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Bill permitting CRE tenants to renegotiate or break leases advances in CA

California’s Senate Judiciary Committee advanced a bill, Senate Bill 939, that would let small businesses renegotiate and modify lease deals if the shelter-in-place orders and economic shutdowns brought on by the COVID-19 pandemic impacted them, Commercial Observer reports. According to the bill, the tenant could break the lease with no penalty if an agreement isn’t reached after 30 days of negotiations.

Landlord advocates have opposed the proposal, stating it is unconstitutional and it would “upend” leases around California.

“Everyone recognizes that restaurant tenants and smaller non-franchise retail tenants in particular really are in dire straights and in need of assistance,” Nixon Peabody real estate partner Justin Thompson told the Commercial Observer. “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.”

Senate Bill 939 background

Initially, SB 939 prohibited California landlords from evicting businesses and non-profit organizations that could not pay rent during the COVID-19 pandemic. The bill was amended earlier in May so small businesses could start renegotiations if they lost more than 40 percent of their revenue because of health crisis-related government restrictions. The amendment also applied if small businesses had to operate with smaller capacity limits because of extended social distancing mandates.

If the tenant and landlord are unable to reach a, “mutually satisfactory agreement” within 30 days of the landlord receiving the negotiation notice, the tenant can break the lease without liability for future rent, fees or costs that would normally be due under the agreement.

Senator Scott Wiener, one of SB 939’s authors, said during last week’s hearing that the bill is geared towards the hospitality sector, which has been hit the hardest during the pandemic. The renegotiation amendment would not apply to publicly owned companies or their businesses. If passed, the law would last until the end of 2021 or two months after California’s state of emergency ends—whichever date is later.

Wiener also argued that California faces, “a mass extinction event of small businesses and non-profits in every neighborhood,” the Commercial Observer reports. He went to say that the state faced the “very real prospect” of small businesses closing permanently due to prolonged mandates that reduce capacity, “chopping in half someone’s business.”

“This would change the face of our state permanently,” Wiener said during the hearing. “It would severely hamper our ability to recover.”

CRE advocates argue SB 939 could do more harm than good

Matthew Hargrove, senior VP of government relations of the California Business Properties Association (CBPA) wrote to the committee that SB 939, “could cause a financial collapse.”
“This postponement of rents will cause landlord’s financials to crumble and lead to lender 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,” Hargrove wrote.

The CBPA also argued passing a law that diminished contract obligation was unconstitutional and warned it would allow, “one party to unilaterally abrogate real estate leasing contracts.”

The bill could also hurt landlord-tenant relationships throughout California, according to Thompson.

“Everything we do, especially in real estate runs on relationships,” he said. “I think that when you tip the balances so far in favor of the tenant the way that SB 939 does, it certainly strikes at the heart of the idea that we’re in this together. This does not make it feel like landlords and tenants are in this together anymore.”

An effort to find middle ground

West Coast-based law firm Buchalter warned its clients that SB 939 sets a “terrible precedent” and would “upend all of your leases,” according to the Commercial Observer. The firm recommended the state provided tenants with assistance and suggested the renter relief proposals Senate Pro Tem Toni Atkins introduced.

Meanwhile, Wiener acknowledged CRE owners’ needs regarding their loan obligations.

“It’s a complicated issue,” he said. “We don’t went these properties to default on their loans, but we needed to be clear—these landlords aren’t going to be able to collect the pre-COVID rents from these restaurants, bars and cafes. That is not the reality; the choice isn’t between full rent and reduced rent. The choice is between reduced rent and no rent.”

Senate Bill 939 will be heard in the Senate Appropriations Committee in June.

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