California Senate Bill 939 Includes Significant Protections for Commercial Tenants Impacted by the COVID-19 Pandemic: Eviction Moratorium, Rental Deferment, and Right to Modify Rental Obligations or Terminate Lease

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Seyfarth Synopsis: On May 22, 2020, the California Senate’s Judiciary Committee voted to approve an amended version of Senate Bill 939 Emergencies: COVID-19: Commercial Tenancies: Evictions (“SB 939”). If signed into law, this bill will institute a state-wide moratorium on the eviction of commercial tenants who have been adversely affected by the COVID-19 pandemic that is similar to the moratorium implemented by the emergency amendments to the California Rules of Court by the California Judicial Council, which we described in a previous Legal Update. Both the California Judicial Council’s eviction moratorium and the eviction protections of SB 939 will remain in place for a period of 90 days following the lifting of the State of Emergency declared by Governor Newsom on March 4, 2020 in response to the COVID-19 pandemic (the “State of Emergency”), but SB 939 includes eligibility requirements not found in the emergency amendments to the California Rules of Court, for example, SB 939 requires that the tenant be adversely impacted by the COVID-19 pandemic and that the tenant operate primarily in California.

As originally introduced in February of this year, SB 939 focused only on evictions, but in its current form, the bill includes tenant protections that go well beyond a suspension of evictions. In the form approved on May 22, 2020, SB 939 (i) would permit eligible commercial tenants to defer rental payments falling due during the State of Emergency for a period of 12 months following the end of the State of Emergency, (ii) would permit certain qualified commercial tenants to modify any rent or economic requirements under their leases, and (iii) would entitle those tenants to terminate their leases if they are unable to reach a mutually satisfactory modification agreement within 30 days. Among other eligibility requirements, these enhanced protections are only available to tenants operating primarily in California, and the modification/termination right is only available to eating and drinking establishments, places of entertainment and performance venues that qualify as small businesses.

This Legal Update provides a brief status update on SB 939 and summarizes key provisions of the bill in its current form.

Status

On May 22, 2020, the California Senate’s Judiciary Committee approved SB 939, as amended, by a vote of five to one, with three members abstaining. The bill has now been referred to the California Senate’s Appropriations Committee for fiscal review. The earliest hearing date for the Appropriations Committee is June 8, 2020. The Appropriations Committee could amend SB 939, refer it to another committee or send it to the Senate for a second reading. Following a third reading, if the bill is approved by the California Senate, it will proceed to the California Assembly, where an identical process of hearings, readings and votes will take place. If approved by both houses, the bill will proceed to the Governor’s desk where it may be signed into law. Suffice it to say, there are numerous remaining procedural hurdles in place prior to SB 939’s approval. The last day for the Senate and Assembly to pass bills is August 31, 2020, but there is an exception for bills that take effect immediately. SB 939 includes an urgency clause providing that it takes effect immediately, so the California legislature could act on the bill after August 31, 2020.

SB 939 has met with near universal opposition in the commercial real estate industry. The California Business Properties Association wrote a letter to the Senate Judiciary Committee indicating that SB 939 could cause a financial collapse and argued that it is unconstitutional for the state to pass a law impairing private contract obligations. The US Constitution (Art. I, § 10, cl. 1.) states, for example, “[n]o state shall … pass any Law impairing the Obligation of Contracts.” Similarly, the California Constitution, provides that “[a] law impairing the obligation of contracts may not be passed.” The California Business Properties Association is the designated legislative advocate in California for the International Council of Shopping Centers, the California Chapters of the Commercial Real Estate Development Association, the Building Owners and Managers Association of California, the National Association of Real Estate Investment Trusts, and AIR Commercial Real Estate Association, among others, all of whom voiced opposition to SB 939 during the Judiciary Committee hearing.ⁱ

On the other hand, supporters of SB 939 warn of a “mass extinction event of small businesses and non-profits in every neighborhood in California … ” which would change the face of the State of California permanently.ⁱⁱ State Senators Scott Wiener and Lena Gonzalez are the primary sponsors of SB 939 and submitted a 26-page bill analysis of SB 939 at the May 22nd Judiciary Committee hearing, which includes the current text of SB 939, along with a list of organizations in support and opposition to the bill.

