How much chaos might a three-sentence bill that was quietly passed by the New York State legislature sow on the real estate lending industry? Potentially plenty.
On June 13, 2025, a bill passed by the New York Assembly (A. 174) and Senate (S.1163) could have major ramifications for the real estate finance industry. The bill prohibits the inclusion of “rent minimums” in real estate secured (i.e., mortgage) loans and states that no borrower of such a loan “shall be charged a fee, forced to default, or otherwise penalized by the [lender] because the [borrower] did not set a high enough rent on all or part of the real estate.” It goes on to say that all terms of a mortgage that cause the borrower to be penalized for not setting a high enough rent “shall be void and unenforceable as against public policy.” The bill states that it shall apply to “all mortgages regardless of when issued, renewed, modified, altered or amended.” (emphasis added). In other words, if adopted, the bill would extend retroactively to all real estate secured loans.
Thus far, Governor Hochul has not signed the bill (the outside date to sign being August 31, 2025), and numerous industry trade groups—the MBA, MBA of NY, REBNY, and NYBA, among others—have lobbied to kill the bill (or at least more narrowly tailor it to more directly and narrowly address the bill’s stated public policy goal, which aims to alleviate the economic hardship imposed by COVID-19 on small business and allow landlords to rent space for less than the minimum requirement in their mortgage without fear of default). The problem with the bill is its lack of detail and specificity, and its breadth and vagueness, which raise a myriad of issues that could tangle it up in litigation for years to come if it becomes law, including basic questions such as:
- Does the bill apply only to “commercial” properties, or also to residential, multifamily, office, industrial, hospitality, or other property types?
- Is the bill limited to small or retail businesses (however those may be defined)?
- Does the bill apply only to commercial rents?
- Does the bill apply only to properties in New York State, or might it apply to properties in other states if the applicable loan document(s) are governed by New York law?
- What does the bill mean when it references that a borrower cannot be “penalized?”
- Does the bill vitiate typical debt service coverage, debt yield, or similar tests found in loan documents, however drafted or framed?
- Will the bill impact the enforcement of any third-party guaranties for, or related to, the affected loan?
- Does the bill cover loans secured by mezzanine pledges, but not mortgages?
- Does the bill impact leasing parameters, prudent minimum or average rent requirements, leasing approvals for major leases, future fundings for tenant improvements or leasing commissions, loan extensions, or the imposition or utilization of cash management?
- Will the bill become a standard borrower mortgage foreclosure defense, effecting potential billions of dollars of mortgages?
- Is the retroactive effect or other terms of the bill enforceable under the New York and United States constitutions?
- Does the bill conflict with regulatory requirements for prudent lending?
- Will the bill have the negative effect of chilling lending, or cause lenders to increase costs to the very borrowers the bill seeks to protect, to cover the additional lending risk?
- Might the bill cloud title in the secondary and securitization markets, causing put or repurchase obligations, and needless litigation?
It is possible that the governor just lets the bill die or that there is an attempt to narrow the bill or eliminate some of its more egregious aspects. Either way, we will keep an eye on this bill and report back with anything newsworthy.
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