May 21, 2020
California State Senators Scott Wiener and Lena Gonzalez have proposed a law that would allow some tenants in California to terminate their leases. In order to qualify, a tenant’s landlord must have refused to lower the amount of rent to be paid. This proposed law is known as Senate Bill 939 (SB939). As of the date this article was written, the bill has yet to be passed.
The proposed bill applies to commercial leases. To terminate a lease, a tenant must have recognized a reduction in revenue amounting to 40% or greater. For certain businesses such as dining establishments and entertainment venues, they must have also experienced a 25% or greater reduction in capacity as it relates to customers abler to be served.
In order to calculate the rate of decline, a business may compare this year’s numbers to either
- The amounts earned during the equivalent month in 2019, or
- The two-month period prior to the date the applicable shelter-in-place order was set forth (State or local).
This law applies to small businesses. A small business for this purpose is currently defined as “a business that is not dominant in its field of operation, the principal office of which is located in California, the officers of which are domiciled in California, and which has 500 or fewer employees.” This definition raises more questions than it answers. One thing that is certain is that public companies are excluded.
As indicated above, the rule pertaining to the 25% decline in capacity pertains to eating/drinking establishments, places of entertainment and performance venues. In addition to experiencing the reduction due to social distancing requirements, a business may also have experienced the reduction due to general safety concerns.
Things to Note
- Tenants must state under penalty of perjury that they meet both the 40% and 25% criteria described above
- A tenant must make good faith rent negotiations prior to terminating a lease. If negotiations fail after negotiating over a 30-day period, the tenant may terminate the lease after ten days following the end of the 30-day period
- If a lease is terminated, the results will end “the lease without any liability for future rent, fees, or costs that otherwise may have been due under the lease.”
- Terminating a lease requires that unpaid rent that accrued prior to the Covid-19 outbreak still be paid
- Termination also requires that unpaid rent up to three months after the Covid-19 outbreak still be paid within 12 months following notice of termination.
- Upon termination, all personal guaranties including third-party guarantees will be unenforceable
SB 939 is a work in progress. It was amended as recently as May 13, 2020. While this proposed law will be welcome by many, others are not so excited. Several people are challenging both the legal ramifications as well as the enforceability of the proposed bill.
Stay tuned to see if it passes…
Matthew Cohen is a partner at the Tax Resolution Institute.