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California Bill Would Allow Pandemic-Stricken Businesses to Abandon Leases

May 19, 2020 by Marc Rapport
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California lawmakers have before them a bill that would further codify eviction moratoriums already in place in the Golden State and give many businesses the right to walk away from leases if they can't be renegotiated.

As shelter-in-place restrictions ease across the country, including in California, Governor Gavin Newsom's office issued guidance for restaurants, wineries, brewers, and distilleries to follow as they reopen restricted dining rooms when their local jurisdictions permit. In Los Angeles County, that well may not be until August.

One of the bill's creators said the idea now is to help give restaurants and other hospitality businesses operating with reduced capacity "a space to survive."

State cannot afford "mass closures"

On his website, Senator Scott Wiener, a Democrat who represents San Francisco and part of San Mateo County, said, "Our small businesses and nonprofits are part of the fabric of our community, and they are hurting like never before. If we want to see them reopen, we must act swiftly by empowering them to renegotiate their leases or terminate their leases if necessary. California cannot afford mass closure of small businesses and mass bankruptcies of their owners."

And in a tweet, Wiener added, "We can't let that happen. These businesses play an essential role in our economy and our neighborhoods."

A companion bill is now in the California State Assembly. Here's the Senate bill -- SB-939 -- in its latest amended version.

A space to renegotiate

"In addition to creating a commercial eviction moratorium for businesses and nonprofits, (the bill) creates space for hospitality businesses to renegotiate rent where capacity has been slashed due to social distancing and the rent no longer corresponds to their mandated business model," Wiener said in his Twitter thread.

"If landlords and hospitality businesses aren't able to renegotiate rent to reflect managed reduced capacity, SB939 allows the business to terminate the lease. Otherwise, it'll be stuck in an unsustainable lease or close down, be sued, and the owner driven into personal bankruptcy," he added.

A patchwork of moratoriums for owners of residential and commercial property alike have been put in place across the country in response to the pandemic. In California, they include a sweeping executive order from Governor Gavin Newsom that expires on May 31, an edict that could result in a $10,000 fine or a year in jail for landlords deemed to have wrongfully evicted a commercial tenant.

This National Law Review article posted Friday, May 15, includes a rundown on the status of commercial eviction moratoriums in multiple major California markets.

What's a landlord to do?

So, what should the owners of those properties do about their investment? And could it lead simply to more commercial investors simply throwing in the towel on distressed properties?

The solution, according to an article posted on JD Supra, "will likely be different for each landlord and tenant."

"Some landlords and tenants may agree to amending a lease with deferred rent or an extension, while some tenants may be invoking force majeure in order to avoid performance. Others will simply rely on city orders, like those in San Francisco," the article said.

Ultimately, the goal is to find a solution that benefits everyone involved. "We want these businesses to survive. It's in all our interest. Including the landlords'," Wiener said.

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