The Small Business Jobs Survival Act (the Act) bill currently before the New York City Council seeks to regulate all commercial leases affecting property in the City of New York. The bill was introduced by Council Member Ydanis Rodriguez on March 22, 2018. The bill is predicated on the proposition that “New York City is more dependent than ever on small businesses for job growth and revenues” (the Act, §1) and that rising property values and other factors influencing the commercial rental market including real estate speculators have created a situation where “established small businesses are being forced out of business solely as a result of the commercial lease renewal process” (the Act, §1). The bill states that this has led to “lost jobs, tax revenues and community instability” (the Act, §1). The bill's stated intention is “to give small businesses rights in the commercial lease renewal process, and therefore, a measure of predictability of future costs through a two-step procedure of mediation and, if necessary, arbitration for negotiating commercial lease renewals and rentals” (the Act, §1).

From a substantive perspective, the bill would provide all commercial tenants in New York City with the absolute right to a renewal of their lease. The renewal term would be for a minimum of 10 years. Rent under the renewal lease would first be subject to mediation and then to binding arbitration.

The landlord may refuse to renew the lease for any of eight specified reasons. The first of those is if the tenant was a persistent late payer of the rent and certain notices were given within stipulated time frames (§22-1206(d)(1). References to §22-12xx refer to proposed new chapter 12 of Title 22 of the administrative code of the city of New York). If the tenant used the premises improperly (§22-1206(d)(2)) or illegally (§22-1206(d)(3)), the landlord would be able to refuse to renew the lease. The tenant would not be able to renew the lease if there is an uncured default for more than 30 days after notice (§22-1206(d)(4)). A bona fide intention to demolish or substantially rebuild the premises would allow the landlord not to renew the lease (§22-1206(d)(5)). If a court determines that the tenant is a “gross and persistent violator” of New York City laws, including tax and licenses (§22-1206(d)(7)), the lease would not have to be renewed. If the landlord intends to occupy a retail space to operate its own business, different from that of the tenant, then no lease renewal would be required (§22-1206(d)(8)). The last specified “exception” is for an unpermitted sublease (§22-1206(d)(6)).

While each of the various grounds for non-renewal has problematic elements, the narrow provision that is limited to an unpermitted sublease is most troublesome. Since the definition of “landlord” in the bill includes a “sublessor” (§22-1203), the bill would establish that a subtenant has a right to a renewal lease under the bill. The bill's requirement for a 10-year minimum renewal term raises the question how a renewal sublease could be effectuated if the prime lease lacks 10 remaining years of its own term. Would the sublessor be required to offer to renew the sublease if 10 years do not remain for the term of the prime lease? Since the prime lease may have more than 180 days remaining prior to its expiration, there would be no obligation on the part of the landlord of the prime lease to extend the prime tenant's (sublessor's) lease at that time. Certainly the bill should not by inferential extension create a situation where parties may only enter into subleases that upon their expiration would be co-terminus with the related prime lease. In addition, if the sublessor does not desire to renew its prime lease or does not have the right to renew the prime lease at that time, does that mean that the subtenant has a right to a direct lease with the prime landlord or is the obligation to provide a renewal lease placed solely upon the sublessor? It would appear to create an undesirable burden upon sublessors to force them into a potentially perpetual cycle of subleases when their original intention in subleasing their premises was to relieve themselves of the burden of their lease for the remainder of the lease term at which time they could move on. If the subtenant were entitled to a direct lease with the prime landlord upon the expiration of the term of its sublease, would that direct lease be for only the remaining portion of the 10-year period following the expiration of the prior sublease or would the prime landlord be required to offer the subtenant a full 10-year term at that time? However, since there is no expiring lease between the prime landlord and the subtenant, would the bill apply to this situation at all as any lease from the prime landlord would not be a renewal?

If the landlord has no valid reason to refuse to renew the lease, the statutory regime would then apply. The landlord would need to provide a notice to the tenant at least 180 days before the expiration of the lease of the intention to renew the lease. The 180-day notice triggers a 90-day period during which the parties are intended to negotiate to reach an agreement concerning a renewal lease “with any agreed to terms and conditions, not inconsistent with the provisions of this chapter” (§22-1206(e)(1)). It is unclear which provisions of a negotiated agreement between the landlord and the tenant may be inconsistent with the bill. While the bill specifically states that “a lease of shorter or longer duration may be selected” (§22-1206(a)) by the tenant, subject to the landlord's agreement, would it be inconsistent with the bill if the parties were to include a unilateral termination right in the lease on the part of the landlord for a prospective future demolition of the building during the term of the lease and prior to 10 years from the beginning of the renewal term?

In fact, would the landlord be able to refuse to renew the lease, pursuant to the bill's grounds for non-renewal, if the landlord were to cite as its reason for non-renewal a bona fide intention to demolish or substantially rebuild the premises within the 10-year period following the scheduled expiration date of the lease then in force? What would then be the result if the landlord's plans were to change during the 10-year period due to changed circumstances, such as an economic downturn or unavailability of financing?

The mandatory renewal scheme that the bill would establish would also not allow a landlord to eliminate an undesirable use from its property. For example, as societal attitudes have shifted, uses that were at one time in vogue, such as a tobacco shop, may later become out of favor and a landlord may not want its property to play host to such a business. Also, uses that were relatively non-controversial may later become the focus of protests, which an owner may also prefer to avoid as there could be resultant negative effects on other tenants in the building, some of whom may even choose to locate elsewhere, leaving the landlord with an underperforming property.

It should be noted that even during the initial 90-day period following the giving of the 180-day notice of intention to renew given by the landlord, either party may demand mediation at any time. Pending a determination of the renewal period rent, the tenant must continue to pay rent at the rate set forth in the expiring lease. If the landlord and the tenant do not reach an agreement or do not accept the mediator's non-binding determination of the renewal lease rent, then the tenant may require binding arbitration to determine the rent (§22-1206(e)). If the tenant is unwilling to pay the rent determined by the arbitrator, the tenant may choose not to proceed with the renewal. But subject nevertheless to a right to remain in the premises beyond the lease expiration date at the last rent charged under the lease plus 10%. The tenant still retains a right of first refusal on any subsequent deal the landlord reaches with a new tenant (§22-1206(g)).

The bill lists numerous criteria to be considered by the arbitrator in determining rent. However, the bill does not take into account the realities of New York City. For example, one factor is “the cost of leasing similar premises within a one-mile radius of the property” (§22-1206(e)(3)(d) and (e)) and “the past five year rental market history within a one mile radius of the property” Id. In Manhattan, for example, the market based differences in rental cost within a one-mile radius can be as vast as the distances between galaxies in the cosmos.

It should also be noted that a stated factor arbitrators should use in determine rent under the bill is “the rental guidelines as set forth by the administering agency” (§22-1206(e)(3)(d) and (e)). It is possible that any such guidelines will be construed as an attempt at rent control, somewhat akin to the rent stabilization guidelines that regulate rents for certain residential properties in New York City.

In fact, it is open to debate whether the entire bill is beyond New York City's power in the absence of enabling legislation by New York State. This issue has been raised by the New York City Bar in a Report on Legislation by the Committee on Real Property Law.

Harlan T. Greenman is of counsel to Greenspoon Marder in New York City. His real estate practice includes extensive experience across the spectrum of complex commercial real estate. He currently serves on the Real Property Law Committee of the New York City Bar Association.