Opinion
Index No. 655654/2020
04-21-2023
MANSION REALTY LLC, Plaintiff, v. 656 6TH AVE GYM LLC, Defendant.
Golino Law Group PLLC, New York, NY (Brian W. Shaw of counsel), for plaintiff. Nelson Mullins Riley & Scarborough LLP, Fort Lauderdale, FL (Harsh Arora of counsel), for defendant.
Golino Law Group PLLC, New York, NY (Brian W. Shaw of counsel), for plaintiff.
Nelson Mullins Riley & Scarborough LLP, Fort Lauderdale, FL (Harsh Arora of counsel), for defendant.
Gerald Lebovits, J. This action to collect on sums allegedly owed on a commercial lease raises significant questions about the scope of the protections conferred on personal guarantors by New York City Administrative Code § 22-1005.
Plaintiff-landlord, Mansion Realty LLC, initially brought this action against defendant-tenant, 656 6th Ave Gym LLC, seeking unpaid rent that had accrued through October 31, 2020. (See NYSCEF No. 1.) Landlord now moves under CPLR 3025 (b) to seek post-commencement unpaid rent against tenant. Landlord also seeks leave to add Alex Reznik, the individual guarantor of the lease, as a defendant, and to seek unpaid rent from the guarantor for, at a minimum, the period running from July 1, 2021, through the filing of this motion. Tenant and guarantor raise several arguments in opposition—most significantly, that landlord's claim against guarantor for post-June 30, 2021, rent is permanently barred by § 22-1005 because the underlying lease default occurred during the period in which § 22-1005 ’s protections were in effect.
The Appellate Division has not yet had occasion to address this important question. Although the issue is not free from doubt, this court ultimately concludes that tenant and guarantor read § 22-1005 too broadly. That statute bars only those claims against guarantors seeking rent that came due within the statute's protection period. It does not, as tenant and guarantor contend, bar claims against a lease guarantor for the life of the lease merely because the tenant first defaulted during the protection period.
BACKGROUND
In December 2019, landlord and tenant in this case entered into a lease of commercial premises for use as a gym facility. (See NYSCEF No. 19 at 11 § 6.01 (A).) Guarantor simultaneously executed an absolute and unconditional guarantee of tenant's obligations under the lease. (See id. at 31-32 [guarantee].) The complaint alleges that tenant stopped paying rent as of June 1, 2020. (NYSCEF No. 1 at ¶ 14.)
Landlord brought this action in October 2020. As originally pleaded, the complaint asserts a breach-of-contract claim against tenant, claiming $430,684.17 in unpaid rent/additional rent accrued through October 31, 2020, plus attorney fees under the lease. (See id. at ¶¶ 18, 24, 26.) The complaint does not name guarantor as a defendant; but it asserts that he can be held liable in breach of contract under his guarantee, notwithstanding Administrative Code § 22-1005. (See id. at ¶¶ 18-21, 24.) The complaint alleges that this statute does not bar landlord's claims because it is (assertedly) unconstitutional. (Id. at ¶ 22.) In the alternative, landlord alleges that it will be entitled to hold guarantor liable for damages stemming from tenant's "monetary obligations due under the Lease accruing through March 5, 2020 and after March 31, 2021." (Id. at ¶ 23.)
When landlord commenced this action in October 2020, the § 22-1005 protection period extended through March 31, 2021. In April 2021, the City Counsel amended the statute to extend retroactively that period from March 31, 2021, through June 30, 2021.
Landlord now moves under CPLR 3025 (b) for leave to amend the complaint. The proposed amended complaint seeks allegedly unpaid rent/additional rent accrued through September 7, 2022, a total of $2,608,318.93. (See NYSCEF No. 17 at ¶ 26.) The amended complaint asserts a breach-of-contract claim against guarantor, as well as against tenant. The amended complaint's allegations about guarantor mirror those in the original complaint. The amended complaint again alleges that Administrative Code § 22-1005 is inapplicable because it is unconstitutional. (Id. at ¶¶ 29-30.) In the alternative, landlord seeks to hold guarantor liable for the $1,483,345.01 in unpaid rent/additional rent that landlord alleges accrued from July 1, 2021, through September 7, 2022.
