Small Businesses Could More Easily Leave Leases Under New Bill

If landlords and hospitality businesses aren’t able to renegotiate rent to reflect mandated reduced capacity, SB 939 allows the business to terminate the lease.

On Wednesday, a new California law was proposed in the Senate that would allow all small businesses financially hurt by the coronavirus pandemic to be able to renegotiate their lease and leave the lease more easily, as well as halting all small business evictions until the end of the state lockdown.

Rent negotiations and a halt of evictions

Senate Bill 939, written by Senators Scott Wiener (D-San Francisco) and Lena Gonzalez (D-Long Beach), would give tenants much greater power in rent renegotiations due to decreased business caused by the lockdown. If landlords and renters don’t agree to a new rent price based around how much the business is now taking in with only take-out and limited dining capacity customers, renters could end their lease without declaring bankruptcy or being sued by the property owner. The renter would not have to pay any future rents as well, but with the caveat that all back rents up to lease termination would still need to be paid.

Publicly traded companies would not be covered under SB 939.

A halt of commercial evictions for small businesses and non-profits affected by the lockdown would also be enacted as part of the bill. These businesses cannot be evicted until either 2 months after the end of the statewide lockdown or by the end of 2021, whichever comes sooner.

Senator Wiener himself also noted that he wrote the bill primarily to save restaurants and small businesses from closing during the lockdown and to allow businesses to keep operating even though they will be making less under current restaurant reopening guidelines.

A ‘severe risk of mass closure of restaurants, bars and cafes’

“We’re at severe risk of mass closure of restaurants, bars and cafes due to social distancing requirements,” tweeted Senator Wiener on Thursday. “We can’t let that happen. These businesses play an essential role in our economy & our neighborhoods. I’m introducing legislation, SB 939, to avoid mass closures. In addition to creating a commercial eviction moratorium for businesses and nonprofits, it 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.

If landlords and hospitality businesses aren’t able to renegotiate rent to reflect mandated reduced capacity, SB 939 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.

SB 939’s goal is to encourage, and create strong space and incentives for, renegotiated rents to reflect the reality that restaurants, bars, and cafes will have mandated reduced capacity. We want these business to survive. It’s in all of our interest, including the landlords. Covid-19 is an emergency for so many in our community. It’s an emergency for our small businesses. We need to support them & create space for them to survive. SB 939 will help.”

1/We’re at severe risk of mass closure of restaurants, bars & cafes due to social distancing requirements. We can’t let that happen. These businesses play an essential role in our economy & our neighborhoods.

I’m introducing legislation, #SB939, to avoid mass closures. Details:

— Senator Scott Wiener (@Scott_Wiener) May 14, 2020

Possible fallout of SB 939

While SB 939 has gained some support among restaurant and small business owners, land and building owners have strongly come out against the bill.

“It doesn’t say how we’re supposed to pay off the mortgage on the building,” said John Caldwell, who co-owns two strip malls respectively in Los Angeles and Santa Ana. “I know a lot of people hate people like me for charging rents, but being forced to keep a tenant with them not paying full rent is ridiculous. We can’t evict them and we can’t bind them to their lease, so we essentially are forced to give them a cheaper rent and eat all costs not covered by the lower rent ourselves.”

Senator Wiener did point out that the bill incentivizes new, negotiated rents. He argues that the business would survive, the landlord wouldn’t be out a tenant during a trying time with few new leasers, and rents would go back to normal during the next leasing period. However, landlords say it isn’t that simple.

“That’s a naive way of looking at things, because it still doesn’t address how we still have to pay, in full, all utilities, all building upkeep, all unexpected costs, and, this is the big one – all mortgage payments. Do we get relief too? Because if we don’t we’ll start losing money. There are some owners out here who are close to folding anyway, and if they can’t pay, the entire complex becomes the banks’.”

“This bill just assumes everyone past the point of tenants will be okay with less money, but the truth of the matter is, for many of us, it won’t be ok. Can we just shut off all electricity and water and gas if they don’t pay? Or if they pay less, do we limit them there to make up for lost payments?”

“If [SB 939] passes we are looking at a possible commercial property collapse later in the year. Or this whole thing might circle around. Businesses leave one tenancy then try to find another only to find all property owners are stonewalled on their rents, leaving them having to pay the same amount anyway, possibly more. It can really backfire that way if only a few owners decide to renegotiate. I hope whoever wrote this at least considered that possibility.”

SB 939 is scheduled be heard during the Senate Judiciary Committee hearing on May 22nd.