NYC Landlords Suing Pandemic-Slammed Small Businesses by the Hundreds for Missed Rent

Yves here. There’s been so many flavors of Covid-induced distress that it’s hard to keep up. One slow-moving train wreck is the damage to small businesses, particularly retailers and restaurants. Due to the one-two punch of the decline in commuter traffic and tourism, New York City’s small businesses are particularly hard hit. But only some landlords are willing to cut a break.

Even though the New York City is unique in the extent of its damage, many neighborhoods and businesses are suffering. For instance, here in Birmingham, we got one of the very last pre-shutdown meals prepared by a mid-range restaurant that never reopened. The most celebrated restaurant in town is shuttered. Landlord behavior will be a significant factor in which small companies make it and which don’t.

This article covers some of the legal issues as well as knock-on effects of rent forgiveness. But half a loaf is still generally better than none.

By Rachel Holliday Smith. Originally published at THE CITY on November 30, 2020

Barbara T. doesn’t sell many school uniforms these days.

Before the spring, the Staten Islander made a living selling outfits to Manhattan private school students through her uniform store, in business since 1972.

Typically, she would order the bulk of her inventory in January for sale in the spring. But this year her usually busiest months corresponded with the worst of the pandemic: March, April and May.

“I had to be closed down,” she said as her voice broke over the phone. “I get emotional.”

Now, with many students in remote learning, sales are way down. The inventory Barbara ordered in the winter sits in a space she moved to in November because she couldn’t pay the rent on the company’s previous location on Staten Island’s South Shore.

“Nobody knows if they’re going to school, so nobody’s buying a lot,” she said.

As she contends with a dried-up market, she faces another financial challenge: Her previous landlord recently sued her company for unpaid rent, alleging the business owes more than $25,000, court papers show. At her request for privacy, THE CITY is not publishing Barbara’s full name.

When THE CITY alerted her about the lawsuit — the first she had heard of it — she said she simply can’t afford to pay the debt.

“I have nothing. I haven’t paid my [home] mortgage in six months. How am I gonna deal with it?” she said. “You know, it just makes a hard life harder. That’s all.”

‘Harsh Results’

She is not alone.

In the COVID-19 pandemic, hundreds of city business owners — and, sometimes, their commercial landlords who are sued proactively by struggling tenants — face lawsuits over rent owed by proprietors whose income has all but vanished.

In New York, the already backlogged civil court system is being further clogged by the suits. Some of the larger ones — with millions of dollars on the line — get headlines, such as with the battles variously pitting landlords against The Gap, Planet Hollywood in Times Square and the NBA Store on Fifth Avenue.

But every day, cases quietly appear on the city docket for rent owed by much smaller fish.

In DUMBO, a landlord alleged that a Mexican restaurant that has been in the neighborhood for 20 years owes $163,000 in back rent. In Midtown, a salon for eyelash extensions on West 43rd Street is behind $24,000, its landlord claimed.

Pedro’s Bar on Jay Street in DUMBO, Nov. 24, 2020. Ben Fractenberg/THE CITY

A sushi restaurant at a hotel on Bryant Park owes $180,000, the property owner says. In Clinton Hill, a Middle Eastern café is accused of being $25,600 in arrears.

“Everyone is dealing with this,” said Janice Mac Avoy, co-head of the real estate litigation division at the law firm Fried Frank.

A year ago, Mac Avoy almost never saw this type of suit.

“Now, there are hundreds,” she said. “It’s changed dramatically.”

Mac Avoy, who has represented both tenants and landlords in similar cases, said it’s an uphill climb for renters trying to wriggle out of their lease obligations, especially in the city. New York state judges can be particularly strict when it comes to contracts, she observed.

“New York courts very much believe that part of their role is to preserve the sanctity of New York as a banking center by preserving the predictability of contracts,” Mac Avoy said. “And so, courts are generally very, very willing to enforce contracts as they are written, even if it seems to result in harsh results.”

Built-in Landlord Protections

On top of that, the arguments tenants can make in court are limited — and hard to win, said Prof. Deborah Zalesne of the CUNY School of Law.

One approach would require a contract holder to prove that an unforeseen circumstance makes the keeping to a contract impossible or “unduly burdensome,” she said. But the bar for proving the “doctrine of impracticability,” as it’s called, is very high.

Another tack, called “frustration of purpose,” holds that the reason for, or the value you expected to get from, the contract has been destroyed, Zalesne noted.

Many retail renters likely don’t even have the option to use those arguments, however, because of the way many leases are written.