Although SB 939 is a statewide bill, it expressly indicates that it will not preempt any local laws that address the same or similar conduct or that may impose a more severe penalty. Testimony given at the Judiciary Committee hearing suggests that the intent of SB 939 is to set a statewide floor for available tenant protections and to establish minimum penalties for violation of those protections, while allowing localities to set their own standards that may be more protective of tenants. As a result, even if SB 939 becomes law, landlords and tenants will need to navigate a patch-work of local and state law when assessing their rights and obligations with respect to COVID-19 leasing issues.

We will continue to monitor developments with respect to SB 939 as it works its way through the legislative process.

Summary of Key Provisions of SB 939

If enacted, SB 939 would add new sections 1951.9 and 1951.10 to the California Civil Code. Proposed §1951.9 provides for the eviction moratorium and the 12-month rental deferment, and proposed §1951.10 provides for the modification and termination rights. The protections proposed by SB 939 are only available to tenants that operate primarily in California and that have been adversely impacted by the COVID-19 pandemic. In addition, the modification/termination right set forth in proposed §1951.10 is only available to eating and drinking establishments, places of entertainment and performance venues that qualify as small businesses.

Proposed Civil Code §1951.9 (Eviction Moratorium and Rent Deferment)

Proposed Civil Code §1951.9 would make it unlawful for a commercial landlord to initiate unlawful detainer proceedings against a commercial tenant for the failure to pay rent that is due during the State of Emergency. Although the ban on initiating unlawful detainer proceedings would remain in effect for 90 days after the lifting of the State of Emergency, it would only apply to non-payment of rent during the State of Emergency. Commercial landlords would not be prevented from pursuing evictions on grounds other than the non-payment of rent, although they would not be able to pursue an eviction for failure to replenish a security deposit if that deposit was applied to rent due during the State of Emergency.

In order to avail itself of the protection from eviction under proposed §1951.9, the tenant must deliver written notice to its landlord affirming under penalty of perjury that it is an “eligible COVID-19 impacted commercial tenant.” To qualify as an eligible COVID-19 impacted commercial tenant, the tenant must operate primarily in California and must meet one of three eligibility criteria: (A) the tenant must have experienced a decline in average monthly revenue of 20% or more over the previous two calendar months when compared to either its average monthly revenue for the two months preceding a state or local shelter-in-place order or its average monthly revenue for the same calendar months in 2019, (B) the tenant is prevented from, or delayed in, opening its business because of the State of Emergency, or (C) the tenant has suffered a decline in capacity of 15% or more due to a public health order or occupational health and safety guideline designed to prevent the spread of COVID-19. No guidance has yet been provided as to how to determine if a tenant is primarily operating in California. However, Senator Wiener did indicate during the May 22nd Judiciary Committee hearing that he did not intend for any multinational corporations to benefit from this proposed bill.

If any eligible COVID-19 impacted commercial tenant is unable to pay rent during the State of Emergency, the cumulative total of such unpaid rent will not be due until 12 months after the State of Emergency ends and the landlord may not charge late fees in respect of any such unpaid rent.

Proposed Civil Code §1951.9 would also require landlords to provide a mandatory written notice of the protections afforded by the provision to tenants of commercial real property within 30 days of the effective date of the new law. Opponents of SB 939 argue that the written notice requirement is “overly burdensome” and would “cost millions.”ⁱⁱⁱ

A willful violation of proposed Civil Code §1951.9 will constitute an unlawful business practice and act of unfair competition under §17200 of the Business and Professions Code and would subject landlords to the remedies and penalties thereunder. Moreover, proposed §1951.9 provides that any commercial landlord who willfully harasses, intimidates, threatens or retaliates against a commercial tenant may be liable for fines not to exceed $2,000 for each incident.

