Alert – Update on Senate Bill 939’s Potential Impact on Commercial Leases

Note: This article was originally published on 6/5/2020 and was last updated on 6/26/2020.

Update: On June 18, 2020, the Senate Appropriations Committee did not remove SB 939 from the Suspense File, effectively killing the bill for this Legislative Session.

Update: At the June 11, 2020 hearing, the Appropriations Committee, per a 7-0 vote, placed SB 939 on its Suspense File.

Senate Bill 939’s Potential Impact on Commercial Leases

As many in the Commercial Leasing field in California have most likely read or heard, on May 29, 2020 Senate Bill 939, titled “COVID-19: Commercial Tenancies: Evictions,” which was introduced by Democratic State Senators Scott Wiener and Lena Gonzalez, was approved by the California Senate Judiciary Committee 5-1, with 3 NVRs (“no votes recorded.”). Those approving the Bill were Democratic Senators Hannah-Beth Jackson (District 19), Lena A. Gonzalez (Dist. 33), Maria Elena Durazo (Dist. 24), Bill Monning (Dist. 17), and Bob Wieckowski (Dist. 10); the lone no vote was Republican Brian W. Jones (Dist. 38).  Those not recording a vote were Republican Andreas Borgeas (Dist. 8) and Democrats Henry I. Stern (Dist. 27) and Thomas Umbeg (Dist. 34). The Bill is now scheduled for a fiscal review hearing with the Senate Appropriation Committee on June 9, 2020.

The Bill proposes to add sections 1951.9 and 1951.10 to the Civil Code, relating to commercial tenant evictions.

Specifically, SB 939 places a temporary moratorium on all evictions/unlawful detainer actions against any qualifying commercial tenants, defined as Eligible COVID-19 Impacted Commercial Tenants,[1] until 90 days after the COVID-19 State of Emergency issued by Governor Newsom on March 4, 2020 (“State of Emergency”) is lifted or repealed. (Proposed, Civ. Code § 1951.9(a) and (b).)  It also allows all Eligible COVID-19 Impacted Commercial Tenants one (1) penalty free year of rent deferment for any accrued rents during the State of Emergency from the date the State of Emergency ends. (Id. at §§ 1951.9(i) and (j).)

It also provides that small (not publicly traded, under 500 employees, “not dominant in its field of operation,” and with its principal office in and officers domiciled in California) restaurants, bars, places of entertainment, and performance venues, which meet certain additional requirements,[2] can unilaterally demand “good faith” re-negotiations of existing leases and, if a re-negotiated agreement cannot be reached within 30 days, these qualifying tenants can terminate their existing leases with capped recoverable damages (a maximum of  three (3) months of rent accrued during the State of Emergency plus any additional rents incurred and unpaid outside of the State of Emergency).  (Proposed, Civ. Code §§ 1951.10(a)-(d).)  Additionally, these specified tenants would have one (1) year from the termination of the lease to pay the penalty-free recoverable damages, and any third-party guaranties associated with the lease would be unenforceable. (Id. at § 1951.10(d).)  This section, however, would only be operative until December 31, 2021, or two (2) months after the State of Emergency ends, whichever is earlier. (Id. at § 1951.10 (h).)

SB 939 also creates civil remedies for all commercial tenants, whether they are Eligible COVID-19 Impacted Commercial Tenants or not, for conduct of a commercial landlord deemed to be willfully harassing, intimidating, threatening, or retaliatory against a commercial tenant with the intent to terminate the tenant’s commercial occupancy. The remedies available to the commercial tenant include: the tenant’s actual damages, up to $2,000, with a minimum of $250, for each violation; the prevailing tenant’s attorney’s fees; and other remedies provided by Business and Professions Code section 17000, as well as any other State law. (Id. at §§ 1951.9(n), (o), (p) and (q).)

Both of these sections would go into effect immediately upon being signed into law by the Governor.

