SB 939 alters the terms of commercial leases. California’s Senate Judiciary Committee passed SB 939 following a 5-1 vote on May 22, 2020. Democratic State Senators Scott Wieners and Lena Gonzales introduced Senate Bill 939 (SB 939) in response to the stay-at-home orders and other regulations related to COVID-19 negatively affecting businesses operating under a commercial lease. SB 939 proposes to add §1951.9 to the Civil Code, with two different sections. Each section seeks to assist commercial lessees that have been impacted by COVID-19 restrictions. SB 939’s key features are:

 

  • It limits a commercial landlord’s right to evict certain defaulting commercial tenants during California’s State of Emergency until December 31, 2021 or 90 days after the State of Emergency ends (whichever is later), adds new penalties and puts a notice burden on the landlord;
  • It voids all evictions for non-payment attempted since March 4, 2020 but before the effective date of the bill;
  • For Section 1 Commercial Tenants (defined below) it requires commercial landlords to defer qualified commercial tenants’ rent and other economic obligations for at least one year and takes away commercial landlord’s ability to collect late fees or apply already collected security deposits as rent;
  • For Section 2 Commercial Tenants (defined below) it establishes a procedure for qualified commercial tenants to renegotiate the lease terms and if the lease negotiations fail, it provides a procedure for the qualified commercial tenant to terminate valid leases with a cap on the qualified commercial tenant’s liability regardless of the remaining duration of the qualified commercial tenant’s lease.

Who is a “Section 1 Commercial Tenant” under SB 939 (proposed CCC 1951.9)?

For the purposes of Section 1, an eligible Covid-19 impacted commercial tenant is a commercial tenant that operates primarily in California, occupies commercial real property pursuant to a lease, and meets one of the following:

  • Has experienced a decline of 20% or more in average monthly revenue over the two most recent calendar months when compared to one of the following:
    • Its average monthly revenue for the two calendar months before a state or local government shelter-in-place order took effect; or
    • its average monthly revenue for the same calendar months in 2019.
  • Was prevented from opening or required to delay opening its business because of the state of emergency. 
  • Has suffered a decline of 15% or more in capacity due to compliance with an official public health order or occupational health and safety guideline for preventing the spread of COVID-19. 

Section 1 requires landlords to send notice of the bill’s provisions to all tenants within 30 days of it going into effect. Commercial tenants then have the opportunity to send notice to their landlords, under penalty or perjury, that they are eligible COVID-19 impacted commercial tenants as defined by Section 1 of §1951.9 to be fully protected by the Section 1’s provisions, which are substantial.

Under the provisions of Section 1, during the state of emergency – landlords are prohibited from terminating the tenancy of an eligible COVID-19 impacted commercial tenant, serving notice of termination of tenancy, using lockout or utility shutoff actions to effectively terminate tenancy, or engaging in any other effort to evict these eligible tenants, if the tenant is being evicted for non-payment of rent, unless the eligible tenant poses a threat to the property, other tenants, or other persons, business, or entities.

Section 1 goes on to make any of the above actions, as well as harassment, mistreatment, or retaliation against an eligible tenant punishable by a fine between $250 and $2,000 per action/occurrence. Additionally, it makes it an act of unfair competition and unfair business practice with separate cumulative legal remedies and penalties under Section 17200 to violate any of its proposed provisions. Any eviction made in violation of the bill’s provisions that occurred since March 4, 2020 will be void, against public policy, and unenforceable.  Prevailing tenants in any litigation related to this provision will be awarded actual damages and reasonable attorney’s fees.

Finally, Section 1 of §1951.9 automatically defers the sum total of all non-paid rent due in any months occurring during the state of emergency twelve months after the state of emergency ends, unless the eligible commercial tenant and landlord agree for that sum total to be paid at an even later date. No late fees may be imposed on this rent, regardless of any lease provision to the contrary, and security deposits may not be applied to cover the balance of any outstanding rent.

Who is a Section 2 Commercial Tenant under SB 939 (proposed CCC 1951.9)?