The motion is granted with respect to landlord's claim against tenant. On landlord's claim against guarantor, the motion is denied without prejudice for rent accruing from June 1, 2020, through June 30, 2021, and granted for rent accruing from July 1, 2021, through September 7, 2022.
DISCUSSION
Leave to amend under CPLR 3025 (b) is freely granted: Absent prejudice or surprise, leave should be denied only if the nonmovant establishes that the proffered amendment is "palpably insufficient or clearly devoid of merit." ( Fairpoint Cos., LLC v. Vella , 134 A.D.3d 645, 645, 22 N.Y.S.3d 49 [1st Dept. 2015] [internal quotation marks omitted].)
I. Whether Administrative Code § 22-1005 Bars Landlord's Proposed Unpaid-Rent Claims Against Guarantor
A. Landlord's July 2021 to September 2022 Rent Claim
Landlord's proposed amended complaint asserts a claim against guarantor for rent accruing from July 1, 2021, through September 7, 2022—i.e. , after the expiration of the protection period established by Administrative Code § 22-1005. Guarantor argues that leave to amend should be denied because, he argues, this proposed claim is clearly without merit under that statute. Determining which party is correct about the scope of § 22-1005 requires closely examining the statute's terms.
Landlord also seeks leave to assert a claim against guarantor for rent accruing from June 1, 2020, through June 30, 2021, although it acknowledges that this claim is currently barred by § 22-1005. This aspect of landlord's claim in addressed in Section I.B., infra.
Section 22-1005 bars enforceability against a natural person of that person's guarantee of commercial-lease obligations if two conditions are satisfied: (i) The tenant's operations were halted or restricted under March 2020 COVID-related executive orders; and (ii) 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 June 30, 2021, inclusive." (Administrative Code § 22-1005 [2].) It is undisputed that the first statutory condition was satisfied. The question here is instead the nature and scope of the second statutory condition, and whether it has been satisfied in the case of landlord's claims against guarantor for rent owed after June 30, 2021.
Neither the First Department nor the other departments of the Appellate Division have yet resolved this interpretive question. Considering the issue for itself, this court agrees with landlord's interpretation of § 22-1005 (2).
All but one of the First Department's decisions addressing the scope of § 22-1005 (2) have addressed claims for rent owed for times that were before or during the statutory protection period, not after. (See 721 Borrower LLC v. Moha , 204 A.D.3d 510, 511, 164 N.Y.S.3d 817 [1st Dept. 2022] [rent owed for May 2018 through February 2020]; 3rd & 60th Assoc. Sub LLC v. Third Ave. M & I, LLC , 199 A.D.3d 601, 602-603, 157 N.Y.S.3d 434 [1st Dept. 2021] [holding that under the applicable cure provisions of the lease, the unpaid rent at issue was not required to be paid until March 12, 2020, within the protection period]; 558 Seventh Ave. Corp. v. Times Sq. Photo Inc. , 194 A.D.3d 561, 562, 149 N.Y.S.3d 55 [1st Dept. 2021] [addressing claim for rent owed before March 7, 2020].) The remaining decision, 274 Madison Company, LLC v. Vieira , 205 A.D.3d 403, 404, 168 N.Y.S.3d 30 (1st Dept. 2002), involved a landlord's acceleration within the § 22-1005 protection period of rent obligations running through June 2024.
1. Arguments from statutory text
The First Department has emphasized that "regardless of when a tenant's lease default occurred, the critical time frame for determining when the protections of Administrative Code § 22–1005 attach is the time of the ‘event causing such natural persons to become ... liable.’ " ( 3rd & 60th Assoc. Sub LLC v. Third Ave. M & I, LLC , 199 A.D.3d 601, 602, 157 N.Y.S.3d 434 [1st Dept. 2021], quoting Administrative Code § 22-1005 [2] [alterations in original].) Absent a contrary provision in the lease, a guarantor of a tenant's lease obligations will become liable under the guarantee for a given month's rent (or liquidated damages) at the point in time when the tenant can be held liable for failing to make the payment as contractually required. Thus, if the tenant's liability arose between March 7, 2020, and June 30, 2021, the guarantor's obligation under the guarantee is unenforceable. If the tenant's liability instead arose before March 7, 2020, or after June 30, 2021, the landlord may enforce the guarantor's obligation under the guarantee. In 3rd & 60th Associates , for example, tenant's default occurred on March 1, 2020; but the expiration of the cure period for that default, the point in time at which tenant or guarantor could be held liable for an uncured default, did not occur until March 13, 2020—within the protected period. (See 199 A.D.3d at 602-603, 157 N.Y.S.3d 434.)
