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.

Adishian Law Group, P.C. founder Chris Adishian answers why Adishian Law Group practices real estate law.

Transcript

Our firm practices real estate because I’ve always had an interest in real estate as a young adult and that interest just grew over time. Fortunately, along the way I had two great instructors, one was Marvin Starr, who was an attorney and actually the co-author of the main treatise on California law, governing real estate.
Another was Bill Coskran at Loyola Law School who was a fantastic real estate attorney, as well as a professor.

When I graduated from law school, I went to work at Arthur Andersen, and during my time there I worked on a number of large real estate companies tax matters. And then at Montgomery Securities, after Arthur Andersen, we did a lot of public market financing and M&A in the real estate space, mostly related to hotels and timeshare companies. After I started my law firm, I became a fully licensed California real estate broker. So through our affiliated company, Adishian Capital, our clients can get full brokerage services and full property management services. And taken together, they have a law firm and a property management firm, real estate brokerage, to have relationship continuity across all their real estate activities in California.