Under the language of the SB 939 as of its  May 20th Senate Judiciary Committee hearing, an “eligible COVID-19 impacted commercial tenant” under Section 2 means a commercial tenant that operates primarily in California, that occupies commercial real property pursuant to a lease, and that meets one of the following criteria:

  • It is an eating or drinking establishment, a place of entertainment, or a performance venue that has experienced a decline of 40% or more of average monthly revenue over the two most recent calendar months when compared to one or both of the following:
    • Its average monthly revenue for the two calendar months before a state of local government shelter-in-place order took effect; or
    • Its average monthly revenue the same calendar months in 2019.
  • It is an eating or drinking establishment, a place of entertainment, or a performance venue that was prevented from opening or required to delay opening its business because of the state of emergency.
  • It is an eating or drinking establishment, a place of entertainment, or a performance venue that has suffered a decline of 25% or more in capacity due to compliance with an official public health order or occupational health and safety guideline for preventing the spread of COVID-19.

Section 2 does not apply to any publicly traded company or any company owned by or affiliated with a publicly traded company.

Section 2 permits good faith negotiations between eligible commercial tenants and landlords to modify any rent or economic requirements of the lease, regardless of the term remaining on the lease. In order to initiate these renegotiations, commercial tenants must serve written notice on the landlord, affirming under penalty of perjury, that the tenant is an eligible COVID-19 impacted commercial tenant under Section 2. The notice must also include the lease modifications the tenant seeks to obtain and be sent in accordance with the notice provisions of the lease, and if the lease contains no such provisions, through any other manner where actual receipt occurs to the landlord or the landlord’s designated agent.

The goal of Section 2 is for landlord and commercial tenants to come to new terms that are more appropriate in light of the pandemic and the changes it will impact of the economy. Ideally, landlords and commercial tenants come to a mutually satisfactory agreement and continue to go about business in accordance with those terms.

However, if a commercial tenant and landlord do not reach a mutually satisfactory agreement within 30 days of the date the Landlord received the negotiation notice then, within 10 days thereafter, the commercial tenant may terminate the lease without liability for future rents, fees, or costs that otherwise would have accrued under the lease. Instead, the law creates a new damage calculation. Lease termination by the commercial tenant only requires that the tenant send a termination notice under the same procedures followed to send a renegotiation notice. Upon the landlord’s receipt of the commercial notice, the tenant has 14 days to vacate. If the tenant vacates, then the lease, any liability for costs that shall accrue under the lease, and any third-party guaranties associated with the lease terminates and is no longer enforceable.

The tenant is not entirely off the hook though, and regardless of terminating vacancy, commercial tenants are still liable for past due rent in an amount no greater than the sum of the following:

  • A maximum of three months’ worth of past due rent incurred during the state of emergency and regulations related to COVID-19; and
  • All rent incurred and unpaid during a time unrelated to COVID-19 through the date of the termination notice.

Section 2 commercial tenants must make this payment to their landlords within 12 months of the date of the termination notice before becoming liable for its late payment.

As of this writing SB 939 is not law. It is possible that the draft will continue to change as it makes its way through the legislature. It is also possible that it may not become law.

If you are a landlord seeking help with your commercial properties, or a tenant seeking help with your commercial lease, call the expert real estate attorneys at Adishian Law Group. We can be reached at the phone numbers listed above.

We are dedicating this post to COVID-19 information and resources. Our goal is to centralize key links so that businesses, landlords, employees and tenants can find actionable information quickly. If you need a legal consultation regarding navigating and coping with COVID-19 relating laws and regulations, please contact our office. Instead of writing new articles, we will post ongoing updates here with a date separator.

GENERAL RESOURCES AND LINKS:

Center for Disease Control’s (“CDC’s”) COVID-19 Page.

State of California’s Pandemic Roadmap (Stages 1-4)

UCLA Health’s COVID-19 Resources Page

American Industrial Hygiene Associations COVID-19 Resources Page

Update June 6, 2020

Trump signs the new PPP extension law into law.

Update June 3, 2020

Senate passes PPP bill, sends to President. Under the proposal, small businesses would have to spend 60% of the loan money on payroll instead of the previous 75%. Read more here.

Update May 29, 2020

House votes to extend PPP period from 8 weeks to 24 weeks. Read more here.

Update: May 19, 2020

Round 2 PPP funds are still available for qualified small businesses.

Update: April 16, 2020

United States Department of the Treasury. The U.S. Treasury announced Round 2 of PPP.

