On April 22, 2020, the New York City Council Speaker Corey Johnson introduced a bill meant to give much needed relief to residential and commercial tenants suffering from the economic fallout of the COVID-19 pandemic (the Bill). The Bill—Int. No. 1912, titled "A Local Law in relation to ceasing the taking and restitution of property and the execution of money judgments by the City sheriff and marshals due to the impacts of COVID-19"—is intended to effectively extend the existing federal and New York state moratoria on evictions by directing New York City marshals and sheriffs not to enforce any possessory or money judgments until as late as April 2021, so long as the judgment debtor can show a court that it has suffered a "substantial loss of income" because of COVID-19. The Bill is part of a larger tenant-focused legislative package, some parts of which the City Council has already recently approved.

The Bill defines "substantial loss of income" differently for natural persons and businesses.

A "substantial loss of income" for a natural person occurs if, in a statutorily defined window period beginning in March 2020, that person experienced two or more weeks where either: (1) the person claimed federal or state unemployment insurance benefits; or (2) the person worked fewer than three days and earned less than $504 because of one or more of 10 enumerated scenarios relating to diagnosis with or a quarantine resulting from, New York state actions taken pursuant to the declared emergency over, a family breadwinner's death as a result of, or business closing as a result of COVID-19. Int. No. 1912 §3(3)(b)(1).

A "substantial loss of income" for a business occurs: (1) if the business "was subject to seating, occupancy or on-premises service limitations pursuant to an executive order issued by the governor or mayor" during the pandemic response, or (2) if the business' "revenues for any three-month period [during a statutorily defined window period beginning in March 2020], were less than 50 percent of its revenues for the same period in 2019, or less than 50 percent of its aggregate revenues for the months of December 2019, January 2020, and February 2020." Id. §3(3)(b)(2)

The Bill also reaches those persons who acted as personal guarantors for a business that meets the above criteria. Id. §3(3)(b)(3).

Because so many businesses in New York were "subject to seating, occupancy or on-premises service limitations" at least as of March 22, 2020, when Governor Cuomo's Executive Order 202.8, which mandated that non-essential employers "reduce the[ir] in-person workforce[s] … by 100%," took effect, the number of businesses that could be protected from eviction and money-judgment collections is staggering. In many cases, an analysis of revenues may not even be necessary to trigger the Bill's protection from judgment enforcement.

One of the Bill's objectives is to give tenants additional time to repay their rent. But, rather than introduce sustainable systemic solutions, the draconian measures set forth in the Bill will yield profound negative consequences for the City's own finances, the real estate market, employment, tenant welfare, the number of foreclosures, and much more.

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The Bill Will Hurt the City's Property Tax Revenues

Property owners rely upon their rent roll in order to pay their property taxes, mortgages, utilities, essential repair and maintenance bills, and other carrying costs. If the Bill becomes law, owners simply may not have the money to pay their property taxes, mortgages, or other expenses. The Bill simply does not address how property owners are expected to meet their property tax, mortgage, and other obligations without rent income; how the City would be able to compensate for the significant shortfall in its largest tax revenue source; or how owners would be protected from losing their properties as a natural result of the Bill.

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The Bill Would Hurt Jobs

Moreover, if the Bill becomes law, property owners would likely find themselves in the unfortunate position of cutting costs in their struggles to pay their property taxes, mortgages, utilities, maintenance costs, and other expenses. As a result, they will likely be forced to reduce their building and office staff. Skilled tradespeople, such as plumbers, electricians, and carpenters, would also likely suffer, as property owners would be unable to engage them for anything other than the most pressing of emergency repairs. These job cuts would only further strain a state unemployment system that is already taxed beyond capacity and cause further systemic harm to the economy. Adding to this inequity is the fact that many property owners are themselves small businesses that have been severely impacted by the pandemic. Yet, while their tenants are able to obtain federal Paycheck Protection Program (PPP) loans—which are specifically intended to assist recipients in paying their rent and other expenses—landlords are largely understood to be ineligible for PPP loans. See Georgia Kromrei, Landlords locked out of $350B Paycheck Protection Program, The Real Deal, April 7, 2020.

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The Bill Is Punitive to Property Owners

Though property owners would be financially unable to pay for maintenance and repairs with neither rent revenue nor government relief, they would nevertheless be legally, commercially, and contractually obligated to make those repairs and provide essential services. Indeed, tenants might suffer if owners are unable to afford to maintain their buildings. Yet the Bill offers no relief to property owners. This imbalance is exacerbated by Governor Cuomo's recent Executive Order prohibiting landlords from collecting late penalties from defaulting tenants for missed rent payments during the state's eviction moratorium, notwithstanding that landlords themselves remain exposed to default and other penalties for failing to meet their own obligations. See Executive Order 202.28 (2020).

If the Bill becomes law, these hardships will not be faced by only a minority of property owners. The ambit of the Bill, which covers any tenant whose business was affected by an executive order limiting seating, occupancy and on-premises services, is over-inclusive. Int. No. 1912 §3(3)(b)(2). As discussed, Executive Order 202.8's workforce restrictions likely bring a vast number of non-essential businesses under the statute. Moreover, reference to seating, occupancy and on-premises service limitations is misguided because that metric is not necessarily correlative with a business' financial condition and ability to pay rent. For example, a restaurant that is unable to seat patrons might still earn enough revenue to pay its rent and other expenses through take-out orders. Brick-and-mortar boutiques might see foot traffic into their shops grind to a halt, but might still sell enough merchandise online to pay rent.