Often, Zalesne said, leases include a “force majeure” clause — French for “superior force,” which puts all risk on the tenant for so-called acts of God.

“Lots of times, it’s in boilerplate. Parties don’t even know they’ve agreed to it if they haven’t read the terms that carefully,” she said. And often, since contracts are drafted by owners, those clauses are written to assign risk to the leaseholder.

“If it includes a force majeure clause, almost certainly it’s going to protect the landlord,” she said.

Suits Seen in Hard Times

These types of commercial rent lawsuits are nothing new “in times of disruption and emergency” in the United States, Mac Avoy said.

During World War II, some Japanese-American business owners — who were barred from operating stores by racist wartime laws — sued to dissolve their newly useless leases.

Owners of car lots, too, brought similar suits when auto sales were banned during the war, she said.

More recently, 9/11 brought a wave of lawsuits along those lines in New York, and other rounds followed the 2008 financial collapse and Superstorm Sandy in 2012, Zalesne said.

But in many of those cases, courts enforced existing contracts.

“These are hard defenses to win,” she said. “Traditionally, historically, they’ve been hard.”

The pandemic is, of course, a different type of disaster and the jury is still out on how courts will come down on commercial rent cases now. Because the courts are so backed up, few decisions have yet been made by New York judges — and the ones that have are preliminary, and mixed, Mac Avoy co-wrote in a recent legal analysis.

But in the case against the Staten Island uniform shop, the owner faces the same uphill battle as many other tenants will as they mount a defense.

“It’s tough for her because … the pandemic resulted in a drop in sales. It didn’t make her business impossible,” Mac Avoy said.

Avoiding Court

Not all rent battles go to court. According to a recent survey from the National Retail Federation, more than half of large nationwide retailers reported striking some kind of rent deal from their landlords this year.

Locally, small business support professionals told THE CITY they see more negotiation between tenants and landlords than lawsuits.

“From the businesses that I’ve spoken to, for most of them, they’ve been fortunate that the landlord has been understanding,” said Joycelyn Taylor, a candidate for mayor and the co-founder of the NYC MWBE Alliance, a nonprofit that helps minority- and women-owned businesses.

An empty storefront in the Flatiron District, Oct. 2, 2020.Hiram Alejandro Durán/THE CITY

To her, going to court over rent won’t help solve much. If businesses have nothing to give, a court case won’t change that.

“At the end of the day, what’s going to happen? You cannot ask somebody to provide something that they just don’t have,” she said.

It is true that if a lawsuit is filed against a business with no assets, the landlord won’t be able to recover much, Mac Avoy said.

However, if a case is won against an individual tenant or a guarantor on a lease, a landlord can go after their bank account, property and other assets. The action may force a bankruptcy and ruin a person’s credit.

‘Nothing to Squeeze from Me’

Letting tenants off the hook, however, can have a big cascade effect.

If rent is owed, landlords may not be able to pay their mortgages or real estate taxes. Property taxes make up the biggest slice of the city government’s revenueevery year, according to the city’s Independent Budget Office.

“It’s easy to be sympathetic for the tenant, which we should be, because they’re screwed,” said Zalesne of CUNY. “But remember that if a tenant is able to get out of the lease, then the landlord bears the burden. And lots of times, landlords are not rich companies or billionaires. They’re also regular people.”

To Taylor, the fix comes from outside of the courts: Through government mandating relief programs, especially on the federal level.

“The city can’t do it by itself. The state can’t do it by itself. We need the federal government to step in,” she said.

In Staten Island, the owner of the uniform shop is figuring out how to best handle the new lawsuit filed against her company. The first step is finding legal help.

A spokesperson for the city’s Small Businesses Services department says the agency can help businesses find an attorney through a number of business-focused pro bono legal groups. The federal Small Business Administration can also help connect owners to emergency financing.

Barbara T. suspects her landlord is going to court to force her to negotiate.

But any amount of rent for her right now is too much. Not only are sales flattened, but her own tenant — a mom of two who lives in her home’s downstairs apartment — is out of work and hasn’t paid rent in six months.

“There’s nothing to get,” she said. “There’s nothing to even squeeze from me.”

This story was originally published by THE CITY, an independent, nonprofit news organization dedicated to hard-hitting reporting that serves the people of New York.

