The 2021 Maryland General Assembly session will be remembered, in part, for the extraordinary steps taken to legislate landlord tenant issues in the wake of the unprecedented interventions taken through executive order at the height of the COVID-19 emergency.
Although the Assembly focused most of its legislative effort on residential leases, during the closing days of the session the Maryland House and Senate will decide the enforceability of personal liability clauses related to commercial leases.
House Bill 719 made such agreements between building owners and nonessential businesses unenforceable if a default was caused by an executive order or proclamation related to a catastrophic health emergency. The bill did not address the role of partial closures, PPP and other government relief payments or rent abatement provided by the building owner.
Buoyed by a court decision upholding a similar law issued by the Southern District of New York, restaurants and retailers hit hard by government closures supported the bill. NAIOP, other real estate organizations and banking organizations opposed it. From the NAIOP testimony:
By preventing the enforceability of personal liability clauses, HB 719 would unilaterally amend existing, valid contracts and create negative consequences for both tenants and building owners. Often it is the personal guarantee that qualifies a company to rent space. Eliminating the enforceability of personal guarantees could have a chilling effect on new leases, lease renewal, forbearance, and lease modifications for companies experiencing economic stress from COVID-19. In other cases, a silent partner, or a corporate parent, who is not the tenant may be the guarantor of lease payments for multiple business locations. These guarantees would also be negatively affected by the bill regardless of financial circumstances of the guarantor or the aggregated business locations.
The House of Delegates passed the bill over to the Senate with amendments that permit the court to decide whether to enforce the personal liability clause based on the “totality of the circumstances.” The amendments also established an expiration date 180 days after the Governor lifts the COVID-19 state of emergency.
With two weeks remaining in the legislative session, the bill remains in a Senate committee. The Judicial Proceedings Committee has some remaining concerns about language allowing the court to enter a judgement against a commercial landlord for attempting to enforce a personal liability clause that the landlord “should know is unenforceable.” Influential members of the committee understand the gravity of invalidating a private contract but also see providing a court hearing on the facts prior to enforcing a personal liability clause may be an appropriate compromise given the extraordinary impacts caused by government enforced business closures.
Copyright 2021, NAIOP Maryland. Reprinted with permission from NAIOP-MD 360. www.naiopmd.org
