As many readers of our blog and emails know, at Shenwick & Associates we are helping many commercial tenants vacate their leases prior to the expiration of their lease, due to the virus and other economic factors. See https://shenwick.blogspot.com/2019/11/the-failed-or-closed-restaurant-and-its_6.html and
"Commercial leases in New York City, COVID-19, Recent Protests and a Strategy to End or Terminate Commercial Leases", dated SUNDAY, JULY 12, 2020 can be found at https://shenwick.blogspot.com/2020/07/commercial-leases-in-new-york-city.html.
A law was recently passed in NYC which limits the liability of individuals who have guaranteed leases with certain restrictions (that law Int. 1932-A, which is discussed below and which many people including attorneys and lawyers are not aware) can limit a guarantors exposure if a lease is terminated.
The Wall Street Journal reports that only 10% of workers have returned to their office in NYC and with so many workers working remotely, many businesses would like to terminate or exit their leases and or vacate their space prior to the expiration date of the lease to save on the cost of rent.
In fact, office rent and the cost of commuting are significant business expenses that many businesses would like to reduce or eliminate.
Additionally, many experts predict that many workers may never return to New York or other cities due to technological advances like Zoom, Google Meet, crime, the diminishing quality of life in New York, the cost, aggravation and time spent commuting and the other benefits of not having to commute, such as more family and leisure time.
At Shenwick & Associates, we have helped many tenants vacate their lease and space using a multi pronged strategy consisting of: 1. review of the commercial lease to determine if the Landlord has breached any terms of the Lease, 2. review of the guarantee or good guy guarantee signed by the principle of the business, 3. aggressive negotiations with the landlord and 4. threatening or filing a bankruptcy petition, including new sub chapter 5 of chapter 11 of the bankruptcy code, to reject the lease in bankruptcy or to close the business.
Many clients are interested in retaining our services, but they are concerned about the impact of the guarantee or the good guy guarantee, if the commercial tenant vacates the space early or terminates the lease prior to its expiration.
Guarantees:
There are two types of guarantees in leases: a regular guarantee and a good guy guarantee.
Good guy guarantees are more common in leases than regular guarantees in leases.
Having reviewed many office guarantees, we note that many guarantees have a limited life, meaning that the guarantee expires on its own terms during the term of the lease or converts to a good guy guaranty, after a period of time.
A good guy guarantee generally provides that the guarantors liability for rent or additional rent terminate when 1. the tenant gives proper notice (pursuant to the terms of the Lease or the good guy guaranty) that the tenant will vacate the space (generally 90 days), 2. The tenant does in fact vacate the space and is current on the payment of rent or additional rent when it vacates and 3. The premises are left “broome clean”. Provided that these and other conditions are met, the guarantors liability ceases, however the tenant remains liable for rent and additional rent until the lease expires.
Oftentimes if we can show a landlord that the tenant is out of business, closing its business, losing money or has few assets, the landlord may be amenable to allowing the tenant to vacate the space early, pursuant to a negotiated lease surrender agreement.
If the landlord resists, we will draft a bankruptcy petition and send it to the landlord indicating that if the parties cannot reach an agreement then the tenant will file for bankruptcy and the landlord will lose rent, and incur significant legal fees for landlord tenant and bankruptcy attorneys.
Additionally, there is a New York City law that can aid a tenant who wants to vacate a space with respect to money that may be owed by the guarantor., which law prohibits the enforcement of personal liability provisions in certain commercial leases
Int. 1932-A prohibits landlords under certain commercial leases from enforcing guarantees in their leases if the guarantors are “natural persons,” (it may not apply if the guarantor is an LLC or corporations), provided that the default occurred between March 7, 2020 and September 30, 2020, and that the tenant was impacted by the stay at home orders implemented by the Governor’s office in one of the following ways:
1. the tenant was required to cease serving food or beverages for on-premises consumption or to cease operation under Executive Order 202.3 issued by the Governor on March 16, 2020;
2. 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 202.6 issued by the Governor on March 18, 2020; or
3. the tenant was required to close to members of the public under Executive Order 202.7 issued by the Governor on March 19, 2020 (i.e. barbershops, hair salons, tattoo or piercing parlors, nail technicians, cosmetologists, estheticians and the provision of electrolysis, laser hair removal services and related personal care services).
The law also provides that if a landlord attempts to enforce a guaranty that the landlord knows or reasonably knows is not enforceable, that would be commercial tenant harassment that is prohibited under Subdivision a of section 22-902 of the Administrative Code of the City of New York
The facts of each case need to be reviewed to determine if Int. 1932-A applies, however at Shenwick & Associates we have found that many tenants meet the requirements of the law based on the fact that the tenant was a non-essential retail establishment and therefore their guarantor liability was voided.
Clients that are interested in terminating their lease or existing their lease early should contact Jim Shenwick jshenwick@gmail.com 212 541 6224.
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