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  1. Sound of the Suburbs

    Don’t get confused between making money and creating wealth.
    When you equate making money with creating wealth, people try and make money in the easiest way possible, which doesn’t actually create any wealth.
    In 1984, for the first time in American history, “unearned” income exceeded “earned” income.
    The American have lost sight of what real wealth creation is, and are just focussed on making money.
    You might as well do that in the easiest way possible.
    It looks like a parasitic rentier capitalism because that is what it is.

    Bankers make the most money when they are driving your economy into a financial crisis.
    They will load your economy up with their debt products until you get a financial crisis.
    On a BBC documentary, comparing 1929 to 2008, it said the last time US bankers made as much money as they did before 2008 was in the 1920s.
    At 18 mins.
    The bankers loaded the US economy up with their debt products until they got financial crises in 1929 and 2008.
    As you head towards the financial crisis, the economy booms due to the money creation of bank loans.
    The financial crisis appears to come out of a clear blue sky when you use an economics that doesn’t consider debt, like neoclassical economics.

    Banks – What is the idea?
    The idea is that banks lend into business and industry to increase the productive capacity of the economy.
    Business and industry don’t have to wait until they have the money to expand. They can borrow the money and use it to expand today, and then pay that money back in the future.
    The economy can then grow more rapidly than it would without banks.
    Debt grows with GDP and there are no problems.
    The banks create money and use it to create real wealth.

    1. cnchal

      > They will load your economy up with their debt products until you get a financial crisis.

      That’s the plan. The next step in the plan is to use free FED bucks to buy up the now dirt cheap houses for peanuts and gouge the former debt serfs which are the new destitute renters.

      A famous president from two centuries ago fought the banks precisely on this point, warning the future of the mendacity of banksters. Here we are, again.

      1. Objective Ace

        What cheap houses? That may have been the plan, but enough actors, after seeing their 2009 playbook and the resulting asset appreciation as Q3 money hit the economy, are front running the inevitable appreciation increase this time around preventing any drop in residential real estate prices.

        (Which isn’t to say debt serfs/destitute renters aren’t being gouged. Its probably overall worse the more the FED intervenes)

        1. Mel

          Reading Michael Hudson’s Finance Capitalism and its Discontents. As long as those ambitious players use borrowed money to outbid each other for the not-really-cheap buildings, then the banks will make out fine. Better even, because they won’t be burdened by those awkward buildings.

  2. Bob Hertz

    In a piece I wrote on Debt Forgiveness During the Pandemic, I estimated that it would cost $100 billion to compensate landlords for missed rents from individuals on their apartments.

    This was as of about July so the number is higher now.

    I do not have the ability to calculate how much would be required to compensate landlords for missed business rents. Since I believe the pandemic will last 18 months and almost all restaurants will go broke, this bailout number will be quite large.

    The awful problem with lockdowns is not how to do them, it is how to finance them. Perhaps one of your readers who knows bankruptcy law can suggest some solutions for small business owners.

    1. Pavel

      Trump and the Repubs wanted an extra $75+B for the “defence” budget last year, and the Dems went along. It is near $800B and that doesn’t include a lot of hidden costs, CIA black ops, and of course the VA expenses of endless pointless war.

      How about cutting that budget by, say, a third and forcing the military industrial complex and the K Street lobbyists to forgo their income for a year? Oh, and bring the troops home. They could work on the infrastructure and plant a few trees. WTF are they doing in Japan, S Korea, Germany anyway?

      And while we’re at it, the Congresscritters should forgo their salaries and vacations as long as they promote lockdowns (of dubious scientific validity). Poor Nancy Pelosi (family net worth estimated at $150M) might have to give up one of those $14 cartons of ice cream.

      Do I sound bitter?

        1. sharonsj

          For years, lots of people have been saying what Pavel said. But Congress just keeps giving money to their corporate donors. The CARES act spent $2.2 trillion but about 85% went to the wealthy and the corporations. Sure, if we stopped the endless wars and the war on drugs, there’d be money for us peons, but I’m not holding my breath.

  3. eg

    Didn’t Henry George have this sorted long ago? Rentiers are parasites, whether they come in the form of the rural oligarchs of the Bronze Age, the landowner class that emerged from feudalism, or the FIRE (finance, insurance, real estate) sector today?

    The solution in the Bronze Age was “andurarum/deror/jubilee,” and the classical economists exposed the landowner racket for what it was — unearned income (thanks to Michael Hudson for these insights).

    Unfortunately, the neoclassical economists and their fellow travellers “did for” the concept of unearned income, which provides cover for the FIRE sector’s depredations to continue.

