Under a proposed California law, certain tenants that experience declines in revenue as a result of Covid-19 can terminate their lease if their landlords do not agree to a rent reduction. This Senate Bill 939 (SB 939) has been introduced in the California Senate, but has not been enacted. Does this termination right in SB 939 apply to AIR CRE Leases?
Short Answer/Summary: Yes, it applies to all commercial leases, including AIR CRE Leases. It applies only to tenants that experience 40% monthly revenue declines. For restaurants/bars and places of entertainment to qualify for this termination right, they must also experience a 25% decline in capacity due to a social distancing or safety concerns.
Applies To “Small Businesses” With a 40% Monthly Revenue Decline: SB 939 applies to small businesses, and eating/drinking establishments, places of entertainment, and performance venues which have experienced a decline of 40% or more of monthly revenue, as compared to either: (1) the same month in 2019; or (2) “two months . . . before a state or local government shelter-in-place order took effect.”
Decline of 25% in Capacity Due To Social Distancing Also Required But Only For: Eating/Drinking Establishments; Places of Entertainment; and Performance Venues: If the business is an eating or drinking establishment, a place of entertainment, or a performance venue, then it does not qualify under SB 939 unless it is also experiencing “a decline of 25 percent or more in capacity due to a social or physical distancing order or safety concerns.”
Requirements Before Termination: (1) Certification of Impact; and (2) Good Faith Rent Negotiations: SB 939 appears to require the commercial tenant to “affirm, under the penalty of perjury, that the commercial tenant meets the financial criteria [i.e., the 40% revenue decline and if applicable the 25% capacity decline above],” and also to state “the modifications the commercial tenant desires.”
10-Day Termination Window After 30 Days: If the parties do not reach an agreement within 30 days, “then within 10 days thereafter, 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.”
Payment of Pre-Termination Rent Within 12 Months: Notwithstanding any lease termination, SB 939 still requires all rent for a time unrelated to Covid-19 to be paid. It also requires rent to be paid for the Covid-19 period, up to a maximum of three months’ worth of such rent. The amounts due “shall be paid to the landlord within 12 months of the termination notice.”
Personal Guaranties Extinguished: If the lease is terminated pursuant to SB 939, “any third-party guaranties associated with the lease shall also terminate and shall no longer be enforceable.” This appears to apply to any past due rent even for a time unrelated to Covid-19.
Proposed Law Only: SB 939 was only recently amended on May 13, 2020 to its current version. Various groups are challenging the constitutionality and enforceability of this proposed law.
Additional Qualifications: SB 939 only applies to businesses that operate primarily in California. SB 939 does not define “small business;” however, it explicitly does not apply to a “publicly traded company” or its affiliates. It appears to require that businesses must also be subject to regulations to prevent the spread of COVID-19 that will financially impair the business.
Great piece Usman…thank you
Thanks Mike, appreciate it.
Wow, this is crazy. It’s all going to cascade to the banks.
Thank you for the information.
Does the below apply to industrial and office tenants as well?
Yes it does, if they have a 40% decline in revenue, are primarily operating in California, are not publicly traded, etc.
Is this during and specific to this Covid event only or will this apply to all possible future events moving forward?
Also, what is standard for showing that such decline? 24 months audited financial statements?
This is very problematic I think…
Only for Covid period. The 40% decline can be satisfied by comparing a current month to either of the following: (1) the same month in 2019; or (2) monthly revenue pre-Covid. It does not specify that audited financial statements are required.
When would this vote be taken?
I am not sure. It would have to pass the California State Senate and the California Assembly, and then be signed by the governor. I have not seen any news reports indicating how much support the bill has at this point.
I hope that helps. And thank you for reading!