority to make a lease provision unenforceable is not readily apparent. Furthermore, the legislation also seemingly modifies existing leases raising both state and federal constitutional questions. Given these significant questions, the legislation is likely to face legal challenges if signed into law.
Commercial Tenant Harassment
To provide additional protection from harassment to businesses run by people affected by the Pandemic, the City Council passed legislation expanding the City’s commercial tenant harassment law. Under the City’s existing harassment law, a commercial landlord cannot harass a tenant based on “such person’s actual or perceived age, race, creed, color, national origin, gender, disability, marital status, partnership status, caregiver status, uniformed service, sexual orientation, alienage or citizenship status, status as a victim of domestic violence[,] or status as a victim of sex offenses or stalking”. City Council No. 1914-2020 A expands this provision to include the status of persons and businesses “impacted” by COVID-19 and a commercial tenant’s receipt of a rent concession or forbearance for any rent owed during the Pandemic. Such harassment is punishable by civil fine of $10,000 to $50,000.
The legislation defines both persons and businesses “impacted” by COVID-19 broadly. Persons impacted includes individuals: (i) diagnosed with COVID-19 or experiencing COVID-19 symptoms and seeking a diagnosis; (ii) with a household member diagnosed with COVID-19; (iii) providing care for a family or household member diagnosed with COVID-19; (iv) with a household member who was unable to attend school due to the state disaster emergency; (v) unable to reach their business because of a quarantine or self-quarantine; (vi) who become financially responsible for a household because the previous head of household died from COVID-19; and (vii) with a business closed as a direct result of the COVID-19 declared emergency.
A business “impacted” by COVID-19 includes those businesses subject to seating, occupancy or on-premises services limitations as well as those businesses who suffer a revenue loss of more than 50 percent during any three-month period covered by the act as compared to the same period in 2019 or as compared to the period of December 2019 through February 2020, provided that the state disaster emergency is the proximate cause of such revenue loss. The legislation also expands the harassment law to cover businesses that receives a rent concession or rent forbearance.
The period covered by these changes runs from March 7, 2020 until the later of (i) the end of the first month that commences after the expiration of the eviction moratorium established under the Governor’s Executive Order 202.8 (March 20, 2020) as extended; (ii) the end of the first month that commences after the expiration of the 120-day moratorium on certain residential evictions set forth under the CARES Act (March 27, 2020) as may be extended; and September 30, 2020.
While the Committee on Small Business Report states that the legislation is not intended to limit “the right of a landlord to terminate a tenancy, refuse to renew or extend a lease or other rental agreement, or reenter and repossess property” or limit “the obligation of a commercial tenant to continue paying rent owed,” given the broad nature of the term “impacted” the legislation may have a chilling effect on landlord-tenant discussions. As a result of the significant market disruptions caused by the Pandemic, regular communication between commercial landlords and tenants is critical as the parties determine how to best navigate the particularly challenging times.
Limitation on Third-Party Food Service Delivery Charges
In response to the severe impact that the Pandemic has had on restaurants and the fact that those that remain open rely heavily on delivery orders, the City Council passed legislation to limit the charges third-party delivery service providers charge for orders. The City’s Council report on the legislation notes that there are four major delivery platforms in the marketplace and these providers have charged fees as much as 30 percent or more per order.
City Council No. 1908-2020 B limits the delivery charge that a third-party delivery service may charge a food service establishment to no more than 15 percent of the purchase price of the online order and limits any other fee charged to five percent of the purchase price of the online order. The prohibition is effective during a declared emergency through the date that is 90 days after the end of such declared emergency. A fine of $1,000 per violation is imposed. City Council No. 1898-2020 A adds that a third-party delivery service cannot charge a fee for a telephone order that does not result in a transaction.
Waiver of Sidewalk Café Fees
To help ease the burden of restaurants suffering from restrictions imposed as a result of the Pandemic, City Council No. 1916-2020 A waives fees required to be paid for (i) an enclosed sidewalk café consent for the period from March 1, 2020 until Mayor Executive Order 105 Section 2 (April 4, 2020) expires and (ii) an unenclosed sidewalk café consent for the period from March 1, 2020 until February 28, 2021. Applications for new consents filed after March 30, 2020 are not covered by the waiver.
As the City government continues to turn its attention economic relief and recovery, we expect more legislation and programs to follow. We will continue to monitor these efforts as they develop.
© 2020 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.