We’ve set the stage for what the state does, and then what the county does and what the city does. So now, before we get to what to do about it, we have to talk about what the Judicial Council does, because the Judicial Council tells the courts what they can do. On April 6th, the Judicial Council made Judicial Council Emergency Order Number One. They said, “a court may not issue a summons on a complaint for unlawful detainer unless the court finds in its discretion and on the record, that the action is necessary to protect public health and safety.” So that really is only if someone is, for example, manufacturing drugs; they’re not going to do it for any other reason. They went on to say that the rule will remain in effect for 90 days after the governor declares the state of emergency related to COVID-19 pandemic is lifted, or until amendment. They went beyond the order that Governor Newsom set, so they’ve told their courts that not only can they not issue a summons, but in the case of commercial tenants—this was not part of Governor Newsom’s order—they may not issue that eviction until 90 days after it’s been lifted. They’re not going to issue a summons, even though it would have been allowed under Governor Newsom’s orders.
That’s very frustrating for landlords, who should be able to file if they’re complying with the rules. You should be able to file that eviction when you need to file it, but they won’t issue it, which kind of highlights where this is all going. The legislature is working on a bill right now called Senate Bill 939. This is an extremely important bill primarily for your commercial tenants. That’s where it has the majority of the effect, and even more so for restaurants. If you have a restaurant tenant, this is extremely important to pay attention to. For Senate Bill 939, first we’ll go over the general things, and then we’ll get to the bad things, and then we’re going to get to the really bad.
So the general idea is it prohibits commercial landlords from terminating tenancy or endeavoring to evict a tenant of commercial real estate property during the state of emergency. Now, that’s not too bad because you couldn’t get a summons anyway, during the the state of emergency. So there really isn’t a lot of loss there. There are also fines for harassment and mistreatment, so now they’re taking that idea from the county of Los Angeles and applying it across the board; that would be the problem of, if I’m reminding my tenant every week and checking in on where they’re at on paying their rent, is that harassment? The way that our court system is, I think it’s going to be much more likely to be very, very tenant-friendly, even on the commercial side. I’m not sure if it’ll be to the same point that it is on the residential side, but it’s going to be very tenant-friendly. That means you could very well be fined for harassment. It also extends the time when that back pay could be paid back, up to 12 months after the state of emergency ends. There’s no restriction on company size. This could be the Google complex, if they’re your tenant and they’ve got 1000 employees in there. I’m not sure that Google has any real estate in California that is not owned by them, but they would be accepted and they do not need to pay their back pay for 12 months.
That’s part of Senate Bill 939. Important to note, SB-939 is not enacted yet. I’ll talk about where it is right in just a minute, but it is not law yet, but it could be. It also specifies that no late fees of any kind can be can be imposed for the rent that came due during the state of emergency, and that’s even after the 12 month period has ended. So they have 12 months to pay back their rent from June. If this is enacted, and they don’t pay back that rent, you still can’t charge late fees on it.
Now, let’s go from even worse to even worser. You can be sued for unlawful business practice under 17200 if you do anything to try and enforce your rights that is in disagreement with Senate Bill 939. It requires written notice, so it’s taking that same idea that exists for many residential tenants, and putting it on your commercial tenant. It requires written notice from landlords to the tenants within 30 days after the bill entrance. Well, that which puts an enormous burden on you. You will have to give that notice to law firms, law firms that specialize in commercial real estate. I mean, I’m a tenant in a building; I own other buildings but I don’t own the building that I’m in. I’d have to be getting that notice, and here I am talking about it, but I would still be required to get that notice or I would be exempted. (I’ve been paying my rent, so there hasn’t been wouldn’t be an issue on me specifically. But if I hadn’t, I’d have to get that notice.)
For eating and drinking establishments, now, here’s the absolute worst. For eating and drinking establishments, places of entertainment, and performance venues, if they’re at the end of the emergency period, the tenant can come to you and you have to discuss how you’re going to work this out. You have 30 days to resolve it. If you don’t come to an agreement, the tenant can just say, “No, I’m going to pay you nothing.” There’s no discussion of reasonableness. They do not need to be reasonable. Then, within 10 days thereafter, they can terminate their lease; they can just tear it up and walk away. And all they have to do is pay their three months back rent, adjust up to three months, and if there’s any more they don’t have to pay it. This is just base rent that they would need to pay you. They can just tear the lease up, and they have 12 months to pay you back, and they walk away clean.
I mean, that’s scary, right? They could have 10 years left. And this also doesn’t apply to that. They say it applies for small business, but because of how these companies are set up and how many of the larger restaurants are set up, they’re in single purpose entities. Even those single purpose entities are considered small businesses. So they can just tear it up, underperforming storage just a little bit. Tear it up, just walk away, doesn’t matter. This is obviously horrific.
So where is Senate Bill 939 at? Right now it has gone through the Senate and it’s passed the Senate. They did have a quorum, but many of our local senators did not vote on it. For the City of Los Angeles, the senator did not vote on it, and it is shocking that something this important could just be ignored. It’s gone past the Judiciary Committee—and how it’s gone past the Judiciary Committee is beyond me, because on its face, this looks like a gross violation of our constitution and our right to contract. I find it awful that that they could clear that. It’s now in the Appropriations Committee of the Senate, and then it will go to the assembly, and then go to the governor. It looks right now like it has a very, very high likelihood of passing.
