Proposed California Bill Would Ban Commercial Evictions During State of Emergency, Grant Lease Termination Rights to Qualifying Tenants (UPDATE)

UPDATE NO. 2:  On May 29, 2020, the Senate submitted the amended language to the bill, which narrows the class of commercial tenants protected from eviction and afforded lease negotiation and termination rights. The amended bill is set for hearing by the Senate Appropriations Committee on Tuesday, June 9, 2020, and the notable revisions are as follows.

Eviction Moratorium (California Civil Code Section 1951.9)

• The eviction moratorium was narrowed to apply only to “Eligible COVID-19 impacted commercial tenant,” rather than all commercial tenants. Eligible tenants are those that operate primarily in California and meet one of the following criteria: (a) has experienced a decline of 20% or more in average monthly revenue as compared to the two calendar months before the state or local shelter-in-place order took effect and/or the same calendar months in 2019; (b) was prevented from or delayed opening due to the state of emergency; or (c) has suffered a decline of 15% or more in capacity due to compliance with COVID-19 orders or guidelines.
• The moratorium was extended to 90 days following the lifting of the state of emergency.

Negotiation and Termination Rights (Proposed California Civil Code Section 1951.10)

• Express negotiation and termination rights no longer apply to all COVID-19 impacted small businesses. The category of protected tenants was narrowed to apply only to small business tenants that are eating or drinking establishments, places of entertainment or performance venues.
• The amendment expressly defines “small business” as a business that is not dominant in its field of operation, has a principal office located in and officers domiciled in California, and has 500 or fewer employees.
• In addition to the limit on rent liability following lease termination, any third-party lease guaranties shall terminate.

UPDATE #1: On May 22, 2020, California’s Senate Judiciary Committee voted 5 to 1 to pass Senate Bill 939, but moved to further amend the bill and re-referred to the Appropriations Committee for fiscal impact review. Once the amended language is drafted and submitted, the earliest Appropriations Committee hearing date would be Monday, June 8, 2020. At the hearing, the Committee could vote to approve the bill (in which case, it would be sent to the Senate floor for a second reading), amend the bill or refer it to another committee. The last day for each of the Senate and the Assembly to pass bills is Monday, August 31, 2020, except bills that take effect immediately or bills in Extraordinary Session. Senate Bill 939 expressly provides that it is “it is necessary that this act take effect immediately,” thereby permitting the legislature to act on the bill outside of the August 31 deadline.

On May 13, 2020, proposed California Senate Bill No. 939 was amended to not only prohibit landlords from evicting commercial tenants during the pendency of the COVID-19 state of emergency, but to extend protections to certain qualifying tenants permitting express rent reduction negotiation rights and lease termination rights. Unlike the eviction moratorium restrictions imposed in many counties and cities across the state, tenants are not required to show financial losses related to COVID-19; all commercial tenants are shielded from eviction. In addition, the bill gives a subset of commercial tenants express negotiation and termination rights.

General Commercial Eviction Moratorium

The eviction moratorium is broad. The proposed Civil Code Section 1951.9 would prohibit any landlord from terminating a tenancy, using lockout or utility shutoff actions or evicting a tenant of commercial property during the pendency of the state of emergency proclaimed by Governor Newsom on March 4, 2020. The proposed legislation does not require any showing of financial losses resulting from COVID-19 or “shelter in place” restrictions, and as a result, the prohibition would apply to all commercial tenants, expressly including businesses and nonprofit organizations. The only exception is if the tenant has been found to pose a threat to the property or other tenants or third parties.

In addition, the proposed legislation provides that if a tenant does not pay rent during the state of emergency, the tenant will have until 12 months following the end of the state of emergency to pay the amount due. A landlord could not impose late fees on unpaid rent during the state of emergency.

Additional Protections for Small Businesses, Restaurants and Cafés, and Entertainment Venues

The protections for certain commercial tenants are even broader and would give them express rent negotiation rights and lease termination rights. A tenant that would qualify under this portion of the bill would be required to operate primarily in California and have a primary business that is a small business, eating or drinking establishment, place of entertainment, or performance venue. The tenant would be required to show a decline in 40% or more of monthly revenue as compared to either the two months before the local or state shelter-in-place order took effect or the same month in 2019, and if a restaurant or entertainment or performance venue, a 25% decline in capacity due to social distancing orders.

Although publicly traded companies and their affiliates are expressly excluded from protection, the bill does not define “small business,” so this language will be open to interpretation and argument from both sides. It is unclear what constitutes “primarily operating in California.”

If passed, this bill would allow a commercial tenant that satisfies the listed conditions to notify its landlord that it meets the financial criteria under the statute and to list the desired lease modifications, including rent reduction. If the parties do not reach an agreement within 30 days of the notice, then the tenant may terminate the lease without liability for any amounts owing after the termination date. For prior rent due, the tenant’s liability would be limited to the sum of three months’ worth during the state of emergency and all other amounts unpaid unrelated to COVID-19, which amount would be not be due until 12 months after the lease termination date.

As proposed, California Civil Code Section 1951.9 would be in effect until the later of December 31, 2021, or two months after the end of the state of emergency.

According to the California Legislature’s website, the bill is scheduled for hearing by the Senate Judiciary Committee on Friday, May 22, 2020. It is possible that the bill will be further amended, or ultimately, may not pass to become law. However, until it is enacted (or not), landlords and tenants will be left in a state of limbo. Any landlords that commence eviction proceedings may have incurred tremendous expense and resources with respect to non-paying commercial tenants. Commercial tenants that are not publicly traded companies may seek to avail themselves of the lease negotiation and termination rights under the proposed legislation in anticipation of enactment, with arguments that they satisfy the primary California operation and other requirements.

For more information, please reach out to your regular Pillsbury contact or the authors of this client alert.

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