The Bill alternatively authorizes courts to evaluate whether a business has suffered a "substantial loss of income" by reference to whether that business' revenues during the statutory window period were less than 50% of its revenues for the same period in 2019 or less than 50% of its aggregate revenues for the months of December 2019, January through February 2020."  Int. No. 1912 §3(3)(b)(2).

However, this focus on revenue is also misguided, and falls short of balancing the need to aid struggling tenants with the reality of property owners' own obligations, struggles, and economic expectations. For example, a business might have seen its revenue decline during the relevant time period, but might still have enough cash reserves to pay rent and judgment creditors without an issue. The Bill does not permit courts to evaluate a business' entire financial condition. Instead, the court is limited to considering only revenues during a specific window period. As a result, a business that is liquid could be effectively excused from paying rent (and other judgment creditors) until April 2021. (The Bill similarly does not permit courts to evaluate a natural person's entire financial condition.) Moreover, the Bill fails to consider those businesses receiving PPP loan proceeds, which are specifically intended to help businesses pay rent. Although it is currently unclear whether PPP loan proceeds will count towards revenue (because those loans may eventually be forgiven), it is likely that, until the PPP loans are forgiven, they will not count towards revenue. Thus, under the Bill, beneficiaries of the PPP program: (1) may not need to count those loan proceeds as revenue for purposes of determining whether they have suffered "substantial loss of income"; and (2) may then effectively be permitted to withhold rent payments until April 2021 and use their PPP loan proceeds for any other purpose at a mere 1.0% interest obligation.

The Bill also has the potential to effectively undo rent settlement and restructuring agreements reached between tenants and landlords during the pandemic. The Bill threatens to upend the intentions of the parties memorialized in those agreements by effectively granting tenants the statutory authority to abrogate them by not paying rent until April 2021.

The Bill also fails to account for businesses that have more than one location and that may conduct part of their business over the internet. It also overlooks businesses whose online and brick-and-mortar operations are each run by separate special-purpose entities, and offers no clarity on the critical question of whether courts analyzing the pandemic revenue of those businesses can and should look at the revenue of the business as a whole, or only at the revenue of the particular legal entity that has leased the space at issue, notwithstanding that all of the revenues go to the benefit of one parent company.

On a practical level, adjudicating whether there has been a "substantial loss of income" will require protracted litigation that will further delay the execution of possessory and money judgments. Under ordinary circumstances—between statutory notice periods, adjournments, jurisdictional challenges, traverse hearings, substantive motion practice, and finally actually going to a trial—it could be a minimum of six months to a year before an owner obtains a judgment against a tenant. Throughout this entire period, and even post-judgment, tenants will be able to remain in possession without paying rent. Addressing the new question of whether there has been a "substantial loss of income" will necessarily require additional costly motion practice, conferences, and hearings. Along with further delaying resolution of nonpayment proceedings, the Bill will thus increase the burden on litigants and courts that are already overburdened.

Even once the Bill permits the execution of judgments after April 2021, there is no guaranty that money judgments will ever be collectible because the judgment debtors may file for bankruptcy protection prior to execution of the judgments. As general creditors, judgment creditors may never be able to collect on their judgments. In addition to interfering with collecting on money judgments, filing for bankruptcy would trigger an automatic stay of all proceedings outside of bankruptcy court that would further delay execution of possessory judgments. It would take property owners months and yet more legal fees and expenses—all of which they would incur while not receiving any rent revenue or any government compensation—to lift the automatic bankruptcy stay and regain possession of their property.

Even if a judgment debtor does not file for bankruptcy protection, given the likely realities of the post-pandemic litigation landscape, there is no telling how long it could take owners and judgment creditors to actually enforce their judgments. Many property owners could lose their properties in the process, and many other judgment creditors could find themselves out of business.

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Conclusion

Any legislation that purports to bail out tenants by creating circumstances that would inevitably require bailouts for property owners themselves is simply bad policy. In their search for novel systemic solutions to an unprecedented crisis, legislators must account for the grim economic realities suffered not only by tenants, but by property owners and judgment creditors, too. Any relief measures for tenants and debtors must also include commensurate relief for property owners and creditors to avoid causing more harm and financial instability. The Bill simply gets it wrong at a time where our economy cannot afford such missteps. A better legislative solution might come in the form of mortgage or property tax relief for property owners that is tied to commensurate temporary rent reductions for their tenants. The amount by which rent would be reduced could either be amortized over the remainder of the lease, or it could be entirely forgiven, depending on whether a property owners' mortgage payments or property taxes are forgiven or deferred.

Furthermore, though not addressed in this Article, it is probable that the Bill's government-coerced continued tenancies violate the Takings Clause of the U.S. Constitution because they impair property owners' rights to exclude others from their properties without providing just compensation. See, e.g., Seawall Assocs. v. City of New York, 542 N.E.2d 1059, 1062-64 (N.Y. 1989). The Bill may also run afoul of the Contracts Clause. Legislatures must therefore also be mindful of the constitutional limitations on their authority to interfere with private property rights and contractual rights.

Eliad S. Shapiro is an associate at Smith & Shapiro in Manhattan, where he practices commercial litigation and real estate litigation. He can be reached at [email protected].

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