Generally, the common law of California does not address whether a pandemic can constitute justifying excuse from contractual performance of commercial leases.
However, the Executive Order N-28-20 signed into effect as of March 16, 2020 by Governor Newsom addressed the concerns about payment of rent for both commercial and residential properties in the state of emergency due to COVID-19.
This Order provides Counties in California the ability to extend protections to tenants such that if the tenant provides proof that there are insufficient funds to pay their lease for the time being due to the COVID-19 Pandemic, and on that basis fails to pay rent, they are not evicted from the property, commercial or residential. However, this does not excuse the tenant from paying rent or the landlord from lawfully recovering the rent due. These protections are in effect until May 31, 2020.
On March 17, 2020 Los Angeles County issued a retroactive order that prohibits all residential and commercial evictions for nonpayment of rent, late fees and related costs due to a loss of business or household income caused by COVID-19. It applies to all no-fault evictions other than those necessary for health and safety reasons and lasts through May 31, 2020. (Disclaimer – we have been unable to obtain the actual order but are relying on a press release that can be found on the City of Los Angeles Mayor’s Website.
Furthermore, it is anticipated that the Legislature will follow Governor Newsom’s Order and enact a statewide protection for commercial tenants. On March 20, 2020 Senators Scott Wiener (D-San Francisco) and Lena Gonzalez (D-Long Beach) introduced SB 939, which places a moratorium on commercial evictions, including small businesses and nonprofits, for the duration of the COVID-19 health emergency. While there hasn’t been a vote on this proposed legislation, it is anticipated that there will be bi-partisan support once the Legislature is back in session.
In the end, commercial tenants may not have to pay for now. Tenants may view this as a windfall, but it is important to bear in mind that ultimately they are responsible for the payment of rent, just the time for such payment may be temporarily suspended.
As the law currently stands, landlords will still have the right to pursue eviction proceedings if the tenants do not pay their rent. Tenants may currently have a pause on paying their rent, but when the COVID-19 crisis comes to an end they may have large outstanding bills to pay as the law does not excuse entire performance of their rental agreement.
Landlords and tenants should consider this time as an opportunity for ongoing discussion and negotiations about any payment schedule to assist both parties in effectively moving forward in times of economic uncertainty.
What You Should Be Doing Now:
– Open the lines of communications before a dispute begins: The lack of communication creates uncertainty, stress and distrust.
– Create a plan of action for regular calls and emails regarding the status of the situation.
– Explore other opportunities which may be beneficial to both sides (Tenant may be able to provide professional services in lieu of rent temporarily).
– Document all interactions:
If you are a landlord, and your tenant always had difficulty paying their rent, those past experiences should be documented.
– If you are a tenant and your business has been affected by COVID-19, take this time to get your records in place to demonstrate sales or revenues prior to the pandemic, records to show how your business was affected and ability to pay in the long term.
– Many commercial leases contain a force majeure clause (more on that can be found here). Review your lease to see if yours contains one.
Here are some helpful links to the current orders, the state legislature and pending legislation: