On October 28, 2021, the United States Court of Appeals for the Second Circuit ruled on Melendez v. New York City, in which the plaintiffs, who are owners in New York City, alleged that some laws enacted in response to the COVID-19 pandemic were unconstitutional. First, the plaintiffs alleged that the changes to the City’s laws on residential and commercial harassment (the “Harassment law”) Which prohibit“ threatening ”tenants based on their status as businesses or people affected by COVID-19 from violating complainants’ free speech rights by restricting commercial speech in routine rent collection and further violating their due process rights by failing to provide fair notice of what constitutes “threatening” conduct. In addition, the complainants alleged that the “Personal Liability Provisions in Commercial Leases” Act (the “Guarantee law“), which renders inapplicable the personal liability guarantees of commercial lease obligations that arose between March 7, 2020 and June 30, 2021, violates the contractual term. The United States District Court for the Southern District of New York rejected the plaintiffs’ two constitutional challenges.The Second Circuit, however, found that while the plaintiffs did not make plausible free speech / due process claims, they did make a plausible challenge to the contract term. against warranty law and, therefore, their claim under the contractual clause should not have been dismissed in the lower court.

As of May 26, 2020, the harassment law prohibits threatening any legitimate residential occupant “on the basis of that person’s actual or perceived status as a critical employee, their status as a person affected by COVID-19, or the receipt of a rent concession or an abstention from all rent. due during the COVID-19 period. Violations could result in fines of $ 2,000 to $ 10,000. The harassment law also prohibits threatening a legal commercial tenant based on that tenant’s “status as a person or business affected by COVID-19 or.” . . receipt of a lease grant or forbearance for any rent owed during the COVID-19 period ”with fines for violations ranging from $ 10,000 to $ 50,000.

Also in effect on May 26, 2020, the Guarantee Act covers leases held by commercial tenants who have been required to cease or limit their activities under certain decrees made in response to the pandemic. The law on guarantees releases a guarantor from his obligations on such commercial leases and applies retroactively to arrears of rent from March 7, 2020 and prospectively until June 30, 2021, regardless of the financial situation of the tenant, the guarantor or of the owner. The Court noted that warranty law does not delay an owner’s ability to enforce a personal warranty, but “extinguishes it forever.”

The district court allowed the defendants’ motion to dismiss for lack of declaration. Regarding the law on commercial harassment, the district court found that nothing in the laws prevented landlords from communicating with tenants about overdue rents and from exercising available remedies to collect the rent or repossess their property. As for the Home Harassment Act, the district court ruled that rent claims in the ordinary course of business were not prohibited, citing New York case law that distinguished “inappropriate threats” from “authorized warnings from unfavorable but legitimate consequences ”for non-payment of unpaid rent. Finally, with regard to the Guarantee Law, the District Court concluded that although the plaintiffs plausibly alleged a substantial infringement of their contractual rights, the dismissal was justified because the Guarantee Law pursues an objective legitimate public and is a reasonable and necessary response to a “real emergency.”

The second circuit confirmed the rejection of the challenges to the harassment law. He agreed with the district court that the relevant legislation, viewed in context and as interpreted by New York courts, does not support the idea that homeowners are prohibited from making claims. reasonable and legal for the payment of overdue rents. However, the Second Circuit disagreed with the district court that the challenge to the guarantee law could be dismissed in law. It applied the same three-part balancing test as the district court: (1) whether the contested law materially alters the plaintiffs’ commercial leases; (2) whether, nevertheless, the disability serves an important and legitimate public objective, and (3) whether the impugned law is appropriate and reasonable to advance that objective. The District Court concluded that the answer was “yes” to all three parts.

The Second Circuit also found that the Guarantee Act significantly compromises the plaintiffs’ contracts, as it appears to permanently render commercial lease guarantees inapplicable for arrears arising over a period of 16 months. Further, relying on precedents according to which the mitigation of economic emergencies as a public utility may favor tampering with contracts, the Court concluded that, because the City asserted a legitimate public objective (that is to say, to alleviate the economic emergency in New York resulting from the COVID-19 pandemic) which appears at least plausible in the pleadings, the Court must conduct a further investigation. However, the court disagreed with the district court at the last stage, finding that the plaintiffs had invoked sufficient facts to prevent a court from concluding in law that the law on collateral was a reasonable and appropriate means. to serve the public interest of the city. The Court held that all five features of the warranty law prevent the dismissal of the contract clause claim: (1) the warranty law is not a temporary or limited alteration of the contract; (2) the Court cannot conclude in law that the Guarantee Act is an appropriate means to achieve its objective: “to help closed small businesses survive the pandemic so that they can reopen after the emergency, ensuring functional quarters throughout the city “; (3) the Guarantee Act assigns the economic burden not to the public but to a discrete group of private persons: the commercial owners; (4) the relief is not conditional on need but instead extinguishes the obligations of guarantors of up to 16 months in arrears of rent regardless of their ability to pay, which raises questions of reasonableness; and (5) the reasonableness of the law on collateral is also put back questioned by the fact that the law does not provide that owners are compensated for damages or losses suffered as a result of the deterioration of their guarantees. Thus, the Court held that it cannot conclude in law that the warranty law is a reasonable and appropriate means to serve the public interest in order to justify the dismissal of the claim. The Court, however, made sure to note that it would be premature for it to declare the Guarantee Act unconstitutional in law. Thus, the Court referred the case back to the district court.