Client Alert

Key Provisions in Proposed California Legislation (SB-939) Impacting Commercial Real Property Owners and Developers

There is urgency legislation pending in the State of California known as Senate Bill No. 939 (“SB-939”) that proposes to add Section 1951.9 to the Civil Code (“Section 1951.9”).  If SB-939 is passed as currently proposed, it would become effective immediately and have a dramatic impact on existing leases and the rights of commercial property developers and landlords. SB-939 provides two categories of rights to certain tenants:

(1)        Eviction protections and rent deferral privileges (Section 1 of Section 1951.9), and

(2)        Lease renegotiation and termination rights (Section 2 of Section 1951.9).

This alert is intended to summarize the most pertinent provisions of SB-939.  Full text of SB-939 is available here.

SECTION 1 OF SECTION 1951.9

Eviction Protections

Section 1 of Section 1951.9 (“Section 1”) makes it unlawful for a landlord to (1) terminate a tenancy, (2) serve notice to terminate a tenancy, (3) use lockout or utility shutoff actions to terminate a tenancy, or (4) otherwise endeavor to evict a tenant of commercial real property, while the COVID-19-related state of emergency proclaimed by Governor Newsom on March 4, 2020 (the “State of Emergency”) remains in effect.

In addition, an eviction which occurs after March 4, 2020 (i.e., after the date of the State of Emergency) but before the effective date of SB-939, is deemed to violate Section 1.  However, an eviction during the State of Emergency is not prohibited if the tenant has been found to pose a threat to the property, other tenants, or a person, business, or other entity, or if a landlord continues an “eviction process that was lawfully begun” prior to the State of Emergency.  SB-939 does not indicate the prerequisites for an “eviction process” to have “lawfully begun.”

Penalties for Violating Eviction Protections

An eviction that violates Section 1 is deemed void, against public policy and unenforceable, and constitutes an unlawful business practice and act of unfair competition under Section 17200 of the Business and Professions Code (“Section 17200”).  Landlords that engage in any harassment, mistreatment or retaliation against a tenant to force such tenant to break or abandon its lease may also be subject to a $2,000 fine.  The remedies provided under Section 1, Section 17200 and any other remedies and penalties provided under all of the other laws of the State of California are cumulative to each other, meaning the tenant may seek all such remedies together or in any combination.

Rent Deferral Rights

For any tenant that does not pay the rent due under its lease while the State of Emergency is in effect, such failure will not constitute a basis for an unlawful detainer proceeding to evict the tenant.  Instead, the cumulative total of such unpaid rent will be due 12 months after the State of Emergency ends.  The landlord cannot charge late fees or interest on rent that became due during the State of Emergency.

Written Notice Required

Written notice of the protections afforded by Section 1 must be provided to tenants of commercial real property within 30 days of the effective date of Section 1.  SB-939 does not specifically reference that the landlord must provide such written notice.  However, such interpretation might be the intent of the legislature and, if SB-939 is enacted as currently proposed, it would be prudent practice for a landlord to provide such notice to its tenants.

SECTION 2 OF SECTION 1951.9

Renegotiation Right

Section 2 of Section 1951.9 (“Section 2”) provides that if a tenant constitutes a “commercial tenant” (as described in more detail below), it is entitled to engage in good faith negotiations with its landlord to modify the rent and economic requirements of its lease.  This right applies regardless of the length of the term remaining on the lease.

To begin the renegotiation process, the commercial tenant must provide a “negotiation notice” to the landlord.  The “negotiation notice” must (1) affirm under the penalty of perjury that the commercial tenant meets the financial criteria, (2) state the desired lease modifications, and (3) be provided to the landlord in accordance with the notice provisions of the lease.

Termination Right

If the commercial tenant and landlord do not reach a mutually satisfactory agreement within 30 days after the date the landlord receives the negotiation notice, then the commercial tenant has the one-time right to terminate the lease (“termination option”) by providing written notice to the landlord (“termination notice”) within 10 days after the expiration of such 30-day negotiation period.

While the commercial tenant is entitled to exercise the termination option without any liability for future rent, fees, or costs that otherwise may have been due under the lease, the commercial tenant is nevertheless responsible for payment of previously due rent in an amount no greater than the following:  (1) a maximum of three months’ worth of the past due rent incurred while the civil authority and regulations related to COVID-19 were in effect (or a lesser sum as may be actually unpaid), plus (2) all rent incurred and unpaid during a time unrelated to COVID-19 through the date of the termination notice.  The foregoing payment must be made to the landlord within 12 months of the termination notice.

Additionally, the termination notice must be sent in accordance with the notice provisions of the lease.  The commercial tenant is required to vacate the leased premises within 14 days after the landlord receives the termination notice.  Upon service of the termination notice, the lease and any third-party guaranties associated with the lease are deemed terminated and no longer enforceable.

Applies to a “Commercial Tenant”

The protections and provisions contained in Section 2 apply to a “commercial tenant.”  This is a narrower scope than the protections afforded by Section 1, which broadly apply to all tenants of commercial real property.  A tenant that is a publicly traded company or a company that is owned by or is affiliated with a publicly traded company does not constitute a “commercial tenant” under Section 2.

Section 2 defines “commercial tenant” as (1) a small business, eating or drinking establishment, place of entertainment or performance venue (those terms are not defined in SB-939), (2) that operates primarily in California, (3) has experienced a decline of 40% or more of monthly revenue as compared to (i) two months before a state or local government shelter-in-place order took effect or (ii) the same month in 2019, and (4) is subject to regulations to prevent the spread of COVID-19 that will financially impair the business as compared to the period before the shelter-in-place order took effect.  While SB-939 does not specifically enumerate the promulgating entities or types of “regulations” to prevent the spread of COVID-19, the intent of the legislature is likely that the commercial tenant’s business is subject to, among other things, physical distancing or restrictive occupancy requirements.

In addition to meeting the criteria discussed above, there is a further requirement for an eating or drinking establishment, place of entertainment or performance venue to constitute a “commercial tenant.”  Such tenant must also have experienced a decline of 25% or more in capacity due to a social or physical distancing order or safety concerns.

Expiration of Section 2

Section 2 becomes inoperative as of the later of (i) two months after the State of Emergency ends or (ii) December 31, 2021.

WHAT’S NEXT?

The next hearing date for SB-939 is May 22, 2020.  If the state Senate ultimately approves SB-939, it will proceed to the Assembly and eventually to Governor Newsom.  We will continue to monitor the progress of SB-939 and provide an update if SB-939 is enacted or further amended.

Cox Castle has created a Task Force to monitor, analyze and advise on a wide array of business and legal challenges arising from the COVID-19 pandemic, including the matters discussed in this alert.  Coordinating across multiple practice groups and industries, the Task Force is keeping track of the latest developments with COVID-19 and working to provide the best advice possible to our clients in the real estate industry and beyond.  If you have any questions about these matters or responding to the COVID-19 pandemic more generally, please reach out to any Cox Castle professional or member of the Task Force.

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