09 Jun SB 939
“SB 939 essentially ties the commercial rental property owner’s hands by forcing them to participate in inequitable negotiations…”
Do you remember “The Impossible Dream” (or quest), a very popular song that was written by Mitch Leigh from the Broadway musical Man of La Mancha?
Well, that “quest” may come true if the progressives prevail this year at the City Council, Board of Supervisors and State Legislature levels. Let’s look at a few remarkable bills that, if nothing else, as the idiom goes will make your blood boil.
SB 939 (Wiener) would act to tie the hands of commercial rental property owners in an inequitable, burdensome and deleterious manner. It proposes to amend existing law providing that it shall be unlawful to terminate a commercial tenancy during the pendency of the state of emergency proclaimed by our Governor on March 4, 2020. The bill among other things promotes unconscionability and oppression to disparate bargaining power by allowing a commercial tenant who wishes to modify a rental agreement to enter into negotiation with the landlord regarding a legally binding existing contract that was legally formed. If negotiations are determined to be unfavorable, then one party and only one party to the agreement (the tenant) is allowed to terminate tenancy at will with no additional economic consequence.
SB 939 essentially ties the commercial rental property owner’s hands by forcing them to participate in inequitable negotiations where one party, the tenant, has all the leverage and the other party, the landlord, is forced to accept any term proposed or be subject to unrestrained default.
Oppression in the context of disparate bargaining power is where one party is forced to accept burdensome terms, those advanced by another party, and that are not justified by commercial necessities, as the cost of obtaining the contract’s benefits. The oppressed party accepts the oppressive terms, although aware of the consequences, because his bargaining power is such that he must do business on these terms or not at all.
Furthermore, the freedom of contract doctrine rests on the assumption that parties to a contract are the best judges of the value to themselves of the reciprocal obligations in the contract. This assumption is realistic only so long as the contract represents real bargaining between parties with freedom of choice and consequent ability to negotiate in a meaningful sense.
SB 939 provides for inequitable terms in that only one party to the agreement, the tenant, can elect to re-negotiate the agreement, although it was mutually agreed upon by both parties. Furthermore, if the tenant finds that the negotiation process has not yielded the desired outcome within thirty (30) days of the notice to negotiate, then the tenant and only the tenant, can terminate the lease with no additional costs.
Commercial rental property landlords and tenants have unique dealings that often differ from the terms of residential agreements. For instance, a factor that is often essential to such an agreement and must be accounted for is premises improvement and fixture accommodation.
Because such expenditures are often extremely costly, their outlays must be amortized and recovered over great periods of time, in most cases over a period of several years. In all cases it is the landlord that finances this investment; the only guarantee that costs will be recovered is the contractual agreement entered into with the tenant. To allow the tenant to terminate this agree ment with no obligation to provide the landlord restitution is the definition of unconscionability. SB 939, at best, places the landlord in an unequal bargaining position; at worst, it forecloses any means for the landlord to recover an investment while obliterating any right or interest protected by contract law or the Uniform Commercial Code (UCC).
The suggestion that one party to an agreement is allowed to terminate it at will with no consequence is inequitable, offensive and contrary to basic principles of equity established in contract law. Equity proceeds in the principle that a right or liability should as far as possible be equalized among all interested.
Additionally, even the SB 939 provision that provides for a maximum of three (3) months of past due rent is unenforceable by a commercial rental landlord. This is because Section 1, subsection (d), of SB 939 states that, “The non-payment of rent that would have been due during the state of emergency shall not be grounds for an unlawful detainer.” As such for the tenant there is no consequence for refusing to pay even the three (3) months required by the provision. Effectively making the only part of SB 939 that protects the commercial landlord, unenforceable.
And another bill, AB 3260, in our judgement would largely unravel the security deposit law. AB 3260 would mandate a landlord to authorize a tenant, as an alternative to paying the full amount of a security deposit before taking possession of the premises, to satisfy the security by either obtaining and maintaining rental security insurance, surety bond, or paying the amount of the security in monthly installments over a period of not less than six months. Tenant advocates ob serve that many cannot afford to pay the security deposit and the first month’s rent when taking possession of a rental unit, particularly amidst the COVID-19 pandemic.
One needs to become a student of security deposit insurance coverage, availability, affordability, and exculpatory clauses.
The “student” will discover that there are less than a handful of insurers in the State, there are several exclusions from coverage, and the insurers that are approved by the Department of Insurance, are not acceptable to our industry. Surety bonds are not an alternative. They simply are not offered in the State.
Where the significant danger exists is the suggestion that a new tenant will pay the security deposit over time. Default will not be easy to perfect. It will be next to impossible to successfully pursue an unlawful detainer. Should damage occur during that time, where a tenant stops paying the security deposit, it will be extremely difficult to financially recover.
So, I repeat, will the “quest” to take control of the rental real estate market come true this year?
Ron may be reached at Ron@CalStrategic.com