New York Legislature Targets Real Estate Lenders To Lower Rents

In an effort to protect small businesses from high rents, on June 13, both houses of New York's legislature passed a bill, S1163, that prohibits "rent minimums" in real estate secured loan documents. As of this writing, this bill has yet to be delivered to the governor for her signature. To become law, this bill must be signed by the governor no later than August 31, 2025.  If signed by the Governor, this law could have significant implications for the New York  real estate lending and investment markets. 

By its terms, S1163 would go into immediate effect to: 

• "Apply to all mortgages regardless of when issued, renewed, modified, altered or amended;" and 
• Retroactively and prospectively render "void and unenforceable as against public policy" any mortgage provision that "penalizes" a borrower for "not sett[ing] a high enough rent on all or part of" the mortgaged real property. 

The legislative justification: to help New York small businesses recover from the COVID-19 downturn by "allow[ing] … landlords to rent space for less than the minimum stipulated in their mortgage … without fear of default." Although this official policy rationale is limited to commercial rents, the legislation's plain text does not appear to limit it to only mortgages secured by commercial property. 

Should S1163 become law, it could affect existing and future loans that are governed by New York law, or secured by New York real property, that include minimum rent requirements. Given the legislation's express reference to "public policy," New York courts could interpret S1163 broadly to render unenforceable most contractual provisions, however phrased, that seek to impose a minimum rent. If S1163 becomes law, its retroactive application to impair existing contracts between private parties could face challenges under the New York and federal constitutions.