Proposed Civil Code §1951.10 (Lease Modification & Termination)

Proposed Civil Code §1951.10 would allow a qualified commercial tenant to engage in good faith negotiations with its landlord to modify any rent or economic requirement of its lease regardless of the remaining term of the lease. If the tenant and its landlord do not reach a mutually satisfactory agreement within 30 days, the tenant may terminate its lease.

As with proposed §1951.9, a tenant seeking to avail itself of this modification/termination right, must provide written notice to its landlord affirming under penalty of perjury that is an “eligible COVID-19 impacted commercial tenant.” Although the same term is used, the eligibility requirements set forth in the definition of “eligible COVID-19 impacted commercial tenant” in proposed §1951.10 are more exacting than those set forth in proposed §1951.9 and fewer tenants will be able to able to use the modification/termination right than will be eligible for eviction protection and rental deferment. As with proposed §1951.9, a tenant must be operating primarily in California to be eligible for the protections available under proposed §1951.10. In addition, an eligible tenant under proposed §1951.10 must be an eating or drinking establishment, a place of entertainment or a performance venue that qualifies as a “small business.” A small business is defined as a business with 500 or fewer employees that is not dominant in its field of operation and that has a principal office in California with officers who are domiciled in California. In addition, to qualify as an eligible COVID-19 impacted commercial tenant under proposed §1951.10, the tenant must meet one of three eligibility criteria: (A) the tenant must have experienced a decline in average monthly revenue of 40% or more over the previous two calendar months when compared to either its average monthly revenue for the two months preceding a state or local shelter-in-place order or its average monthly revenue for the same calendar months in 2019, (B) the tenant is prevented from, or delayed in, opening its business because of the State of Emergency, or (C) the tenant has suffered a decline in capacity of 25% or more due to a public health order or occupational health and safety guideline designed to prevent the spread of COVID-19. Finally, proposed §1951.10 is not applicable to any publicly traded company or a company that is owned or affiliated with a publicly traded company.

If the tenant and landlord cannot reach a mutually agreeable modification within 30 days after the date that the landlord receives a negotiation notice from the tenant, then the tenant has the one-time right to terminate its lease by providing written notice to the landlord within 10 days after the expiration of such 30-day negotiation period. If the tenant terminates its lease in accordance with the provisions of proposed §1951.10, it will have no liability for future rent, fees, or costs that otherwise may have been due under the lease, but will, nevertheless, be responsible for payment of (i) 3 months’ worth of the past due rent incurred during the State of Emergency (or such lesser amount as may actually be unpaid), and (ii) all rents incurred and unpaid outside of the State of Emergency. The tenant is required to vacate the leased premises within 14 days after it notifies landlord of the termination and the foregoing payments must be made within 12 months of tenant’s vacating of the premises. After the tenant vacates the premises, the lease and any third-party guaranties associated with the lease shall terminate and no longer be enforceable.

Proposed §1951.10 shall no longer be operative as of the later of (i) December 31, 2021 or (ii) two months after the end of the State of Emergency.

 

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ⁱ Greg Cornfield, Bill Allowing Commercial Tenants to Renegotiate, Break Lease Deals Advances in Calif., COMMERCIAL OBSERVER, https://commercialobserver.com/2020/05/california-senate-sb939-commercial-tenants-renegotiate-break-lease-coronavirus (last visited June 1, 2020).
ⁱⁱ Senator Wiener Press Release, Senator Wiener and Senator Gonzalez’s Legislation to Allow Small Businesses to Renegotiate Leases and to Place a Moratorium on Commercial and Nonprofit Evictions Passes Senate Judiciary Committee, HTTPS://SD11.SENATE.CA.GOV, https://sd11.senate.ca.gov/news/20200522-senator-wiener-and-senator-gonzalez’s-legislation-allow-small-businesses-renegotiate (last visited June 1, 2020).
ⁱⁱⁱ Senate Judiciary Committee Hearing, Friday, May 22, 2020, Senate Media on Demand, HTTPS://WWW.SENATE.CA.GOV, https://www.senate.ca.gov/media-archive (last visited June 1, 2020).