    The parasitism needs to be stopped, and the solution is to tax rents into oblivion.

    1. Intelligent yet Idiot

      So I work hard and save some money.
      I borrow some more from the local bank and buy an asset that I renovate, maintain and rent it for some income. How does that make me a parasite?
      How about all the penny pushers that work in finance? What does that make them?
      In the end, all civilization is parasite on the back of the farmer.
      So what do you suggest, we abolish all forms of profit seeking?

      1. bueno

        yes :) we can literally choose to live in a society where we do not force many to suffer for the ungodly wealth of a few

        1. Intelligent yet idiot

          They tried that in The Soviet Union, I suggest you read the gulag archipelago to immerse yourself and if you like it the only remaining similar place is in North Korea, I will voluntarily contribute a penny for your one way ticket.

          1. c_heale

            A lot of the people at the top of the party in the Soviet Union made out like bandits in either property, luxury goods, or political power. Doesn’t seem any different to today.

      2. Upwithfiat

        I borrow some more from the local bank … How does that make me a parasite?

        Well, the banks don’t really lend existing money but create it as they lend (“Bank loans create bank deposits”) with the new purchasing power coming via dilution of the purchasing power of non-borrowers.

        Not that you are to blame since your choice is to be a villain or else a victim yourself – a choice no one should be forced to make as public policy.

        1. Objective Ace

          “Not that you are to blame since your choice is to be a villain or else a victim yourself – a choice no one should be forced to make as public policy”

          I like that–sounds like the sensible answer for combatting the “rentier” class is to become one, but instead of buying extra mansions in the Hamptons and stowing away gold bars in the Cayman Islands: donate money to (deserving) Charities, maybe buy off some lobbyists/politicians for good and have them implement policies for the masses

          1. Upwithfiat

            –sounds like the sensible answer for combatting the “rentier” class is to become one,

            My point is that, with our corrupt banking model, one is either a villain to some extent or else a total victim.

            So the system is at fault, not necessarily individuals. But obviously one can be greedy too …

      3. sharonsj

        There is nothing wrong with someone buying one or several properties and renting or flipping them. Most of us understand that the parasitic rentiers (real estate trust groups) buy them by the hundreds and don’t maintain them.

        1. c_heale

          While there are people who are homeless or living in slums or squalid conditions, flipping houses seems immoral to me. No one really needs more than one house.

      4. Upwithfiat

        So what do you suggest, we abolish all forms of profit seeking?

        In the Bible, profit is good but profit taking isn’t good, at least from one’s own fellow countrymen.

        There’s only one form of money I know that allows profit without profit taking and that’s common stock.

        But why should those with equity share that equity when government privileges for private credit creation allow them to use what is, in essence, the Nation’s credit but for their own private gain?

      5. LarryMotuz

        If you you were a bank or a multinational, you wouldn’t have to work hard and save money ‘cuz the FED would stand ready always to loan you the money to bid up and buy properties.

        It is not the small landlord like you who is a ‘parasite’, although you depend upon rent. It is the large landlord, most often a corporation, which, without consideration for their tenants, tend to exploit their needs while being inflexible.

        If the FED was helping out household and families and small business, I’d cheer loudly. The reality is that it has ‘found’ trillions, little of which has gone to Main Streeters who, with some financial help (not loans), could not only get by but also be the foundation they have always been for much of the private sector.

  4. Intelligent yet idiot

    Bailing out restaurants and retailers is money down the drain. Those things should clear in swift bankruptcy proceedings, asset prices must come down significantly so economic growth can restart.
    What if the pandemic last for 3 more years ?
    What if people permanently change their habits and eat less in restaurants, are we going to keep zombie restaurants alive with public money.
    This bailout mentality has to stop or our social fabric will be totally destroyed and we will have bigger problems in our future.

    1. Dirk77

      If the government mandates that businesses close their doors, they must be compensated for it. The same goes for the employees. And I don’t mean any bills that are due are deferred. I mean they shouldn’t be liable for them at all, unless they are given money to pay them. I am surprised anyone would argue with this. The failure goes all the way up to the federal gov. If there is any indication that the USA is a failed state, it is this.

      1. Intelligent yet Idiot

        you are correct in that USA is a failed state but not because it doesn’t bail out the businesses but because it mandates shut downs.
        People stopped going to restaurants not because government mandates, but because of fear.
        That will not change no matter what the government does unless the virus is defeated first.

      2. Bob Hertz

        You are totally correct.

