USA – California Continues to Impose Restrictions on Commercial Landlords

California’s Executive Branch, judiciary and local governmental authorities have responded to the Covid-19 pandemic by issuing a succession of Executive Orders, Judicial Council Emergency Rules and enacting a series of ordinances.  These Executive Orders, Emergency Rules from the California Judicial Council and numerous local ordinances have eroded the rights of private property owners in the name of protecting the public against economic dislocation and homelessness.

As a result, the impact on commercial lease transactions has been significant. In fact, the orders and rules issued by state and local governments, at least in the short term, seem to shift all economic obligations and responsibilities for a commercial property to the landlord and away from the tenants (both residential and commercial).  This is extremely complicated by the fact this shift is taking place for commercial landlords during an operational disruption and economic downturn “of first impression” as the Covid-19 Virus adversely and significantly impacts real estate ownership, and business in general.

The following are some practical guidelines for landlords and tenants as a result of these recent government actions:

  • It is important to note that the State and local moratoriums do not relieve tenants of their obligation to pay rent.  Rent is not waived.  Rent accrues until the Governor lifts the State of Emergency order and then all back rent will be due in accordance with applicable local governmental ordinances.
  • The moratoriums do not prohibit all evictions.  A landlord may still file an action for an eviction if the default is based upon public safety.  Although not specifically addressed, the Judicial Council of California’s emergency rules approved on April 6, 2020 (the “Emergency Rules”) do not seem to limit forceable detainers where the landlord wants to remove someone who, for example, has broken into a vacant home owned by that landlord.  The landlord may be able to file actions for breach of contract for payment of the past due rents and on guaranties, but not for possession/eviction.
  • Each city or county determines what circumstances are included in the definition of Covid-19 related “financial impacts.”
  • If a landlord filed a lawsuit for an unlawful detainer before the pandemic, which by definition had nothing to do with the pandemic, the Emergency Rules bar the landlord from filing a default unless it deals with public safety.
  • If a landlord filed a lawsuit prior to the pandemic and the tenant answered the lawsuit, the landlord is entitled to a court date, but the trial date will not be set earlier than 60 days from the date the lawsuit is filed.  The Emergency Rules will remain in place for 90 days after Governor Newsom officially declares the pandemic is over.
  • Currently there is not a statewide prohibition against non-judicial foreclosures; however, it is important for the parties to investigate the local rules applicable to the specific property and lease premises in question.  For example, some counties in the Bay Area of California deem nonjudicial foreclosure auctions to be a violation of recent restrictions against public gatherings.  This interpretation goes far beyond the Governor’s Executive Order or the Emergency Rules of the Judicial Council.  Likewise, the City of Santa Ana is an example of another jurisdiction which prohibits nonjudicial foreclosure proceedings.
  • The Judicial Council’s Emergency Rules impact tenant eviction and foreclosure actions in the following ways, including:
  1. The stay on unlawful detainers does not relieve a landlord from its repair and maintenance OR other “habitability” obligations to its tenants.
  2. The Judicial Council’s Emergency Rules do not prevent landlords from serving tenants with notices to pay rent or notices to follow the terms of their lease, but local ordinances and/or Civil Code Section 1946.2 may prevent those notices.
  3. The Judicial Council’s Emergency Rules do not prevent landlords from filing eviction lawsuits (but they do not prohibit issuance of a summons, and all other proceedings outside the public safety exception).
  4. The Judicial Council’s Emergency Rules do not prevent County sheriffs from locking out tenants who already have eviction judgements against them.
  5. The Judicial Council’s Emergency Rules do not halt non-judicial foreclosures unless a non-judicial foreclosure is otherwise modified by the ordinance of the local jurisdiction in which the property is located.
  • If a landlord and tenant enter into a rent deferral agreement, the landlord still cannot bring an unlawful detainer if the tenant violates the rent deferral agreement until 90 days after the Governor officially declares the pandemic is over.
  • In addition to moratoriums, many landlords are unable to file lawsuits against tenants because the courts are currently closed for nonemergency purposes, including landlord/tenant disputes.
  • A landlord should continue serving notices of default to ensure they are able to take legal action when appropriate.
  • When accepting partial payment of rent from a tenant, a landlord should send written communication to the tenant indicating that it is accepting the partial payment without waiving any legal or equitable rights.  Your attorney may have specific language to be inserted in the communication to address the various legal authorities referenced above.

Given these governmental actions, the rights of private property owners are being eroded in California in the name of public safety and to “protect” tenants (residential and commercial) from a vulnerability that is perceived to be greater than that of landlords.  New regulations from different sources are constantly being enacted at a rapid pace and are, in some cases, inconsistent or in conflict with one another.  As a result, commercial landlords and tenants and their counsel will need to keep current on new developments emanating from all levels of government.

In evaluating the regulatory overlay that is impacting the landlord/tenant relationship in California, the parties need to examine (1) the State Executive Orders, (2) any new statutes, (3) the Judicial Council Emergency Rules, (4) applicable local County ordinances, and (5) any specific City ordinances.  In addition, it is important to keep abreast of potentially impactful regulatory propositions that are currently only in the discussion stage but may be a part of the regulatory landscape in the near future.

For example, California Senate Bill 939 provides for a state-wide moratorium on commercial evictions and a 12-month rent deferment for commercial tenants, which meet the criteria as an “eligible Covid-19 impacted” tenant.  In its current form, SB 939 would permit certain eligible tenants who operate primarily in California and operate eating and drinking establishments, places of entertainment and/or performance venues to modify the rent or economic requirements under their lease.  This would also entitle those tenants to terminate their lease if they are unable to reach a mutually satisfactory lease modification with their landlord within 30 days after the date the landlord receives a negotiation notice, meeting the requirements set forth in the proposed bill, from the tenant.  If the landlord has already received an eviction judgement for nonpayment of rent, the tenant can move to have that judgment set aside.  Although SB 939 is a statewide bill, it expressly states it will not preempt local law that addresses the same or similar provisions or that may impose a more severe penalty.

The bill’s sponsor has announced his intent to offer amendments to the bill to remove the lease termination provision and shorten the time frame for eviction, but those amendments have not been submitted.  When SB 939 came before the California Appropriations Committee, it was moved to “Suspense” which means the bill has significant fiscal impacts.  The bill will remain in committee until a vote on June 18, 2020.

As of the date of this article, the Judicial Council is considering a roll back of certain Emergency Rules, including those related to unlawful detainer and foreclosure as California considers its next steps in re-opening the economy.  The Judicial Council is considering an August 3rd sunset date on these Emergency Rules.

With each local government able to enact its own eviction and foreclosure regulations, including moratoriums, it is a very complicated patchwork of laws affecting commercial properties in California.  Given the complexity of these regulations and the variation across different counties and states, it is important to consult a real estate attorney in order to gain a better understanding of your rights under these new ordinances.

The fast-changing legal landscape is expected to continue, so please feel free to reach out if you have any follow up questions about your specific obligations.

Linda S. Koffman

Gipson Hoffman & Pancione

Los Angeles office
1901 Avenue of the Stars
11th Floor 90067
Los Angeles
+1 310 556 4660
+1 310 556 8945

Gipson Hoffman & Pancione

+1 310 556 4660