Just when we thought that we had heard it all from our state’s legislators in Sacramento, along comes a draconian new piece of legislation that would literally make many real estate leases worth no more than the paper they are written on.
Sound hyperbolic? Perhaps, but the truth is that if SB-939 is passed by the State Senate, State Assembly and then signed into law by Governor Newsom, commercial property investors could be in for some real trouble.
What is SB-939? It is an enhancement to the current emergency action taken by Governor Newsom to provide relief for commercial property tenants from the effects of the stay-at-home mandate that began back in March. That order temporarily protects commercial tenants from being evicted for non-payment of rent because of a virus-induced loss of revenue. SB-939 would take it to a whole new level.
Let’s take a quick look:
First of all, the bill attacks the sanctity of the lease contract between a landlord and a tenant in several ways. It contains provisions that allow a commercial tenant who qualifies as an “eligible COVID-19 impacted commercial tenant” (the definition of which is ambiguous and contradictory in the bill’s current form) to terminate their lease and walk away if they cannot reach a satisfactory agreement with the landlord to modify its terms.
Those potentially eligible may include “small businesses” (also poorly defined), eating & drinking establishments and entertainment venues, which could translate to just about everybody who occupies space in Orange County. This would significantly undermine the rights of the landlord, essentially allowing the tenant breach a lease they willingly entered into. Without the tenant’s contractual obligation to pay rent, the lease becomes little more than a non-binding, temporary agreement to use the space until further notice. That would put upward pressure on cap rates as buyers would insist on a higher yield to mitigate the additional vacancy risk.
SB939 also contains a provision stripping the landlord’s right to evict an “eligible COVID-19 impacted tenant” who remains in possession for non-payment of rent through December 31, 2021, or two months after the governor’s emergency order is lifted, whichever occurs later. Yes, you read the right; it’s the later of the two dates, which makes it indefinite. The tenant would then have 12 months after that date to pay past due amounts without penalty. The potential ramifications of this particular aspect of the law would be devastating to property owners who would still have to meet all their expense obligations, including debt service, property taxes, insurance and other operating expenses while their tenants occupy their space rent free.
We are not lawyers, but that sounds unconstitutional to us, and if the bill passes, we expect it to be challenged in the courts. However, just the potential of this intrusion into the relationship between landlord and tenant could throw another blanket of uncertainty over an already-stressed market and further complicate new lease negotiations going forward.
Does this bill have a chance to become law? The answer is yes. It has already survived several committee hearings in the State Senate, with the next hearing in the Appropriations Committee coming as soon as June 8th. If it clears that hurdle, it would go the Senate floor for a second reading and an eventual vote. Given the supermajority status of that body, it would have a good chance of passing.
Next, the bill would go to the State Assembly (which also has a supermajority) for review and a vote before sending it on to Governor Newsom to sign it into law. The current version of the bill calls for it to take effect immediately thereafter.
This is the general thrust of the bill, the details of which are too voluminous to cover in a single post. We are working hard to understand it a more granular level and will be reporting back to you soon. In particular, we seek more clarity on who qualifies as an “eligible COVID-19 impacted commercial tenant” So, stay tuned. If we can help answer any questions you may have in the meantime, just give us a call.
Click here to take a look at the current working version of the bill for yourself.