        American governors can order all kinds of shutdowns, but paying the victims of shutdowns is left to Congress.

        This does not seem to happen in many other countries. It is my impression that places like Germany and Denmark announced wage subsidies the same day they announced shutdowns.

        Are they just more ethical than we are, or does union pressure play a role?

      1. Jeremy Grimm

        I strongly agree! Without restaurants, nightclubs, small shops, theaters, museums, libraries, mass-transit … why would anyone want to live in a crowded City with high rents and jobs that barely paid enough to cover rents, utilities, food, and the basics of life?

    2. c_heale

      The landlords and property owning hedge funds will also lose their shirts if prices come down significantly.

  5. tegnost

    I question whether it’s appropriate to, in the comparison between residential landlords and commercial landlords, to say some commercial landlords are mom and pop operations. An acquaintance in seattle ran a popular bar room (since closed and being developed as one of the now ubiquitous condo towers). His monthly rent was in the high 5 figures, apparently due to the landlord thinking that if he did x amount of business, then he must pay some portion of that in increased rent. How many of these busy little restaurants had high rents based on high traffic? 163,000 for a mexican walk up ? Sure if the landlord decides that you do 100,000 per month in biz so they want 20,000 a month for rent. This is greed. The mom and pop landlords I know are more than happy to work with people and get half a loaf as yves points out in the above. They’re much more concerned about having a decent long term tenant. I also know some property managers who are ruthless evicting scoundrels, and if they were to lose a boatload of their ill gotten gains I wouldn’t shed a tear, indeed I would throw rocks in their boat to help them sink. So here we have yet again the feds being softened up (who doesn’t like mom and pop?) to bailout scoundrels and banksters. Sorry, but if you’re collecting a million a year on a popular business who is locked into your location then you should have saved some of that money for a rainy day. That’s how it works in my little tiny miniscule microscopic economy. But in the US we do socialism for the richest and least deserving then act as if it were some kind of moral victory over sloth.

  6. lordkoos

    I guess I don’t understand commercial landlords wanting to evict. If they evict the tenant, what income will they then have from the property? Who is going to rent these places as long as the pandemic is in effect?

    1. Jeremy Grimm

      And who will rent them after the pandemic? Who will own the houses, apartment and commercial buildings after the foreclosures and after the pandemic? What kind of country will be left?

      1. LarryMotuz

        What kind of a country?

        What I see ahead if not prevented is feudalism without the reciprocal obligations of the social structure and, in particular, the obligations of the property holders to the Monarch (government) and to those ‘below’ them. Private property only came into existence because the feudalist barons, facing onerous reciprocal obligations to the Crown and to the people , convinced Monarchs –mostly at war with each other– that, in lieu of such onerous obligations, wouldn’t the Monarch be better off by taxing their estates — which pleased the Monarchs but destroyed the social order. Even today one can forfeit one’s claim to ‘private property’ if one does not pay the taxes upon it.

        John Locke created a myth about the reasonableness of private property, a myth that had nothing to do with its origins in taxation. Private property in land most definitely did not exist in Europe before ‘taxation’ on such property in lieu of social obligations.

  7. Sparkylab

    I own a music venue with an attached bar/restaurant in the PNW. Yeah – not a good choice of business this year (but we have done well for a decade or so). My landlord is a large owner of buildings in multiple locations in the region. I have always felt his ’empire’ was one of ever expanding, and serial refinancing/consolidation of, debt: buy a older building, renovate over a few years, raise rents, refinance + lock-in a higher collateral value on the asset – that he then used to buy more buildings. Rinse. Repeat.

    If/when we open up next year, I assume some sort of protracted negotiation for the rent shortfall since April ’20, but I have zero expectations of him agreeing to reduce my rent going forward – for the simple reason that any sort of contractual write-down on rental income for a particular building going forward reduces the value of said building. The building my business is in was bought a while ago (I am aware of at least two refinancings during my tenure there), so I could see it playing a central role in his debt-based business/house of cards.

  8. Paul P

    The CARES Act provided a corporate relief package of over $4 trillion. Now, a people’s relief package is coming in at $908 billion. Are state and city budgets going to be backed up by the federal government? It doesn’t look like that will happen. So, the sad stories of
    economic ruin will multiply. All this is unnecessary as our leaders could have planned to keep the economy suspended during Covid and provided the funds for a spring back when it ended. Robert Brenner describes how the Democrats went along with the Republicans on using Covid to drive down the living standards of Americans. Brenner’s article was, I think, in an earlier NC links post.

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