A proposed California law moving rapidly through the legislature aims to aid restaurants, bars, entertainment venues affected by the Covid-19 pandemic. But it would be devastating to the commercial landlords who provide their retail space.
If enacted, Senate Bill 939 would quickly be challenged in the courts; the California Business Roundtable and other groups have called it unconstitutional and said they will sue to block its enforcement if it becomes law.
SB 939, authored by Senator Scott Weiner (D-San Francisco), would in effect erase the future lease obligations of many designated commercial tenants that experienced a decline in revenue of 40% or more, or who had to reduce their capacity by 25% or more.
They could unilaterally terminate their leases without any future liability for rents, fees or costs, other than three months of past-due rent.
Their only obligation would be to “negotiate in good faith” with their landlords. If no agreement is reached in 30 days, the tenant can cancel the lease.
Given that tight timeframe, the proposed law would effectively strip landlords of bargaining power, forcing them to comply with a tenant’s demands for rent reductions and other benefits unless they have another potential tenant waiting for that space – unlikely in today’s economic environment.
Evictions would be barred as long as emergency Covid-19 orders are in effect, including any that occurred after the state of emergency was declared and before enactment of the bill.
The bill’s provisions apply to “a commercial tenant that is … an eating or drinking establishment, place of entertainment, or performance venue.” It excludes publicly held companies and the stores they operate.
Although the bill gives tenants “my way or the highway” power to demand rent concessions, it does not shield landlords from their continuing obligations to pay their mortgages, property tax bills, maintenance costs and other expenses.
However, there is nothing in the text that prohibits its provisions from being waived.
Landlords entering into a lease with a commercial tenant that might fall under the provisions of the bill should consider inserting the following language:
“The Tenant acknowledges that it received, read, and understands pending California Senate Bill 939 which grants the Tenant the right to cancel this Lease under the circumstances described in the Bill. After consultation with its counsel, the Tenant irrevocably and unconditionally waives any rights it would otherwise have under the Bill to cancel this Lease.”
There is no certainty that such a waiver would be enforceable, but including it in a lease could provide a basis for disputing an attempted lease termination, and give the landlord some negotiating leverage. If it turns out that the waiver is unenforceable, the landlord has lost nothing, and is in the same position as if the clause had not been added.
SB 939 is designated an “urgency statute,” meaning it would take effect immediately upon being passed by the legislature and signed by the governor. It would be in effect until the end of 2021 or two months after the declared state of emergency ends, whichever is later.
By Robert C. Weiss