SB 939 still has many roadblocks to clear before becoming law. First, at its June 9, 2020 hearing, the Senate Appropriation Committee could amend the bill or send it to another committee for further review. From there, it will have to pass, via a super majority (2/3 vote), in both the Senate and Assembly, and, assuming it is approved by both houses, it would then proceed to Governor Newsom’s desk, where he may or may not sign it into law. Numerous heavyweights in the real estate industry have lined up in opposition to the Bill, including: Building Owners and Managers Assoc. of California (BOMA); California Assoc. of Realtors (C.A.R.), California Retailers Assoc. (CRA), California Business Properties Assoc. (CBPA), California Chambers of Commerce, International Council of Shopping Centers (ICSC), etc., arguing that this bill would “push many [commercial landlords] into foreclosure” and that it unconstitutionally “undermines all real estate contracts in the state.” (Senate Judiciary Committee Bill Analysis, Comment 6.)

Specific Bill Provisions for Reference

Section 1: Civil Code, §1951.9

(a)…

           (5) “Eligible COVID-19 impacted commercial tenant” 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:

                      (A) It is a commercial tenant that has experienced a decline of 20 percent or more in average monthly revenue over the two most recent calendar months…

                      (B) It is a commercial tenant that was prevented from opening or required to delay opening its business because of the state of emergency.

                      (C) It is a commercial tenant that has suffered a decline of 15 percent or more in capacity due to compliance with an official public health order or occupational health and safety guideline for preventing the spread of the coronavirus COVID-19.

(b) Until 90 days after the state of emergency is lifted, it shall be unlawful for a commercial landlord to serve a commercial tenant with a notice pursuant to paragraph (2) of Section 1161 of the Code of Civil Procedure if both of the following apply:

            (1) The notice requires payment of rent that accrued during the state of emergency.

            (2) The commercial tenant has served written notice on the premises’ landlord affirming, under the penalty of perjury, that the commercial tenant is an eligible COVID-19 impacted commercial tenant as defined by this section.

…

(i) The failure of an eligible COVID-19 impacted commercial tenant to pay rent that accrues during the state of emergency shall not be grounds for an unlawful detainer action. The unpaid balance of any rent that accrued on the commercial tenancy of an eligible COVID-19 impacted commercial tenant during the state of emergency shall be due at the end of the month containing the date 12 months after the end of the state of emergency, unless the tenant has reached an agreement with the person, business, or other entity to pay off the balance at a later time.

(j) Notwithstanding any lease provision to the contrary, late fees shall not be imposed for rent that accrued on the commercial tenancy of an eligible COVID-19 impacted commercial tenant during the state of emergency unless that rent remains unpaid after it becomes due pursuant to the terms of subdivision (i).

(k) Notwithstanding Section 1479, a landlord shall apply any rental payment made by an eligible COVID-19 impacted commercial tenant after the state of emergency is lifted toward the current month’s rent before applying any residuals to any unpaid balance corresponding to rent that came due during the period of the state of emergency.

(l) Written notice of protections afforded by this section shall be provided to tenants of commercial real property within 30 days of the effective date of this section. If the commercial landlord customarily communicates with the commercial tenant in a language other than English, the commercial landlord shall provide the written notice required by this section in that other language.

…

(n) In addition to the prohibitions contained in subdivisions (a) and (b) of Section 798.3, a commercial landlord shall not willfully harass, intimidate, threaten, or retaliate against a commercial tenant with the intent to terminate the occupancy. Any commercial landlord who violates this section shall be liable to the commercial tenant in a civil action for all of the following:

            (1) Actual damages of the tenant.

            (2) An amount not to exceed two thousand dollars ($2,000) for each incident constituting a violation. In determining the amount of the award, the court shall consider proof of those matters as justice may require; however, in no event shall less than two hundred fifty dollars ($250) be awarded for each separate cause of action. Subsequent or repeated violations, which are not committed contemporaneously with the initial violation, shall be treated as separate causes of action and shall be subject to a separate award of damages.