In this case, the lease provides that landlord may terminate the lease for tenant's default, in which case, following tenant's surrender of the premises, tenant "shall remain liable for all obligations arising during the balance of the original stated term." (NYSCEF No. 19 at § 16.01 [a].) Alternatively, rather than terminating the lease, landlord may opt to re-enter the premises following tenant's surrender and seek to relet the premises, in which case tenant will be responsible for any deficiency between the "rents and other sums received from such reletting" and the sums "to be paid during that month" by tenant under the original lease, with that deficiency to be "calculated and paid monthly " during the balance of the original lease term. (Id. at § 16.02 [emphasis added].) Under either scenario, tenant is responsible for paying each month's rent or rent-deficiency as it comes due. And it is a failure by the tenant each month to meet that obligation that renders the guarantor liable under the guarantee. When those failures occurred during the protected period (here, between June 1, 2020, and June 30, 2021), the guarantee is unenforceable against guarantor. But guarantor remains on the hook for tenant's failures after June 30, 2021, to pay the rent/rent-deficiency as it accrues each month.
Guarantor advances a different interpretation of § 22-1005. He contends that because tenant first defaulted during the statutory protection period, guarantor is permanently shielded from landlord's enforcement of the guarantee. (See NYSCEF No. 25 at ¶¶ 14-15.) The undersigned acknowledges that other judges of this court have adopted this reading of § 22-1005. (See e.g. Diamond 47 Nails Inc. v. L'Envie Hair Studio, Inc. , 2022 N.Y. Slip Op. 30932[U], at *3-4, 2022 WL 810243 [Sup. Ct., N.Y. County Mar. 17, 2022] [Arthur Engoron, J.] [holding that the statute "outline[s] a time period where an initial default would trigger the ongoing protections of the Guaranty Law"] [emphasis in original].) As discussed further below, the undersigned respectfully disagrees.
The difficulty with the interpretation guarantor offers is that rent is typically payable on a periodic (usually monthly) basis, with a tenant becoming liable for unpaid rent only as it accrues each period. As a result, should a tenant default, the tenant will then be liable for rent that has already come due and gone unpaid—but not for future rent. (See Utility Garage Corp. v. National Biscuit Co. , 71 A.D.2d 578, 579, 418 N.Y.S.2d 87 [1st Dept. 1979], citing Maflo Holding Corp. v. S. J. Blume, Inc. , 308 N.Y. 570, 575, 127 N.E.2d 558 [1955] ; accord Runfola v. Cavagnaro , 78 A.D.3d 1035, 1035, 910 N.Y.S.2d 910 [2d Dept. 2010] ; Beaumont Offset Corp. v. Zito , 256 A.D.2d 372, 373, 681 N.Y.S.2d 561 [2d Dept. 1998].) For that same reason, if a tenant fails to pay rent over the first six months of the year, the landlord ordinarily can sue in April for January-March rent, then sue again in July for April-June rent, without being subject to a claim-preclusion bar. (See 23 E. 39th St. Dev., LLC v. 23 E. 39th St. Mgt. Corp. , 172 A.D.3d 964, 966, 101 N.Y.S.3d 199 [2d Dept. 2019].) As a result, a tenant's nonpayment default might expose the guarantor to potential future liability, whether in the form of a liquidated-damages provision or otherwise; but that potential is not realized with regard to a future month's rent—the guarantor does not become liable for that rent should it go unpaid—until the month arrives.
To be sure, landlord, tenant, and guarantor can choose to depart from the typical rule described above; and the timing of a guarantor's nonpayment-related liability under a given lease and guarantee will always depend on the particular wording of those agreements. The parties could, for example, include an acceleration clause under which the tenant (and guarantor) would become liable upon default for the full rent owed until the lease's expiration. In that circumstance, if the triggering default occurred during § 22-1005 ’s protection period, the guarantee would be rendered unenforceable for the balance of the lease, not just from default until June 30, 2021. (See 274 Madison Co., LLC v. Vieira , 205 A.D.3d 403, 404-405, 168 N.Y.S.3d 30 [1st Dept. 2022] [holding that § 22-1005 shielded a guarantor from liability for accelerated rent owed due to a default occurring on March 31, 2020].)
