City law protecting commercial tenants upheld on appeal

Zavo graphis

State judges bar landlord from pursuing lease-breaking restaurateurs’ personal assets.

In a win for commercial tenants, an appeals court upheld the city’s key pandemic-era protection that landlords had challenged as unconstitutional.

Appellate Division judges ruled in favor of ZAVŌ Restaurant & Lounge, whose proprietors had personally guaranteed the lease with its landlord, Olshan Properties. Olshan sought to hold ZAVŌ’s owners, Ilya Zavolunov and his father Michael, responsible for at least $795,000 in bills that had piled up starting in March 2020.

The now defunct restaurant had defaulted on its lease for 15,000 square feet at 1011 Third Avenue in early March and handed back the keys that August. The same month, Olshan sued its tenants, who had personally guaranteed the lease, which is not uncommon in commercial tenancies.

The property owners filed the case despite a new city law barring landlords from going after the personal assets of owners or guarantors whose restaurants or retail businesses had defaulted on their leases during the first six months of the pandemic.

Olshan argued that its issues with ZAVŌ predated the pandemic and therefore the tenant shouldn’t receive protection from the law. When a state judge sided with the tenants in April, Olshan filed an appeal, marking the first test of the city’s new law.

In a separate challenge by other commercial landlords, a federal court ruled in October that the city law could be challenged under the U.S. Constitution’s contracts clause, which bars states from passing laws that interfere with contract obligations. Olshan’s lawyer mentioned the ruling during a hearing this month, but the state appeals court did not seize on that decision as a problem.

“We have considered plaintiff’s remaining contentions and find them unavailing,” the panel of justices wrote.

ZAVŌ’s lawyer Leo Jacobs called it a “just and equitable decision given the circumstances of the post-Covid world.”

Olshan Properties and its lawyers, who could seek to take the case to the state’s highest court next, did not immediately respond to requests for comment.

The legislation was introduced by Manhattan Democrat Carlina Rivera, a candidate for City Council speaker. Several Council members voted against it, saying the government could not interfere with private contracts. The measure, which lawmakes later extended to March 31, 2021, was supported by small businesses and their trade groups, including the New York City Hospitality Alliance.

In the federal case, which remains active, first-generation immigrants Marcia Melendez and Ling Yang argued that because of non-paying commercial tenants, they were struggling to make their mortgage payments.