(o) In any action under subdivision (n), the court shall award reasonable attorney’s fees to a prevailing commercial tenant. In any action the commercial tenant may seek appropriate injunctive relief to prevent continuing or further violation of the provisions of this section during the pendency of the action.

(p) Willful violation of this section shall constitute an unlawful business practice and an act of unfair competition within the meaning of Section 17200 of the Business and Professions Code. The remedies and penalties provided by this section are cumulative to each other, the remedies under Chapter 5 (commencing with Section 17200) of Part 2 of Division 7 of the Business and Professions Code, and the remedies or penalties available under all other laws of this state.

Sec. 2: Civil Code, §1951.10

(a)…

            (2) “Eligible COVID-19 impacted commercial tenant” means a small business that operates primarily in California, that occupies commercial real property pursuant to lease, and that meets one of the following criteria:

                      (A) It is an eating or drinking establishment, a place of entertainment, or a performance venue that has experienced a decline of 40 percent or more of average monthly revenue over the two most recent calendar months…

                      (B) 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.

                      (C) It is an eating or drinking establishment, a place of entertainment, or a performance venue that has suffered a decline of 25 percent or more in capacity due to compliance with an official public health order or occupational health and safety guideline for preventing the spread of the coronavirus (COVID-19).

            (3) “Small business” means a business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which has 500 or fewer employees..

(b) An eligible COVID-19 impacted commercial tenant who wishes to modify its commercial lease may engage in good faith negotiations with its landlord to modify any rent or economic requirement regardless of the term remaining on the lease.

(c) A commercial tenant that is an eligible COVID-19 impacted commercial tenant may serve written notice on the premises’ landlord affirming, under the penalty of perjury, that the commercial tenant is an eligible COVID-19 impacted commercial tenant as defined by this section and stating the lease modifications the commercial tenant desires to obtain.

(d) If the eligible COVID-19 impacted commercial tenant and the 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 eligible COVID-19 impacted commercial tenant may terminate the lease by serving a notice of termination of the lease on the landlord. The tenant shall have 14 days from service of the notice to vacate the premises. Once the eligible COVID-19 impacted commercial tenant vacates the property, all of the following shall apply:

            (1) The lease shall terminate.

            (2) No further liability for any rent, fees, or costs shall accrue under the lease.

            (3) Any third-party guaranties associated with the lease shall terminate and shall no longer be enforceable.

            (4) In lieu of any other damages, the eligible COVID-19 impacted commercial tenant shall be obligated, within 12 months of vacating the commercial real property, to pay the landlord all of the following:

                        (A) Three months’ worth of the past due rent incurred during the state of emergency or a lesser sum as may be actually unpaid.

                        (B) All unpaid rent that accrued outside of the state of emergency.

….

(g) This section shall not apply to any publicly traded company or a company that is owned by, or is affiliated with, a publicly traded company.

(h) This section shall be inoperative on December 31, 2021, or two months after the declared state of emergency ends, whichever is later.

SEC. 4. This act is an urgency statute necessary for the immediate preservation of the public peace, health, or safety within the meaning of Article IV of the California Constitution and shall go into immediate effect. The facts constituting the necessity are: 

In order to mitigate the economic hardships to tenants of commercial real property, including businesses, nonprofit organizations, and eating or drinking establishments, resulting from the coronavirus (COVID-19), it is necessary that this act take effect immediately.

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[1] Any commercial tenant that operates primarily in California and that: (1) experienced a 20% decline or more in average monthly revenue over the most 2 recent calendar months; (2) was prevented or delayed from opening its business because of the State of Emergency; or (3) incurred a 15% or more decline in capacity due to compliance with official public health or occupational health and safety guidelines associated with COVID-19.

[2] Any eating or drinking establishment, a place of entertainment, or a performance venue that: (1) has experienced 40% or more decline in average monthly revenue for the 2 most recent calendar months; (2) was prevented or delayed from opening its business because of the State of Emergency; or (3) incurred a 25% or more decline in capacity due to compliance with official public health order or occupational health and safety guidelines associated with COVID-19.