Either way, the key question is when a guarantor becomes liable under the lease and guarantee for a tenant's default. Here, as discussed above, guarantor becomes liable for unpaid rent (or rent deficiency) as that sum accrues each month. (See NYSCEF No. 19 at §§ 16.01 [a], 16.02.) Section 22-1005 thus shields guarantor only for unpaid rent/rent-deficiency from June 1, 2020, through June 30, 2021, not also for July 1, 2021, through September 7, 2022.
2. Arguments from statutory purpose
Diamond 47 Nails suggests that the reading of the statute described above "would let landlords make a runaround of the City Council's intentions by allowing them to come back and hold personal guarantors liable for the remainder of ten-or-twenty-year commercial leases now long-since abandoned." ( 2022 N.Y. Slip Op. 30932[U], at *3.) This court is not persuaded by this purposive objection.
In a commercial lease in which the tenant (and guarantor) becomes liable for a month's unpaid rent only as it comes due, the landlord could not, in the short term, sue the guarantor for not-yet-accrued rent obligations on the remainder of a 10-or-20-year lease term. In the medium or long term, it is to the landlord's economic advantage to relet the premises and mitigate its damages (and, as a result, the guarantor's liability), rather than letting the premises sit empty in the hopes of being able to collect the full amount from the guarantor. And claims against the guarantor are limited regardless by the six-year statute of limitations. (See CPLR 213 [2].)
Conversely, the legislative findings on which Diamond 47 Nails relies emphasize that § 22-1005 is intended as a short-term, temporary emergency measure intended to "provide these businesses a reasonable recovery period with a duration that is comparable to the period of time that these businesses were forced to close or operate with significant limitations on indoor occupancy." (Local Law No. 98/2020, City of New York, § 1 [a] [9] [legislative findings; see also Local Law No. 50/2021, City of New York, § 1 [a] [9] [same].) Affording guarantors a permanent shield against liability that accrued after this "reasonable recovery period" would run counter to the City Council's stated intent.
In short, it is unclear that the purpose of § 22-1005 supports the interpretation reached by Diamond 47 Nails and other decisions following it. And in any event, the First Department has made clear that in construing § 22-1005, courts must pay close attention to the statutory language—and its limits—rather than relying on broader conceptions of statutory purpose. (See Knickerbocker Retail LLC v. Bruckner Forever Young Social Adult Day Care Inc. , 204 A.D.3d 536, 538, 167 N.Y.S.3d 462 [1st Dept. 2022] [holding § 22-1005 ’s protections inapplicable to a guarantor because "while the spirit of the law would appear to include" him, the "letter of the law does not"].)
This court concludes, therefore, that § 22-1005 does not foreclose landlord from amending its complaint to add guarantor as a defendant and assert a claim against him for unpaid rent/additional rent accruing from July 1, 2021, through September 7, 2022, after the expiration of the statutory protection period.
B. Landlord's June 2020 to June 2021 Rent Claim
Landlord also seeks leave to assert a claim against guarantor for the rent/additional rent that accrued during the protection period, from June 1, 2020, through June 30, 2021. Landlord does not dispute that the statute currently bars this claim. Landlord's proposed amended complaint and reply papers on this motion contend, though, that this bar should be disregarded as unconstitutional. (See NYSCEF No. 17 at ¶¶ 29-30 [amended complaint]; NYSCEF No. 26 at ¶¶ 10-11.) Although the undersigned has previously rejected that argument (see 45-47-49 Eighth Avenue v. Conti , 2021 N.Y. Slip Op. 50691[U], at *5, 2021 WL 3137676 [Sup. Ct., N.Y. County July 23, 2021] ), that decision is now on appeal to the Appellate Division, First Department, which has not yet decided the question. In these circumstances, landlord's request for leave to assert a claim for rent accruing during the statutory protection period is denied, without prejudice to its renewal should the First Department hold § 22-1005 unconstitutional.
