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SB
939 - if passed - would provide rent relief for tenants impacted by the
Covid-19 shutdown. In some instances - tenants would be allowed to terminate
their lease if they cannot reach agreement with their landlords. SB 939 is
presently making its way through Senate sub-committees. Recently confirmed in
the judiciary by a vote of 5-1 with three abstentions - next up is the Senate
appropriations. In its amended form - the lease termination provision has been
narrowed and only applies to restaurants, bars, and places of entertainment but
the rent relief would be available to ALL commercial tenants meeting certain
criteria. You can read more about the bill here California Senate Bill 939
Includes Significant Protections for Commercial Tenants Impacted by the
COVID-19 Pandemic: Eviction Moratorium, Rental Deferment, and Right to Modify
Rental Obligations or Terminate Lease | Seyfarth Shaw LLP and here SB 939’s New
Controversial Provision: Eviction Protections For Covid-Impacted Tenants In ALL
Industries (Not Limited To Restaurants, Etc.) – A.I.R. Forms Practitioner
To
be sure - certain segments of our economy have been devastated by the self
imposed interruption. Restaurants, bars, entertainment venues, amusement parks,
movie theaters, and the like may never fully recover. We have witnessed several
high profile bankruptcy filings such as JC Penney, Hertz, and Pier One Imports
with others threatened like 24 Hour Fitness and AMC. Some may say - we were
clipping along quite nicely. Actually, we were on pace to have our best year
yet and wham! Our revenue - and thus our ability to pay rent - was crippled by
a microscopic culprit and government’s response ordered us to stay at home. I
get it! And since the business impact was completely out of our control -
someone should step in and provide a cure. Enter SB 939. Easy enough in theory.
A bit more difficult in reality.
Disrupted
is the contractual relationship with two consenting parties - a tenant and his
landlord. Here is how. A lease is an extension of credit from a landlord to a
tenant. In return for a schedule of timely rent payments - a landlord delivers
possession of his building to the occupant for a period of years. The occupant
may lawfully use the premises. Simple. Most commercial leases provide for
remedies in the event of default - a tenant decides not to pay or a landlord
fails to fix something. At the extreme - an owner may evict a defaulting tenant
- give him the boot. SB 939 changes this relationship in favor of the tenant -
with no regard to the owner. Here’s why that one sided approach is a problem.
Some
owners leverage rent checks as debt repayment. If a tenant fails to pay - an
owner must then subsidize his mortgage. If deep pocketed - great! If not - then
what? With no income from his occupant and no ability to find another tenant
-because of the bill’s provisions - an owner must appeal to his bank for help.
SB 939 places the rule of law behind the occupant for rent relief but not
behind the owner who must fend for himself and suffer the consequences imposed
by his lender. Quite slippery is the slope when government attempts to
intervene between agreements made by its citizenry.
Look.
I’m all for saving tenants as they are the lifeblood of commercial real estate.
I even wrote about it here. Plus, I’ll admit - some commercial real estate
owners have enjoyed a very good ride since the doldrums of the Great Recession
- sometimes by increasing rents on tenants with few options but to remain in
residence and swallow the bump. But, because the issue was created by
government’s reaction to the virus - the solution is not by creating government
overreach with bills such as SB 939. My fear is a spate of bank foreclosures.
Allen C. Buchanan, SIOR, is a principal with Lee &
Associates Commercial Real Estate Services in Orange. He can be reached
at abuchanan@lee-associates.com or 714.564.7104. His
website is allencbuchanan.blogspot.com.
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