On May 22nd The California Senate Judiciary Committee advanced a piece of legislation that would allow small businesses like restaurants and bars to renegotiate the terms of their leases and rental agreements if they have been negatively impacted by the coronavirus shutdowns.
Senate Bill 939 would grant small business owners the ability to modify their lease agreements if they can prove a 40% loss in revenue due to sheltering-in-place orders that have put their livelihoods in jeopardy. If property owners and lessees are unable to come to an agreement within 30 days, the tenant is legally permitted to break the lease with no further financial penalty.
What Does Senate Bill 939 Mean for Property Owners & Businesses?
When the coronavirus first forced the closure of non-essential businesses, many were worried about mass evictions of small businesses and nonprofits that were unable to pay their rent because they weren’t generating any revenue. The California Senate bill was originally introduced as a statewide moratorium on evictions that was intended to help those negatively impacted by COVID-19 shutdown orders.
The bill has now been amended to allow small business owners the right to pursue modifications to their lease agreements if they are still experiencing hardships due to more stringent capacity limits and social distancing regulations.
The amendment to Senate Bill 939 was met with opposition from landlords and landlord advocacy groups saying that it is a gross display of government overreach and unconstitutional.
Justin Thompson, a real estate partner with Nixon Peabody, said that the overall consensus from commercial real estate property owners is that the bill is, “overly broad, overreaching, and it is a bit of a sledgehammer” when something less aggressive would be equally effective.
Thompson continued to explain, “Everyone recognizes that restaurant tenants and smaller non-franchise retail tenants in particular really are in dire straits and in need of assistance. But I think the implications of SB 939 are really laying it at the feet of landlords, and putting them in the situation where, even if they have tenants that were going to make it through this, they might now rethink that and leave the landlord in the lurch.”
Senators Take the Side of Small Business Owners
One Senator, who penned the amendment to the bill, claimed that it was focused on supporting the hospitality industry at a time when they have been all but wiped out. California Senator Scott Wiener, who represents the 11th District that encompasses San Francisco and San Mateo County, argued that, “A mass extinction event of small businesses and nonprofits is in every neighborhood,” and that there is a “very real prospect” of them closing indefinitely due to reduced capacity mandates which essentially cuts their business by 50%.
The bill is specific in the sense that it would not apply to publicly owned businesses. If successful, the law would be in effect for two months after the state of emergency ends, or until the end of 2021, whichever happens first.
Opposition to Senate Bill 939 Grows
The opposition to the bill has been fast and fierce. Matthew Hargrove, senior VP of government relations for the California Business Properties Association (CBPA), said that if SB 939 gets written into law that it “could cause a financial collapse.” Hargrove went on to explain, “Postponement of rents will cause landlord’s financials to crumble and lead to lenders putting out cash calls to lower loan balance and foreclose when landlords cannot pay, and cripple landlords’ abilities to keep their properties open and maintained.”
The CBPA has been aggressively arguing that the amended law would be unconstitutional and could potentially discredit the legitimacy of written contracts and weaken their legal efficacy. The California Business Properties Association (CBPA) warned that this may “allow one party to unilaterally abrogate real estate leasing contracts.” The Senate bill may put landlord-tenant relations at risk and create an unfair playing field that would sour future commercial real estate lease negotiations.
Other groups that are advocating against the new Senate Bill include California Chapters of the Commercial Real Estate Development Association, Building Owners and Managers Association of California, the National Association of Real Estate Investment Trusts, and AIR Commercial Real Estate Association, amongst others.
Some suggested that instead of penalizing property owners, that California should provide additional assistance to tenants affected by the lockdown orders. They pointed to renter relief proposals that have been introduced by Senate Pro Tem Toni Atkins.
Compromise & Community Efforts May Be the Solution
With tensions at an all-time high between small business owners and their landlords, it is clear that this is a very complicated, hot-button issue. Current lease agreements that were negotiated prior to COVID-19 are now existing in a very different reality. There is likely no rent money for landlords to collect in the first place, so it becomes an issue of choosing between reduced rent or no rent at all. Neither of which sound like great options for landlords, but it may be the only compromise available.
California Senator Scott Wiener offered further explanation for writing the bill, “Restaurants, bars, and cafes are expected, frankly, to just suck it up, and magically come up with the high rent that was obtained in pre-COVID circumstances,” he said. “This provision is not for leases to be terminated. It is to provide space and incentive to actually get the renegotiation done. … We know that overwhelmingly, these businesses don’t want to close down. This is their life’s work, they want to find a way to survive.”
In the midst of the mayhem, some commercial landlords have stepped up to work with renters and small businesses to waive back rent and compromise on lease provisions moving forward. It’s clear that neither side wishes to harm the other, but both stand to suffer significant financial loss that would all but cripple them for years to come.
Roberta Economidis is a partner with GE Law Group, a hospitality law practice, and backs SB 939. During a press event on Thursday Economidis said, “hospitality-related businesses need long-term rent relief, not simply a deferral of high rents now that will become an insurmountable debt later.”
California Governor Gavin Newsom had already given permission to local governments to freeze commercial real estate evictions. But that is far from being written into law. The might of Senate Bill 939 would aim to protect all small businesses and nonprofits in the state of California across the board, regardless of local legislators’ rulings. SB 939 will come back in front of a Senate Appropriations Committee in June.