Proposed California Bill Would Allow Retail Tenants To Break Leases With Little Penalty

A proposed bill circulating in California's Legislature would allow a commercial tenant to terminate its lease with a landlord if a resolution taking into account the economic effects of the coronavirus isn't met.

If passed, the legislation, Senate Bill 939, would allow a tenant struggling because of state or city shelter-in-place orders to negotiate in good faith with its landlord. But if neither can find a resolution, "the commercial tenant may terminate the lease without any liability for future rent, fees, or costs that otherwise may have been due under the lease by providing written notification to the landlord."

SB 939 is backed by California Sens. Scott Wiener, a Democrat from San Francisco, and Lena Gonzalez, a Democrat from Long Beach, and it has finished its third revision. The bill, introduced in March, initially placed a moratorium on commercial evictions for the duration of the coronavirus health emergency.

But in subsequent revisions, it has evolved from prohibiting the eviction of businesses and nonprofits during the health emergency into a pro-commercial tenant protection bill that one commercial real estate advocacy group says positions tenants over landlords and business over others.

The bill further says that tenants, described as small businesses, eating or drinking establishments, places of entertainment or performance venues, would be obligated to pay past-due rent, but no greater than three months’ worth. The tenant would have 12 months to pay it. 

Additionally, the bill would exclude publicly traded companies and their affiliated companies, such as franchisees, from taking advantage of the program. The bill will be in effect until Dec. 31, 2021, or two months after the end of the coronavirus emergency, whichever is later.

On Friday, AIR CRE, a California commercial real estate trade organization, sent a letter to its members warning them of the dire consequences of the legislation and to take action to oppose the bill.

"We believe that SB 939 clearly violates the contracts clause of the U.S. Constitution and fails the basics of the Blaisdell Test that any court will apply to this legislation," AIR CRE Executive Director Tim Hayes said in the letter.

"This bill allows withholding of rent for more than a year, removes existing legal remedies, and rights from, and gives one party to a contract the right to walk away from a valid lease. Additionally, SB 939 is too broad, poorly written and confusing, does not balance the needs of both parties, is not a reasonable solution, and would prolong the economic pain it purports to address." 

The bill is currently in the state Senate Judiciary Committee. The next hearing date for it is May 22.

CORRECTION: May 19, 3:00 P.M. PT: A previous version of the story misspelled Tim Haye's name. The story has been updated.