California SB 939—a new bill that will provide protections forcommercial tenants impacted by the pandemic—has passed the SenateJudiciary Committee, and will go for a vote in the Committee onAppropriations later this month. The bill has been highlycontroversial, in that it will place a moratorium on commercialevictions and allow commercial tenants to open new negotiations onlease terms or terminate existing leases. However, the bill itselfdoes not provide guidance on how landlords should renegotiate leaseterms.

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"SB-939 does not provide any guidance as to how landlords andtenants should renegotiate rent and other economic lease terms,"Jonathan Zweig of Cox, Castle &Nicholson, tells GlobeSt.com. "Once a tenant is eligibleunder Section 1951.10, it can attempt to renegotiate by engaging in'good faith negotiations.' However, this is a subjective standardthat may provide a means for abuse, as tenants can engage in arenegotiation without any intent to continue the lease, and thenterminate with minimal liability."

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Until now, landlords have largely and willingly entered intolease negotiations with tenants to work through the economicfallout related to the pandemic. Most already have deferral plansin place. "I have found that landlords have been eager to helptenants through this unprecedented period and are willinglynegotiating rent deferral plans with all sorts of tenants, rangingfrom national companies to mom-and-pop stores," says Zweig. "In myexperience, these arrangements carefully balance the needs of bothparties and typically include two to three months of base rentdeferral—but not common area operating expenses, taxes orinsurance—that is paid back in 12 monthly installments beginning ona specified date, usually in early 2021."

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Many of these plans have already been negotiated and covered theneeds of both tenants and landlords. "These deferral plans are ableto balance the interests of helping the tenant through the ongoingpandemic while ensuring that the landlord's cash-flow needs to meetongoing obligations are more urgently addressed," adds Zweig.

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For landlords with existing deferral plans in place, the newbill should not undo those plans, unless the tenants circumstanceshave changed. "SB-939 ought not entitle certain tenants tonegotiate a lease modification unless such modification isabsolutely necessary to support the tenant's ongoing operations,"says Zweig. "Otherwise, the tenant may be able to receive awindfall to the detriment of the landlord."

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When handing these negotiations, Zweig recommends that bothparties' positions should be considered. "Accordingly, a mechanismto consider the relative positions of both parties, including thelandlord's ability to make ongoing debt service and other propertymaintenance payments, and other consideration the landlord may havealready granted to the tenant, such as an improvement allowance,would ensure a fairer process and outcome for tenants andlandlords," he adds.

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Kelsi Maree Borland

Kelsi Maree Borland is a freelance journalist and magazine writer based in Los Angeles, California. For more than 5 years, she has extensively reported on the commercial real estate industry, covering major deals across all commercial asset classes, investment strategy and capital markets trends, market commentary, economic trends and new technologies disrupting and revolutionizing the industry. Her work appears daily on GlobeSt.com and regularly in Real Estate Forum Magazine. As a magazine writer, she covers lifestyle and travel trends. Her work has appeared in Angeleno, Los Angeles Magazine, Travel and Leisure and more.