Update: March 31, 2020

United States Department of the Treasury. Towards the end of March the U.S. Treasury launched the Payroll Protection Program (“PPP”). The purpose is the provide small businesses with the resources they need to maintain their payroll, hire back employees who may have been laid off and cover applicable overhead. The program is administered by the SBA. The first round funds were exhausted very quickly.

March 25, 2020.

To organize our COVID-19 page, we are going to group information by level of government using Federal, State, County / Local.

FEDERAL RESOURCES: The federal government through a variety of agencies: SBA, CDC, Department of Labor and Congress (pending legislation) provides resources to meet the COVID-19 challenges.

The United States Small Business Administration has created a specific section on their website to provide COVID-19 guidance for small businesses. You can find it here: https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources

The Center for Disease Control (CDC) has published Employer Guidance here: https://bit.ly/3bzKSCT

The Department of Labor has created a publication called “Guidance for Preparing Workplaces for COVID-19.” This is a great resource as the country undertakes re-opening after the initial COVID-19 wave.

The Equal Employment Opportunity Commission (“EEOC”). Click here to see the actions taken by the EEOC in response to the Coronavirus and how that may affect Employers and Employees.

STATE OF CALIFORNIA RESOURCES:

The Office of the Governor of California. Click on this link to see an all-inclusive summary of actions taken by the Governor of California to combat COVID-19. Within this list are links to specific orders and releases that may be relevant to you. This includes the stat-at-home order, essential v. non-essential business designations, re-opening guidance and much more. If you want to consult with an attorney on your specific concern, please contact our office.

California Employment Development Department (“EDD”). The EDD has launched or re-activated a number of programs to help businesses and employees in an effort to reduce the impact of unemployment. Similar to other agencies and institutions, the EDD has as COVID-19 page here. This is a great resource for employers and employees, covering questions like extended unemployment insurance, work-sharing, furloughs, PUA, disability insurance, paid family leave, taxpayer assistance and many more. If you want to consult with an attorney on your specific concern, please contact our office.

The California Infrastructure and Economic Development Bank (IBANK). Many Californians have never heard of the IBANK. What is the IBANK? This is similar to the Federal SBA program referenced above. Click here to learn more about the COVID-19 assistance available from IBANK. If you want to consult with an attorney on your specific concern, please contact our office.

California Department of Industrial Relations. The California Department of Industrial Relations has a wonderful resource to help businesses comply with safety guidance. There is general guidance with some specific guidance for identified industries.

California Court System. This is a full one-third of our government. The Courts have been severely impacted by COVID-19. The Court the system has drastically cut back operations and is actively adapting new technology to permit the administration of justice to go on. In the short term, this means the wheels of justice will move even slower. This is bad news for plaintiffs (including landlords seeking a proper commercial or residential eviction) as well as other civil plaintiffs.

In practice, these measures include: delaying hearings and trials, restricting physical access to the courts, emphasizing remote appearance, online mediations / settlement conferences and “triaging” of civil rights. In an environment with even more limited court access, who goes first? Criminal, Family, Real Estate (unlawful detainers), etc. etc?

In any litigation, external non-legal events can take precedence over the legal merits in influencing case resolutions. COVID-19 is one of those non-legal events that litigants will have to weigh as the look to the court system for resolution. Click this link for the full list of California Court COVID-19 measures. If you want to consult with an attorney on your specific concern, please contact our office.

COUNTY/LOCAL RESOURCES. Local resources include County-level on down to municipality, city or town level government. The California State Association of Counties (“CSAC”) website is a great resource to quickly find your county’s COVID-19 website. Once on the CSAC website, click on the link entitled “County Websites Dedicated to the Coronavirus” and that will provide a hyperlink for each of California’s counties.

CONSIDERATIONS FOR EMPLOYER, ASSET OWNER OR INDIVIDUAL: This article contains links to resources and information that can be the starting point of a legal analysis to assess your options, opportunities and rights. If you want to consult with an attorney on your specific concern, please contact our office.

What about non-legal considerations? We’ve gathered some questions that we believe can help guide the decision making process during these challenging times:

  • How serious of a threat do you perceive that this event is to your business?
  • How serious could it be in a probabilistic analysis?
  • Where are there opportunities?
  • Where are there lessons?
  • How do you create a path forward through this environment?

In meeting these challenges, we recommend consulting with your advisors — lawyers, CPAs, financial advisors – to review these and other questions to determine your best path forward.

As always, we are here to help.