There has been a lot of talk in the industry about the proposed CA Senate Bill 939 that interferes with leases between landlords and certain tenants. Since so many of our clients have asked about the bill, I decided to actually read the legislation since I could not find another source that explained it to me clearly. This is my attempt to share what I learned.
First, a few disclaimers:
- I am not a lawyer. This is not legal advice. I am just an individual that decided to read the bill and share what I think it says.
- Like some very poorly written sections of a lease where you need to read it 5 times to have a chance at understanding what was intended, this bill is not clearly written. As a result, I could be reading sections incorrectly, but I have done my best to state it as clearly as possible.
- This bill is ever evolving. The bill written as of June 2, 2020 looks nothing like the bill originally drafted a few months ago. It could change a lot in the next few weeks.
- I highly, highly recommend that if this bill gets enacted that landlords immediately engage legal counsel. This is definitely a situation of “don’t try this at home” because you most certainly will get hurt if you do.
- I am mostly paraphrasing the bill versus quoting it because if I quoted it then it defeats the purpose of this blog which is to provide clarity. If you want the exact words, read the bill (link is provided below).
- In this blog, I am providing very little opinion about the bill. This will likely be the subject of the next blog, but I thought that simply understanding what the bill says is a good first step.
Highlights of CA Senate Bill 939
- As of now, the bill ONLY applies to eating and drinking establishments, places of entertainment, or performance venues. The bill was sponsored by The Bay Area Hospitality Coalition which is why I believe it is focused on just these industries.
- The bill will only apply to businesses with under 500 employees whose principal office is in California and whose officers live in California. I believe that it will apply to franchisees who fit these criteria regardless of how big a franchisor.
- It only applies to the businesses stated above that have been impacted by the virus either:
- Through a 20% decline in revenue as compared to the year prior or months prior whichever demonstrates the impact (this addresses the seasonality of certain businesses);
- OR as a result of a 15% reduction in capacity (which I read as seating or allowed occupancy).
- The tenant does not have to provide the landlord with sales information, but instead state that they are an affected business under penalty of perjury. Probably not a big deal since it is pretty easy to achieve the above criteria.
- If a landlord has a tenant that fits the criteria stated above, AND the tenant provides written notice of their desire to engage in a renegotiation of the lease, AND the tenant and landlord cannot come to an agreement on new terms within 30 days of the tenant’s proposing new terms of the lease, then the tenant has the right to terminate the lease within an additional 10 days notice and vacate within 14 days thereafter.
- The tenant’s liability if they terminate per the above paragraph is:
- They have no further liability for any rents going forward
- 3rd party guaranties are voided
- The tenant would owe a maximum of 3 months of rent that went unpaid since the state of emergency started on March 5th, 2020.
- The tenant would have 12 months after vacating to pay the above stated amount.
Where It Gets Very Confusing
- The bill provides that a Landlord cannot serve an unlawful detainer action until 90 days after the state of emergency is lifted. So it might be possible for a tenant to inform a landlord that they are a tenant that qualifies to renegotiate the rent, but not ask to renegotiate the rent. Under this circumstance, the tenant might be able to stay in the premises and not pay any rent and just see how it goes.
- It may then be possible that at a later date the tenant could ask to renegotiate terms of the lease and if the landlord and tenant cannot come to terms, the tenant can walk away. Please note that I did not see anything that implies that the tenant has to be reasonable. Even if reasonableness is implied, clearly what the tenant may think is reasonable and what the landlord may think is reasonable could easily be very different.
- The expiration of this bill is December 31, 2021 or 2 months after the declared state of emergency, whichever is later.
Where to Be Really Careful
- The bill will require landlords to notice their tenants of the tenant’s rights under the bill within 30 days of the bill passing.
- Any communication with a tenant that qualifies under this bill needs to be done very carefully. There are a lot of penalties against a landlord built into this bill including penalties for harassment, intimidation, retaliation, and similar. Penalties include a maximum of a $2,000 penalty per violation. There is also a provision for the landlord having to pay the tenant for “actual damages” which is not clearly defined, although I suspect that these words are defined in the legal system and your legal counsel could provide guidance.
- In addition to potential penalties, the bill provides all sorts of ways for an unlawful detainer notice to become void. Because it is easy to make mistakes when serving the tenant and because the legal system is expecting long delays, if one makes a mistake it could cost a landlord a lot of time, money and aggravation. Anyone who knows me well, knows that I am not a big fan of lawyers, but this is a case where I think lawyers are going to provide a very valuable service.
- In its definition of landlord, the bill includes the property management company. As a result, because of how onerous the penalties are and how difficult the bill is to interpret, landlords should expect 3rd party property managers to refuse to handle tenants affected by this bill. I expect that if they are prudent they will insist on their clients using legal counsel.
The next step towards the passage of this bill is it being heard in the Senate Appropriates Committee later this month.
For those of you who want to delve into this matter yourselves, here is the link to the bill, the bill analysis, and other info directly from the California legislature’s site.