Lessons From Failed Calif. Bill Protecting Small Biz Tenants

By Grace Winters, Ray Triana and Delilah Clay
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Law360 (June 23, 2020, 6:00 PM EDT) --
Grace Winters
Grace Winters
Ray Triana
Ray Triana
Delilah Clay
Delilah Clay
On June 9, S.B. 939 was heard in the California Senate Appropriations Committee after having been approved in late May by a 5-1 vote in the Senate Judiciary Committee. The Senate Appropriations Committee decided the fate of the bill on June 18, killing the bill in the committee.

While this particular bill is now dead, it remains relevant for real estate professionals to evaluate the impact the bill would have had if passed, given the unpredictable effects of the COVID-19 pandemic. Tenant protections are still a hot issue for lawmakers, and the implications of this bill remain relevant for landlords and tenants alike, in case similar legislation is proposed in the coming months.

The bill, co-authored by Sens. Scott Wiener and Lena Gonzalez, sparked major controversy, pitting small-business tenants against landlord groups. While tenants sought much needed relief in the wake of COVID-19, landlords asserted that the proposed law would have improperly interfered with existing commercial relationships and tilted the playing field too far in favor of tenants.

S.B. 939 had two main parts. The first part of the proposed law would have significantly impacted landlords' eviction remedies. While the California Judicial Council effectively shut the courthouse door to eviction actions until 90 days after Gov. Gavin Newsom lifts the state of emergency put in place on March 4,[1] S.B. 939 (as amended as of May 29) would have further restricted commercial landlords' ability to pursue eviction.

The legislation would have applied to "eligible COVID-19 impacted commercial tenant[s]" and provided that, until 90 days after the state emergency proclaimed by the governor is lifted, a landlord may not (1) serve on the tenant a three-day notice under Code of Civil Procedure Section 1161(2) to pay or quit for failure to pay rent due under the lease that accrued during the state of emergency or (2) issue a default notice for failure to restore a security deposit under Code of Civil Procedure Section 1161(3) if such deposit was applied to outstanding rents accrued during the state of emergency.

In order for these provisions to apply, the tenant would have been required to submit a sworn statement under penalty of perjury affirming that it is an eligible COVID-19 impacted commercial tenant because:

  • It is a tenant (including businesses and nonprofits) that occupies nonresidential property under a lease; 

  • It operates primarily in California; and

  • At least one of the following: it was prevented/delayed from opening due to emergency orders; compliance with such orders has resulted in a decline of 15% or more in capacity; or it has suffered a decline of 20% or more in average monthly revenue over two comparison months, according to a revenue-impact threshold specified in the statute.

The revenue-impact threshold could be satisfied based on comparison with either revenues for the two months preceding the emergency order or revenues from the comparable two-month period in 2019. Additionally, tenants would have been retroactively protected from eviction because the law declares void any notices with respect to rent payments or security deposit restoration obligations accruing or occurring during the state of emergency which were previously sent to a tenant who was an eligible COVID-19 impacted commercial tenant at the time such notice was sent.

Further, the landlord would have been prevented from imposing late fees or collect unpaid rent accrued during the state of emergency, and tenants have had 12 months after the state of emergency ends to repay any unpaid rent from that period. Landlords argued that, by default, this bill would have shifted the burden of rent deferral entirely onto them, even if the tenant is otherwise able to pay the unpaid rent. However, tenants argued that such relief was necessary as there is not currently a foreseeable end in sight for the difficulties they face.

Finally, the eviction-related provisions of S.B. 939 would have prohibited any willful harassment, intimidation, threat or retaliation against a commercial tenant. It also entitled the tenant to receive its actual damages plus an amount up to $2,000 per occurrence and reasonable attorneys fees. Further, such willful action would have been an unlawful business practice under Business and Professions Code Sections 17200 et seq., and such remedies were to be cumulative with other remedies available.

The second part of the proposed law would have imposed an obligation on landlords to engage in workout negotiations. However, instead of applying to all businesses that occupy nonresidential real property under a lease, this portion was intended to cover restaurants, bars and entertainment venues.

Specifically, for purposes of this portion of the law, an eligible COVID-19 impacted commercial tenant would have had to certify under penalty of perjury that:

  • It is a small business (not dominant in its industry, has its principal office located and officers domiciled in California, has 500 or fewer employees, and is not a publicly traded company or affiliate thereof) operating as an eating or drinking establishment, place of entertainment or performance venue (including nonprofits);

  • It operates primarily in California; and

  • It was prevented/delayed from opening during the state of emergency; compliance with the emergency orders resulted in a decline in capacity of 25% or more; or it has suffered a decline of 40% or more in average monthly revenue over the past two most recent months (calculated as noted above).

The proposed law would have greatly empowered such tenants in respect of initiating workout negotiations and terminating their lease if common ground was not reached. If an eligible tenant wanted to modify the economic terms of its commercial lease, the tenant would merely have had to notify the landlord in writing of the specific modifications the tenant desires.

The law would have further provided that, if the parties negotiated in good faith for 30 days and were unable to reach agreement, the tenant could terminate its lease by written notice to the landlord within ten days thereafter.

In such event, the tenant would have to vacate the premises within 14 days after the termination notice is served on the landlord. Upon the tenant vacating, the lease would terminate, along with all further rent obligations and all guaranties. The proposed law would have provided that the tenant remains liable only for three months' rent accruing during the state of emergency and all unpaid rent that accrued outside the emergency period prior to such termination, all of which would have needed to be repaid within 12 months after the tenant vacated the premises.

In this way, landlords argued that the law shifted the power to tenants to determine the outcome of such negotiations. This part of the law would have been effective until the later of Dec. 31, 2021, or two months after the declared state of emergency ends.

S.B. 939 was one of a handful of bills recently moving through the Legislature looking to address some of the economic consequences of the COVID-19 pandemic. A similar measure authored by Assembly Member Monique Limon, A.B. 2501, which also died in the Assembly, would have required lenders to offer extended forbearance on residential and multifamily mortgages and vehicle financing loans.

While that bill did not address commercial property leases, the approach was similar to S.B. 939 as it would have provided en masse, a period of non or limited repayment on existing contractual relationships without providing much relief to the financial services companies and property owners that stand to go months without receiving payment.

Members of the Legislature are continuing to evaluate ways to balance the needs of constituents that have lost their jobs or had their businesses severely hampered, with the downstream consequences of hitting pause on these financial arrangements that are a significant part of the foundation of our economy.

To gain some ground in the face of serious opposition from landlord and lender groups, the next iterations of proposed legislation may need to focus more directly on particular segments of the economy and smaller constituencies rather than tenants and borrowers generally, similar to the way S.B. 939 focused a portion of its implications only on restaurants and live entertainment venues.

As individuals and companies begin to exhaust the financial support received from expanded unemployment benefits and various elements of federal relief, we expect there to be increased bankruptcy activity which may push the Legislature to take additional action in this area. Regardless of the incentives, to be successful any proposed legislation will need to balance more effectively between the interests of tenants/borrowers and landlords/lenders.

Grace Winters is a partner, Ray Triana is counsel and Delilah Clay is a legislative and regulatory adviser at Manatt Phelps & Phillips LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Under Emergency Rules, a court may not issue a summons on a complaint, or enter a default or default judgment for restitution on an unlawful detainer (i.e., eviction) action unless it is necessary for health and safety reasons. Further, in pending actions, a trial date may not be set for earlier than 60 days after a request for trial is made, and any existing trial date must be continued for 60 days unless an earlier date is required, in order to protect public health and safety. See Judicial Council, Emergency Rules Related to COVID-19, Emergency Rule 1.

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