NYC-based boutique law firm Pardalis & Nohavicka brings the latest legal updates from the world of real estate. Pardalis & Nohavicka handles an eclectic array of matters, representing individuals and business owners in civil litigation, criminal cases and business transactions, currently litigating and representing clients throughout the United States and around the world.
As 2020 comes to an end, Pardalis & Nohavicka reflects on a year that left the real estate industry with significant challenges that were met in equal force with creative solutions from industry players, as well as fluctuating legal changes. Here’s a look back at some of the biggest legal happenings from the year and where they stand moving into 2021.
To provide relief for residential and commercial tenants, New York State halted all evictions — both residential and commercial — at the height of the pandemic. And, with no end date in sight, Governor Cuomo has extended the eviction moratorium many times since the initial ban. Currently, all residential and commercial evictions are at a standstill until January 1, 2021, although the Governor’s recent statements suggest that it will most likely be extended once again.
“We’ll do what we can in New York. We’re going to extend the commercial eviction moratorium, so if a business can’t pay the rent because of this situation, they won’t be evicted.”
Personal Guarantee Moratorium
In the summer, New York City Mayor Bill de Blasio signed the City Council’s Personal Liability Bill, which prohibits commercial landlords from enforcing personal guarantees on defaults that arose between March 7, 2020, and September 30, 2020. This measure was intended to provide a shield for businesses to protect their personal assets from landlords.
While this law was certainly a relief for some business owners, it did dramatically limit the contractual rights of commercial landlords and interfered with private contracts. In fact, in one case, three landlords brought suit in the Southern District alleging that the personal guarantee law would cause severe economic harm by impeding the landlord’s ability to profit from their properties and that it violated their constitutional rights.
But, the case was denied because the Circuit’s jurisprudence affords broad deference to the good-faith efforts of policymakers to regulate in the interest of the public good. Therefore, the Court concluded that the guaranty law did not violate the contract clause and that these ordinances were not in conflict with the state’s efforts to respond to the pandemic., and so, they were not preempted.
Where does that leave us now?
Local Law 55 of 2020 was amended on September 28, 2020, to extend the moratorium on personal guarantees for commercial leases. The moratorium now covers defaults by tenants between March 7, 2020, and March 31, 2021. So, if a tenant defaulted during this time, the landlord may never enforce the guarantee to recover losses from the guarantor. However, in order for a tenant to be protected under this amendment, the tenant must meet the following requirements:
- The guarantor has to be a natural person, not an entity
- The business has to be affected by COVID-19 — i.e. closed because it was declared non-essential, etc.
- The default has to occur between March 7, 2020, and March 31, 2021
The Future of Commercial Spaces
During this time, many businesses have moved to remote work — either partially or in full — thereby leaving large commercial spaces empty. This has significantly altered the course of commercial leasing as we once knew it.
As tenants began to discuss more conservative leasing options, one trend that arose was shorter commercial leases. Prior to the pandemic, the term for commercial leases ranged anywhere from five to 30 years. But now, some landlords and tenants have negotiated much shorter leases than usual for fear of what the future brings. This also allows room to renegotiate the lease once the business world picks back up again.
Another trend that came about this year was commercial subleasing. While commercial subleasing has always been an option for tenants, it’s recently become a more popular and beneficial option for both tenants and landlords.
Specifically, subleasing has allowed current tenants to shift some or all of the burden of their lease negotiations to other, smaller businesses — which can then obtain office space in prime locations at lower-than-market rates. This arrangement also allows landlords to maintain their agreed-upon lease and receive a consistent flow of income.
As the year comes to an end, it will be interesting to see if these temporary solutions become the new norm within the industry.
Real Estate and Corporate Transactions Attorney Nataly Goldstein is a graduate of Cardozo School of Law, where she served as President of the Real Estate Law Association. She is experienced in both residential and commercial real estate transactions, and she prides herself on guiding her clients through every step of their transaction, whether they are first home buyers or franchised businesses.