SB 939: Relief for Commercial Tenants Could Spell Disaster for Landlords
On May 22, 2020, the California Senate Judiciary Committee passed Senate Bill 939 (SB 939), a bill intended to provide relief to certain commercial tenants (as more particularly discussed later in this alert) from economic hardship sustained during the COVID-19 state of emergency. If passed, SB 939 will effectively void any action taken by landlords to evict commercial tenants, and allow certain commercial tenants to walk away from their lease obligations, which could have a significant impact on commercial leases across the state of California. Here’s what you need to know about SB 939 and the impact it may have on commercial real estate property leases.
Background on SB 939
SB 939 was initially introduced as a “statewide commercial eviction moratorium” intended to provide hospitality tenants (restaurants, bars and entertainment venues) impacted by the shelter-in-place orders some relief. Most notably, the initial version of the bill granted commercial tenants the ability to renegotiate a commercial lease, and terminate the lease if unable to reach an agreement with the landlord. However, as the bill has passed through committee, it has undergone significant revision which has expanded the scope of the protections.
As amended on May 13, 2020, the bill includes two sections: Section 1 provides for protection of eligible commercial tenants from eviction, and Section 2 provides a procedure for eligible commercial tenants to initiate negotiations to modify any rent or other economic requirements in the lease, regardless of its current terms. As amended on May 29, 2020, Section 1 and Section 2 do not apply to the same class of commercial tenants: rather, as discussed in more detail, below, each section includes a separate definition for the “Eligible COVID-19 impacted commercial tenants” that qualify for the protections.
Section 1 of SB 939 includes the following provisions:
- A landlord may not terminate a tenancy or evict a tenant of commercial real property during the state of emergency declared March 4, 2020 related to COVID-19, unless the tenant poses a threat to the property, other tenants, or a person, business, or other entity.
- Any attempted eviction in violation of this section is void and shall constitute an unlawful business practice and an act of unfair competition under Section 17200 of the Business and Professions Code.
- Nonpayment of rent during the state of emergency shall not be grounds for unlawful detainer. Any rent which was not paid by the tenant during the state of emergency shall not be due until 12 months after the state of emergency ends, unless the landlord and tenant agree otherwise. Landlords may not apply late fees to such unpaid rent, unless the rent remains unpaid past this 12 month period.
As amended on May 29, 2020, these provisions apply only to an “Eligible COVID-19 impacted commercial tenant”, defined in Section 1 as a commercial tenant that: (1) operates primarily in California, (2) occupies commercial property pursuant to a lease, and (3) meets one of the following criteria: the tenant (a) has experienced a decline of 20% or more in average monthly revenue, (b) was prevented from opening or required to delay opening because of the state of emergency, or (c) has experienced a decline of 15% or more in capacity due to compliance with social distancing orders.
Section 2 of the proposed bill outlines the procedure for a more limited group of “Eligible COVID-19 impacted commercial tenants” to conduct their negotiations with landlords. Pursuant to Section 2, “Eligible COVID-19 impacted commercial tenants” may initiate negotiations to modify any rent or other economic requirements in the lease, regardless of its current terms. If the landlord and tenant are unable to reach an agreement after good faith negotiations, Section 2 allows an “Eligible COVID-19 impacted commercial tenant” to terminate the lease. If the tenant so terminates, the maximum amount of past due rent owed is three months, which must be paid within 12 months after the termination notice.
Notably, Section 2 includes a definition of the “Eligible COVID-19 impacted commercial tenants” that qualify for the protections of Section 2 that is narrower than the definition included in Section 1. For the purpose of Section 2, an “Eligible COVID-19 impacted commercial tenant” is a business that operates primarily in California and is an eating or drinking establishment, place of entertainment, or performance venue that meets one of the following criteria: (1) has experienced a decline of 40% or more of average monthly revenue, (2) was prevented from opening or required to delay opening its business because of the state of emergency, or (3) has suffered a decline of 25% or more in capacity due to compliance with social distancing orders.
If passed, the bill contains “urgency language”—that is, the bill will go into effect immediately upon being signed into law. Additionally, the terms of the bill specify that these protections would stay in place until 90 days after the state of emergency is lifted.
Proponents and Opponents: A Stark Divide
The stated intent of the bill is to mitigate the economic hardships caused by COVID-19 for commercial tenants, and to extend protections similar to those available to residential tenants in a state of emergency. Proponents of the bill laud these protections for their assistance to small businesses in need of assistance, helping those impacted by COVID-19 avoid bankruptcy and/or permanent closure.
However, the bill is likely to have a significant adverse effect on commercial landlords. Commercial landlords note the difference between a landlord’s ability to collect reduced rent versus collecting no rent, which could be a consequence of SB 939. Although tenants have the opportunity to negotiate economic terms (i.e.: reduce rent), the bill allows a commercial tenant to walk away from a lease and blocks the landlord’s recourse for nonpayment of rent. In the meantime, the commercial landlord remains responsible for paying mortgage payments, real estate taxes, fees, property insurance, and other costs.
Several organizations—including the California Business Properties Association (“CBPA”)—have spoken out in vehement opposition to SB 939. The CBPA has argued that the bill is unconstitutional due to its impact on contractual obligations, citing that it would allow tenants to “unilaterally abrogate real estate leasing contracts.” Both supporters and opponents of the bill have questioned its constitutionality; specifically, whether the bill violates the Contracts Clause of the U.S. Constitution as well as the California Constitution prohibiting the passing of laws impairing the obligation of contracts. The primary issue is whether it is constitutional for the state to pass a law impairing private contractual obligations. The focus of the constitutional analysis is whether this bill satisfies the legal standard necessary for the state to intervene and break contracts between private parties: courts will generally apply a balancing test to determine whether the impairment is “necessary” and “reasonable” to serve an important public purpose.
In addition to these constitutional challenges, the general consensus among those opposed to SB 939 is that it is overly broad, and, as a result, will have significant unintended consequences that could be disastrous to commercial landlords.
The stated intent and the aim of SB 939 is good for commercial tenants: the bill allows for flexibility in lease negotiations and relief from certain lease obligations for small businesses suffering economic hardship during the COVID-19 state of emergency. However, such assistance may be at the expense of commercial landlords, and the impact of the bill may massively disrupt the commercial leasing market. In its current form, the breadth of the protections provided for in SB 939 apply to a wide swath of commercial tenants, which could have a significant economic impact on commercial landlords across the state, as well as the landlords’ financial ability to keep commercial property open and maintained across the state.
SB 939 is currently set to be heard by the Senate Appropriations Committee in the coming weeks. The bill then must be passed by the legislature by a two-thirds vote, and then signed into law by Governor Newsom.