The U.S. District Court for the Southern District of New York recently held that § 22-1005 violated the Contracts Clause of the U.S. Constitution. (See Melendez v. City of New York , ––– F.Supp.3d ––––, 2023 WL 2746183 [S.D.N.Y. 2023].) That decision does not bind the courts of New York State so as to alter this court's analysis of landlord's claim for rent accruing between June 2020 and June 2021. (See People v. Kan , 78 N.Y.2d 54, 59-60, 571 N.Y.S.2d 436, 574 N.E.2d 1042 [1991] [noting that although "the interpretation of a Federal constitutional question by the lower Federal courts may serve as useful and persuasive authority" for New York courts, only the U.S. Supreme Court's rulings on federal law are binding].)
II. Whether Other Grounds Exist to Deny Leave to Amend
Tenant and guarantor advances several other arguments for denying leave to amend. None has merit.
Guarantor does not identify any authority (or support) for its argument that landlord's claim against tenant and its claim against guarantor must be asserted in two separate causes of action, rather than as different facets of the same cause of action. (See NYSCEF No. 25 at ¶¶ 7, 10-11.) The amended complaint identifies and defines its claim against guarantor and the allegations supporting that claim. That claim (and supporting allegations) follow closely the initial complaint's identification of a potential claim against the guarantor for unpaid rent, eliminating the potential for unfair surprise. (Compare NYSCEF No. 1 at ¶¶ 18-24, with NYSCEF No. 17 at 27-32.) Permitting amendment would not unfairly prejudice guarantor: The initial complaint placed guarantor on notice of this potential claim against him, and the amended complaint's factual allegations supporting the claim substantially overlap with the allegations supporting landlord's claim against tenant. Nor is this court persuaded that the 11-month delay in seeking leave to amend was, in the factual context of this case, an extended delay that landlord has failed to justify.
Tenant and guarantor fault landlord for not mitigating its damages by re-letting the premises between the commencement of this action and the filing of the proposed amended complaint. (NYSCEF No. 25 at ¶ 6.) But commercial landlords are not required to mitigate damages. (See New 24 W. 40th St. LLC v. XE Capital Mgt., LLC , 104 A.D.3d 513, 514, 961 N.Y.S.2d 139 [1st Dept. 2013], citing Holy Props. Ltd. v. Cole Prods., Inc. , 87 N.Y.2d 130, 637 N.Y.S.2d 964, 661 N.E.2d 694 [1995].)
Guarantor also argues that the claim against him is unfairly prejudicial because tenant surrendered the premises to landlord pursuant to an April 2021 agreement among the parties, thereby cutting off guarantor's liability no later than April 2022 under the terms of the underlying guarantee. (NYSCEF No. 25 at ¶¶ 20-22.) But if the circumstances of tenant's surrender of the premises did not satisfy the liability-limiting provisions of the guarantee (see NYSCEF No. 19 at 31-32), then no reasonable basis exists for guarantor to have relied on those provisions to his detriment. If the surrender did satisfy the requirements of the guarantee's liability-cutoff, then landlord's claim for unpaid rent accruing after the cutoff would fail on the merits regardless of prejudice. Guarantor has not, however, clearly demonstrated on this motion that the surrender did limit guarantor's liability, so as to warrant denial of leave to amend.
This is especially true given the surrender agreement's express clause that the tenant's surrender of possession "shall not serve to terminate the Lease and shall not release Tenant and Guarantor from their obligations under the Lease and Guarantee." (NYSCEF No. 15 at 2 ¶ 3.)
Accordingly, it is
ORDERED that the branch of landlord's motion under CPLR 3025 (b) seeking to amend its claim against tenant is granted; and it is further
ORDERED that the branch of landlord's motion under CPLR 3025 (b) seeking to add guarantor as a defendant in this action is granted; and it is further
ORDERED that the branch of landlord's motion under CPLR 3025 (b) for leave to assert a claim against guarantor for unpaid rent for the period of June 1, 2020, through September 7, 2022, inclusive, is granted only with respect to the period July 1, 2021, through September 7, 2022, inclusive, and is otherwise denied without prejudice; and it is further
ORDERED that landlord shall within seven days of entry of this order file an amended complaint that conforms to the terms of this order, and that this document upon its filing shall be deemed the operative complaint in this action; and it is further
ORDERED that tenant and guarantor shall, within 20 days of landlord's filing of the conforming amended complaint, answer or otherwise respond to that amended complaint; and it is further
ORDERED that landlord shall serve a copy of this order with notice of its entry on the office of the General Clerk, which is directed to amend the caption in this action to reflect the addition of guarantor as a party defendant.