Rent and Eviction Bill SB 939 Goes to Committee Tomorrow

SACRAMENTO—Senate Bill 939 is a COVID-19 commercial rent moratorium eviction bill sponsored by California state senator Scott Wiener. The bill is set for committee hearing tomorrow. At this hearing, testimony will be received in support of or opposition to the bill and the committee can vote on the legislation at that time. Because SB-939 is an urgency statute, it would go into immediate effect once passed by the legislature and approved by the governor.

SB 939 Section 1, section 1951.9 as added to the civil code reads: It shall be unlawful for a person, business or other entity to terminate a tenancy, serve notice to terminate a tenancy, use lockout or utility shutoff actions to terminate a tenancy or otherwise endeavor to evict a tenant of commercial real property, including a business or nonprofit organization, during the pendency of the state of emergency proclaimed by the governor on March 4, 2020, related to COVID-19, unless the tenant has been found to pose a threat to the property, other tenants or a person, business or other entity.

But, in getting into the meat of the bill, many are crying overreach. ICSC goes further, saying that if enacted, SB 939 would upend existing real estate leases throughout the state. The legislation requires all lessors in California to defer lessee rent obligations for more than one year. It would also allow a certain business type to negate the existing lease contract, removes existing legal remedies and rights from, and gives one party to a contract the right to walk away from a valid lease. In addition to jeopardizing the rule of contract law between private parties, the bill creates a number of problems, ICSC points out.

Key Issues Outlined by California Business Properties Association/CBPA:

• SB 939 makes it illegal to serve notice to terminate a tenancy until a full year after the state’s COVID-19 emergency order expires.
• SB 939 gives one party the upper hand by making the common act of serving a notice to terminate tenancy a violation of the state’s unfair business practices and creates a $2,000 penalty.
• SB 939 creates a patchwork of local ordinances on the same topic, making it even more complicated for any business that has buildings in multiple jurisdictions.
• SB 939 allows restaurants, bars and entertainment venues with a decline in revenue of 40% as compared to before shelter in place and facing an ongoing reduction of capacity of 25% or more to engage in good faith negotiations with their landlord to modify any rent or economic requirement regardless of the term remaining on the lease.
• Under SB 939, should the tenant and landlord not be able to reach a mutually satisfactory agreement, the tenant shall have the option to terminate the lease and not be liable for more than three months’ rent from the start of the shelter in place to cover the entire rest of the lease term.
• Under SB 939, any third party guarantees will expire with the lease termination.
• SB 939 will be in effect for at least 22 months from March 2020 until December 31, 2021 or two months after the end of the state of emergency, whichever is later.
• SB 939 does not apply to any publicly traded company or a company that is owned by or is affiliated with a publicly traded company (franchisee), creating even more unfair treatment of businesses.

Tony Natsis, chair of Allen Matkins’ global real estate group and partner of the firm, shares concerns about how this legislation may adversely affect the commercial real estate industry, and agrees that the eviction protections are too broad.

“Section 1, eviction protections, applies to ‘a tenant of commercial real property, including a business or nonprofit organization,’”  he says. “Note that this section does not carve out a commercial tenant of any particular size and appears to apply to all ‘tenants of commercial property,’ as distinguished from a ‘commercial tenant,’ which is defined in section 2 and more limited in scope. Although many recent ordinances have excepted large, multinational corporations from their scope, this proposed amendment contains no such exceptions.”

Natsis says section 2 applies to a ‘commercial tenant,’ which section 2 defines as a business that primarily operate in California and whose primary business is a small business, undefined, or is an eating or drinking establishment, undefined, place of entertainment, undefined, or performance venue, undefined.

If SB 939 is passed in its current form, Natsis says section 1 will prohibit any action to terminate any tenancy or otherwise endeavor to evict a tenant of commercial property during the pendency of the state of emergency. If a tenant does not pay rent during any or all months occurring during the state of emergency, the unpaid rent shall be due 12 months after the date the state of emergency ends, unless there is an agreement to pay the unpaid rent at a date later than the 12 months after the end of the state of emergency.