Many organizations are opposed to it. Politically, it’s a lot harder. I mean, we saw the political fight on rent controls in the election previously, and it just makes a much better message politically for them to support it than to oppose it. So, this could very well become law. Now, if it does become a law it is retroactive, but lawyers like myself are poised and ready to file onerous. This does not hold constitutional muster. It is a very, very, very onerous law. It punishes landlords for being landlords, and it’s a shame. So there’s my rant about SB 939. I think it’s shocking. Call your congressman, tell him that you’re adamantly opposed to it, it’s just wrong.
So let’s talk about how to solve this. I mean, how can we get some level of comfort? That’s probably why most of you are here. Right before we do that, I think it’s important to talk about those tenant concerns that you have, so that we can understand when we go to the negotiating table: what is the other side thinking? Tenants have extremely valid concerns. First off, do they have the ability to pay their rent? Their businesses probably have been severely impacted. That’s absolutely true. The lockdowns have been detrimental to most businesses, and the PPP loans that were promised were not very effective. They came very late; EIDL is just starting to flow out now. And even that amount is just not enough, so your tenants have been severely impacted.
They’re also concerned about their performance obligations. Some of them have operating covenants for retail; you probably have mandatory open hours. I haven’t heard of a single landlord that’s being a stickler on this. It would be quite an argument to say, “well, your lease says that you need to be open 350 days a year, and you’ve been closed for two and a half months, so you owe me rent at 150%.” I don’t think any landlord is doing that, because even if you did, you’re not going to win in court there. That is an example of the force majeure argument, which we can talk about more if you have questions. Completion on tenant improvements have also been, and are, of great concern: not only that you may have with them, but also that they may have with their franchise owner. They probably haven’t been able to do their work to do that.
And then they have concerns about their employees. I mean, they want to make sure that their employees and their customers and their suppliers are all safe. There are density issues, and if they’re not allowed to operate at 100% capacity, how are they able to make the same amount of money that supports their business plan, to pay the rent? CDC guidelines are a concern, and those other concerns about how much social distance we need to have. Is there going to be enough commerce coming in? If you’re in downtown LA or the lunch places, are they able to open with what traffic there is going to be? Are they even going to meet their density? Then they’re balancing the safety issue for their employees, versus that for customers, versus that density that they need to grow—a restaurant in downtown has to be very dense in order to be successful.
So, let’s start talking about strategies. I’m one that defines strategies and tactics differently, but they interrelate. Strategies are those big picture ideas: they’re your long term goals and how you get to those long term goals. This is what I want, this is how I’m different, this is how I set myself apart, this is how my building is special: these are the part of strategies. Tactics are those individual moves that you make, how you deal with each tenant, which strategy you do: am I going to evict them? Am I going to not do anything? What are those moves? Those are tactics.
We can go over this strategy, despite the fact that the tenants absolutely have a legal obligation to pay rent. This is has been a default: if they are late on their rent, there has been a default in rent, and I’m going to talk about why that’s very important in a minute. There’s been a default, they have to pay rent.
However, you have to look at it in the context of where we’re at in the economy, what your capabilities are of recovering money from that tenant, and what the judge is likely to order if you were to evict or sue. When the emergency declaration has expired, tenants may be unwilling or unable to pay rent as a large lump sum. Imagine if you had to come up with a three months lump sum, all of it at the drop of a hat; it may be really hard to do for some of those tenants. If you modify the rents, even if you extend it out over three months, it still may be difficult for them to meet their rent obligations over that period. So, you have to consider in your strategy the economic reality of the situation. If you decide that the right tactic for you is an eviction process, courts are going to be backlogged, so what you need to be considering is: what does this mean in terms of how long until I can get my money?
Ultimately, you’ve got to plan for the distinct possibility that you may not receive rent payments for a long time. It may not be right after the emergency declaration period is over; the six month repayment period in these cities may not be enough. And that repayment period delay is the eviction period as well in some of those cities. Of course, there’s the issue of whether or not it’s constitutional for these eviction moratoriums to take place. And those are valid questions. But a constitutional case takes a very long time to prosecute. So it still delays your figuring out what you need to do.
And then you’ve got your concerns as well, which is not only whether that rent is coming in, but you probably have mortgage obligations. We don’t know whether those financial institutions are going to be able to adapt to make sure that property owners are covered. I mean, there may be a three-month deferment on your payment right now, but if those payments are starting in July, what if in July you’re still getting half rent? Maybe there’s going to be future legislation that will try and fix this; we don’t know at this point. All those are unknowns. You should anticipate that we don’t know, and that you need to figure out, “How am I going to do this with my mortgage obligations?” I mean, you are all very sophisticated owners, and you probably have a good sense of this. But it may help to get a better timetable from a real estate attorney who can guide you and say, “Well, here’s where you’re really at, given your lease and where the court system is. And I’ve looked at your loan, and here’s what I think you should be thinking about.” That may be very helpful to talk to a lawyer about.