US coronavirus relief package: Coronavirus Emergency Protect Our Small Businesses Act of 2021

Article 23 March 2021 Experience: Real estate

Overview

On March 9, 2021, Governor Andrew Cuomo signed into law the COVID-19 Emergency Protect Our Small Businesses Act of 2021 (the “Act”), which provides some eviction and foreclosure relief to certain small businesses throughout the State of New York through May 1, 2021.

Summary of the Legislation

A. Commercial Evictions. With respect to commercial tenants, the Act defines “small businesses” as businesses that (i) are residents of New York, (ii) are independently owned, (iii) are not dominant in their field, and (iv) employ fifty (50) or fewer employees. Commercial landlords now must include a form of hardship declaration with every written notice required by the parties’ agreement, law or rule to be provided prior to the commencement of an eviction proceeding, and with every notice of petition or summons and complaint served on a tenant. The substance of the hardship declaration sets forth, among other things, the impacted tenant’s financial hardship, increased operational costs and other factors due to COVID-19 and are set forth in particular detail in the Act. Such notices shall also include the landlord’s contact information. The hardship declaration creates a rebuttable presumption that the tenant is experiencing financial hardship.

Further, commercial landlords now have limited recourse in the event of a default by such affected tenant. For example, there is a prohibition on removing a commercial tenant except by an eviction proceeding. This is a broad prohibition in that it prevents commercial landlords from exercising other typical landlord remedies such as self-help. Any pending eviction proceeding on the effective date of the Act (even if filed on or prior to March 7, 2020) or commenced within thirty (30) days of the effective date of the Act must be stayed for at least sixty (60) days. Whether or not an eviction warrant or judgment of possession has been issued, if the tenant provides a hardship declaration (as outlined above), the eviction proceeding must be stayed until at least May 1, 2021. Even if there is no pending eviction proceeding and a tenant provides a hardship declaration to the landlord, there cannot be any initiation of an eviction proceeding against the tenant until at least May 1, 2021. If the court determines that the hardship declaration was not provided in accordance with the Act, then the court may stay the proceeding for a reasonable time, which shall be no less than ten (10) business days.

We note, however, that the restriction on evictions until May 1, 2021 does not apply to the extent that the tenant persistently and unreasonably engages in behavior that substantially infringes on the use and enjoyment of other tenants or occupants or causes a substantial safety hazard to others.

B. Commercial Foreclosures. With respect to commercial foreclosures, the Act applies to any action to foreclose a mortgage related to commercial real property, provided the owner of such property (i) is a resident of New York, (ii) directly or indirectly owns ten (10) or fewer commercial units, and (iii) employs fifty (50) or fewer persons. The ten (10) or fewer commercial units may be in more than one property or building as long as the total aggregate number of ten (10) units are currently occupied by a tenant or are available for rent. Similar to the hardship declaration required for commercial lease evictions, the foreclosing party must include a hardship declaration with every notice provided to a borrower prior to filing an action for foreclosure. The substance of the hardship declaration, which is set forth in particular detail in the Act, must state, among other things, that the affected borrower has lost significant revenue or had significantly increased necessary costs during the COVID-19 pandemic. Further, such notice must also include a mailing address, telephone number and active email address the borrower can use to contact the foreclosing party and return the hardship declaration. Similar to the leasing context, the hardship declaration creates a rebuttable presumption that the borrower is experiencing financial hardship. If the court determines that the hardship declaration was not provided in accordance with the Act, then the court may stay the proceeding for a reasonable time, which shall be no less than ten (10) business days.

If a borrower provides a hardship declaration to the foreclosing party or an agent of the foreclosing party, there cannot be any initiation of an action to foreclose a mortgage against the borrower until at least May 1, 2021, and in such event any specific time limit for the commencement of an action to foreclose a mortgage shall be tolled until May 1, 2021. Any action to foreclose a mortgage pending on the effective date of the Act, or commenced within thirty (30) days of the effective date of the Act, must be stayed for at least sixty (60) days.

Practical Impacts

The Act grants a temporary reprieve for impacted tenants and borrowers, but does not alleviate any such party’s liability. It should be noted that the accrual of penalties and interest continues throughout any period of non-payment under any lease or mortgage loan, respectively. Therefore from a logistical perspective, the Act, in many ways, simply kicks the proverbial ‘can down the road’ which will inevitably lead to a glut of litigation in New York courts.

In the commercial leasing context, commercial tenants that meet the criteria for protection should be aware of the benefits of the Act and should be able to use the Act as leverage when negotiating any lease restructuring or early termination agreements with their landlord. In the commercial lending context, borrowers can leverage these lender impositions when negotiating debt relief and/or forbearance agreements with their lenders. Landlords and lenders alike should bear in mind the additional obligations required when sending notices to avoid technical delays. Further, landlords and lenders should be on notice as to their limited ability to seek remedies for alleged tenant/borrower breaches during the effective period of the Act.

Withers Bergman LLP is an international law firm with substantial experience with diverse leasing from anchor tenancies in shopping centers to large office leases, luxury brand single city retail leases and multiple city retail rollout programs, warehouse occupancies as well as residential portfolios as well as diverse lending matters. For additional guidance on this recently passed legislation and other COVID-19 related matters, please reach out to our New York Commercial Real Estate Team to develop a legal strategy to plan for near- and long-term solutions tailored to achieve your specific goals.

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