“The nonpayment of rent that would have been due during the state of emergency shall not be grounds for an unlawful detainer,” he says. “No late fees may be imposed for rent that became due during the state of emergency. If one, for example, assumes that the state of emergency will expire on June 30, 2020, then tenants would have until May 31, 2021 to pay back potentially four months of rent they did not pay.”

Section 2 allows a qualifying tenant to engage in good faith negotiations with its landlord to modify any rent or economic requirement regardless of the term remaining on the lease by serving a notice in accordance with the terms of the lease in which it affirms, under penalty of perjury, that it meets the financial criteria and states the modifications the commercial tenant desires to obtain (negotiation notice). However, this section does not include proof of financial standing as a criteria, Natsis says.

“A commercial tenant that was prevented from opening or required to delay opening its business because of a shelter-in-place order shall not be required to demonstrate the financial criteria,” he points out. “If the parties cannot reach agreement within 30 days after the landlord received the negotiation notice, then within 10 days thereafter, the commercial tenant may terminate the lease without any liability for future rent, fees or costs that otherwise may have been due under the lease by providing written notification to the landlord.”

Natsis reasons that the commercial tenant would only be obligated to pay previously due rent, in an amount no greater than the sum of the following:

• a maximum of three months’ worth of the past due rent incurred during the civil authority and regulations related to COVID-19 (or a lesser sum as may be actually unpaid)
• all rent incurred and unpaid during a time unrelated to COVID-19 through the date of the termination notice (payment)

The payment shall be paid to the landlord within 12 months of the termination notice. The tenant is required to vacate the premises within 14 days of the landlord’s receipt of the termination notice. Upon service of the termination notice, the lease and any third-party guaranties associated with the lease shall also terminate and shall no longer be enforceable.

“Therefore, based on the June 30, 2020 date, if a tenant in one of these broad and undefined categories sends a notice to landlord immediately on July 1, 2020, that tenant can terminate its lease on August 1, 2020 and have no more than three months of recourse liability for unpaid rent,” Natsis says.

Section 1 (evictions) would remain in effect during the pendency of the state of emergency proclaimed by the governor on March 4, 2020. Section 2 (negotiation/termination) would be inoperative until December 31, 2021, or two months after the declared state of emergency ends, whichever is later. Based on the June 30, 2020 date, a tenant could terminate its lease with minimal recourse up until December 31, 2021.

If the legislation passes tomorrow, a landlord is required to provide tenants with written notice of the eviction protections afforded by section 1 to tenants of commercial real property within 30 days of the effective date of this section. And if passed, section 1 does not pre-empt existing eviction moratoriums or any local ordinance prohibiting the same or similar conduct or imposing a more severe penalty for the same conduct prohibited by this section.

When it is all said and done, there is one tenant classification that should be protected, Natsis says.

“It really boils down to how to keep food and beverage establishments, restaurants, viable and open,” he tells GlobeSt.com. “This is the most affected class of tenants, and frankly, the other classes of tenants are more viable once the economy reopens and are more replaceable by similar or compatible uses. In that regard, legislators should follow the structural lead of the current state and local shelter orders and apply SB 939 to restaurants.”

Restaurant tenants that lack financial strength under certain well-defined criteria should not be evicted for a period of time after the expiration of the current state of emergency, he says. This expiration date should have a sunset date and then the tenant should have an elongated period of time to repay the unpaid rent.

“This gives restaurant tenants the ability to get back on their feet after the economy has opened up and pay back their unpaid rent as the economy normalizes over an extended period of time,” Natsis tells GlobeSt.com. “One could also give some short period of rent abatement as opposed to a deferral, and concurrently increase the length of the lease term of the tenant in some proportionality to the rent abatement period. These approaches could be very advantageous to the tenant in its quest to remain viable and the landlord could probably live with them, but only if the protected class of tenants was limited to restaurants.”

Natsis concludes that the proposed bill is too broad in terms of protected tenant classes and restaurants are the tenants that need the most help. The bill should stipulate that landlords focus all resources on these tenants.