COMMERCIAL LANDLORDS MAY BE REQUIRED TO MITIGATE
In a long-overdue and groundbreaking development for commercial landlords and their tenants, New York State finally appears poised to pass a bill that would impose a duty on landlords to mitigate damages when commercial tenants default under their leases and prematurely abandon or vacate their spaces. Specifically, landlords would be required to take “reasonable and customary actions to rent the premises,” and bear the burden of proving they did so, prior to recovering unpaid rent from the defaulting tenants.
Last year, upon the passage and signature of the historic pro-tenant Housing Stability and Tenant Protection Act of 2019, the Legislature introduced such a duty in the residential context. Known as Real Property Law § 227-e, that protection was lauded by tenants’ rights advocates and pro-tenant attorneys.
However, commercial tenants were not as fortunate and were excluded from the 2019 law, with efforts to expand a mitigation duty to the commercial sphere faltering -- that is, until the onset of the COVID-19 health crisis. Highlighting the need to protect small businesses and other commercial tenants who have been economically devastated by the crisis, A08482’s sponsors now appear to have mustered enough support to push their bill through the Legislature.
Notable pro-landlord advocates have reacted with considerable dismay. One prominent real-estate attorney, and respected commentator, advised The Real Deal that the new law “flies in the face of contract law” and would further harm landlords, who are already reeling from an exodus of commercial tenants from the City and State. (See article, subscription required.)
Despite such alarmist views, proponents of the duty’s extension to commercial tenants have noted that landlords have historically reaped windfalls at the expense of their defaulting tenants – and that the bill’s language simply requires these owners to take reasonable steps to re-rent otherwise vacant premises, rather than allowing them to do nothing. Furthermore, landlords may still pursue defaulting tenants for any shortfalls, if owners can demonstrate that they took steps to re-rent the premises, in good faith, and according to their resources and abilities.
If signed into law, expect to see significant shifts in the commercial leasing market and robust challenges to the law’s constitutionality -- as it will likely join several others being challenged by landlords on constitutional “contracts clause” grounds.
In one such recent lawsuit challenging Governor Andrew Cuomo’s eviction moratorium imposed midst the pandemic, a federal court rejected a contracts-clause argument (and upheld the moratorium), outlining a three-part test for future challenges. In her decision, Judge McMahon suggested that owners will need to demonstrate that: (1) the law imposes a substantial contractual impairment; (2) the law failed to serve a legitimate public purpose such as remedying a general social or economic problem; and (3) the means chosen to accomplish this purpose were not reasonable and necessary.
Whether this game-changing bill will face, and survive, such a tri-partite analysis remains to be seen.