On May 13, SB 939 became a lightning rod in California – if passed, it would give certain Covid-impacted tenants a right to terminate their commercial leases.  It initially applied to all California small businesses.  However, SB 939 was just amended and the termination right was narrowed substantially.

SB 939’s Termination Right Now Applies To Only Eating Or Drinking Establishments, Places of Entertainment, and Performance Venues: The most significant change to SB 939 is that the lease termination right would apply only to the following businesses:

• Eating or drinking establishments
• Places of entertainment
• Performance venues

These businesses do not automatically qualify for this termination right.  They must also satisfy three additional requirements.

First Requirement – 40% Decline in Monthly Revenue OR 25% Reduction In Capacity: In order to qualify for the lease termination right, the eating or drinking establishment, place of entertainment, or performance venue must qualify as “COVID-19 impacted” by satisfying the revenue decline test or the capacity decline test.

First, a tenant qualifies as “COVID-19 impacted” if it experienced a decline of 40% or more in average monthly revenue over the two most recent calendar months compared to the average monthly revenue for: (1) the same calendar months in 2019; or (2) the two calendar months before a state or local government shelter-in-place order took effect. Note: If the business never opened or was delayed in opening because of the state of emergency, the requirement is satisfied.

Alternatively, a tenant qualifies as “COVID-19 impacted” if it experienced a decline of 25% or more in capacity due to compliance with an official public health order or occupational health and safety guideline for preventing the spread of Covid-19.

Second Requirement – “Small Businesses” Only: Only a “small business” can have a termination right under SB 939.  A “small business” is one that has 500 or fewer employees and is “not dominant in its field of operation.”  SB 939 does not define what it means to be “not dominant in its field of operation.”

Third Requirement – California Businesses Only: The commercial tenant must be a “California” small business in order to qualify for the termination right.  That is, the small business must (1) primarily operate in California, (2) have its principal office in California, and (3) “the officers [must be] domiciled in California.”  It is unclear which officers must be “domiciled in California.”

10-Day Termination Window After 30 Days: If a tenant qualifies as described above, it may give notice to its landlord of the lease modifications it desires, including a rent reduction.  If the landlord and tenant 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.”  The tenant must vacate the premises within 14 days after the termination notice.

Payment of Pre-Termination Rent Within 12 Months: Notwithstanding any lease termination, SB 939 still requires the following pre-termination rent to be paid: (1) all rent accrued outside of the state of emergency; and (2) rent for the Covid-19 state of emergency period, up to a maximum of three months’ worth of such rent.  The amounts due must be paid to the landlord within 12 months of vacating the premises.

Personal Guaranties Extinguished: If the lease is terminated pursuant to SB 939, “any third-party guaranties associated with the lease shall terminate and shall no longer be enforceable.”  This appears to apply to any past due rent even for a time unrelated to Covid-19.

Status Update: SB 939 was approved by the Judiciary Committee of the California Senate, and is now before the Appropriations Committee.  The Appropriations Committee is expected to be the final step before a potential vote by the California Senate.