The Southern District Court in Melendez v. The City of New York, No. 20-CV-5301 (S.D.N.Y.) declared NYC Council’s newly enacted Anti-Harassment and Guaranty Laws that protect commercial and residential tenants constitutional.

As we discussed in previous Blog posts, on May 28, 2020, the New York City Council enacted the Anti-Harassment and Guaranty Law designed to protect residential and commercial tenants from owners’ proceedings for unpaid rent. The plaintiffs in the Melendez case, who are small property landlords, sued the City challenging the New York City Council’s Anti-Harassment Laws and Guaranty Laws as violating the First Amendment because they prohibit commercial speech (i.e., the demand for payment of rent). Plaintiffs argued that the laws caused them severe economic harm by impeding their ability to profit from their properties; specifically, that the Anti-Harassment Laws prevent them from pursuing routine efforts to collect rent from their tenants, while the Guaranty Law prevents them from recouping income pursuant to personal guaranties in connection with defaulting businesses. The plaintiffs challenged the NYC Council’s laws as violating three constitutional rights: the right to free speech, the right to due process and the Contract Clause.

Judge Ronnie Abrams held that the City Council’s laws do not violate any of the landlords’ constitutional rights:

“First, because … the Anti-Harassment Laws do not prevent landlords from making routine rent demands, these laws do not implicate plaintiffs’ free speech rights. Moreover, because the Anti-Harassment Laws are sufficiently clear on what constitutes harassment, the Court further concludes that these laws do not violate due process. And because this Circuit’s jurisprudence affords broad deference to the good-faith efforts of policymakers to regulate in the interest of the public good, the Court must conclude that the Guaranty Law does not violate the Contract Clause. Finally, the Court holds that these ordinances are not in conflict with the State’s efforts to respond to the pandemic, and so they are not preempted.”

As a result of these conclusions, Judge Abrams dismissed the lawsuit in its entirety.

Judge Abrams, in a 37-page decision, concluded that a lawful rent demand is not proscribed by the Anti-Harassment Laws because the NYC Council’s laws do not relieve a tenant of the obligation to pay the rent for which a tenant is otherwise liable. As such, the Anti-Harassment Laws do not prohibit free commercial speech (i.e. the service of a rent demand) and is not, therefore violative of the Plaintiff’s constitutionally protected free speech rights.

Judge Abrams further concluded that the Guaranty Law does not violate the Contracts Clause of the Constitution because:

“Though written in absolute terms, the Contract Clause does not give private parties the unconditional right to contract without government interference. Rather, the Supreme Court has plainly stated that ‘the police power . . . is paramount to any rights under contracts between individuals.’”

Thus, although the Court found that plaintiffs plausibly alleged a substantial impairment with their contracts, the Court recognized that the case law in this Second Circuit affords “substantial deference” to policymakers making good-faith efforts to act in the public interest.

Finally, Judge Abrams ruled that commercial landlords have other means through which they can seek to recoup the rental income that they have lost i.e., from tenants directly, charging late fees, terminating the lease, or eviction.

While Judge Abrams’ ruling as to Free Speech issue was not entirely unexpected; the Judge’s ruling as to Guaranty Law is surprising inasmuch as the decision largely ignores the reality that almost all NYC commercial tenants are single purpose business entities which have gone out of business, declared bankruptcy, or simply stopped paying rent. Thus, the tenant entity is nothing but a shell without assets generally against which a landlord can collect outstanding rent and additional rent. Furthermore, Judge Abrams ignores the eviction moratorium ordered by the Governor as a result of the pandemic. The immediate impact of the decision is that commercial landlords are without a real remedy to recoup their losses or their property. By upholding the Guaranty Law, the Court shifted the cost of a failed commercial business from the personal guarantor back to the to the landlord.

Daniels Norelli Cecere & Tavel, PC understands that the plaintiffs in the Melendez case are appealing Judge Abrams’ decision to the Second Circuit and will follow the matter closely.