The COVID-19 Response And Its Impact On Commercial Lease Payment Obligations Part II; San Francisco and Sacramento Among Several Northern California Jurisdictions with Eviction Moratoriums for Qualifying Commercial Tenants

05.04.2020

As discussed in our prior alert (linked here), following Governor Newsom’s issuance of Executive Order N-28-20 on March 16, 2020, dozens of counties and cities across California have adopted and issued varying local orders and ordinances limiting evictions and deferring rent obligations, subject to qualifications specific to the jurisdiction.

Executive Order N-28-20 authorizes local governments to impose substantive limitations on commercial evictions through May 31, 2020, if: (a) tenants are unable to pay rent because of a substantial decrease in business income (caused by, for example, a reduction in opening hours or consumer demand) or out-of-pocket medical expenses; and (b) the decrease in business income or out-of-pocket medical expenses were caused by the COVID-19 pandemic, or by any local, state, or federal government’s response to COVID-19, and is documented.

Accordingly, commercial tenants should look to the laws of their local government to see what substantive limitations to evictions may apply, if any.  To draw upon further examples of the different ordinances and orders affecting commercial leases in response to COVID-19 throughout California, this alert highlights the Cities of San Francisco and Sacramento.

The City of San Francisco

On March 18, 2020, the City of San Francisco ordered a temporary moratorium on evictions for the non-payment of rent by commercial tenants which are registered to do business in San Francisco with combined worldwide gross receipts for tax year 2019 equal to or less than $25 million.  The moratorium also applies to situations where the tenant is occupying a unit on a month-month periodic tenancy, holdover basis, or similar arrangement, including where the landlord has the right to terminate or not renew the agreement at the landlord’s discretion—unless the landlord can demonstrate an alternative, non-pretextual reason for recovering possession of the unit (such as planned renovations).[1]

If a qualifying commercial tenant fails to make a rent payment that was due on or after March 17, 2020, landlords are required to first provide written notice and an opportunity to cure the violation before seeking to recover possession of the property.  The written notice must specify a cure period of at least one month from the date the tenant receives the notice.  Upon receipt of the notice, the tenant shall have the full cure period to either (1) pay the rent, or (2) provide documentation to the landlord showing that the tenant is unable to pay rent due to a substantial decrease in business income (due to illness or other disruption, reduced open hours or reduced consumer demand, or temporary closure of the business, including closures required to comply with or in response to restrictions under shelter in place or other orders by the San Francisco Health Officer), caused by the COVID-19 pandemic, or by any local, state, or federal government response to COVID-19.

If the tenant provides documentation of its inability to pay rent due to such financial impacts related to COVID-19, then the cure period will be automatically extended by an additional month, in order for the landlord and tenant to discuss the matter in good faith and attempt to develop a payment plan to pay the missed rent.  If no payment plan can be agreed upon, the tenant is required, on or before the new date that the cure period will expire, at the one-month mark, to either (1) pay the rent, or (2) provide additional documentation of its continuing inability to pay rent—in which case the cure period is automatically extended another month.  Thereafter, the tenant may obtain additional monthly extensions of the cure period by providing updated documentation at the end of each such month, but in no event will any cure period extend more than six months beyond the date the rent was originally due.  If at the end of the applicable cure period, the tenant has still not paid all outstanding rent, the landlord may proceed with eviction for non-payment.

This moratorium was originally set for a period of thirty days (until April 17, 2020), or until the Proclamation of Local Emergency was terminated, or upon further Order from the Mayor, whichever occurred sooner.  However, it was extended by an additional thirty days to May 17, 2020, on April 15, 2020.  Accordingly, unless there are further extensions, only rent due on or after March 17, 2020, through May 17, 2020, is subject to the cure period as discussed above.

The City of Sacramento

The City of Sacramento has opted to take a simpler approach, extending eviction protections to its commercial tenants through its City Ordinance No. 2020-0017 (the “Ordinance”), adopted on March 24, 2020.  The Ordinance states that no landlord may attempt to evict a tenant for nonpayment of rent if the tenant demonstrates that its inability to pay rent is due to COVID-19, the state of emergency regarding COVID-19, or due to following government-recommended COVID-19 precautions.

This protection applies if the tenant: (a) notifies the landlord in writing before the day rent is due that the tenant has a “covered reason for delayed payment”; (b) provides the landlord with verifiable documentation to support the assertion of a covered reason for delayed payment; and (c) pays the portion of rent that the tenant is able to pay.  Such documentation may be provided after notice is given, but should be produced as soon as possible.  For commercial tenants, “covered reason for delayed payment” means a tenant’s loss of income due to the tenant’s closure of, operating restrictions placed upon, or other loss of patronage of the tenant’s business directly resulting from (i) the state-declared emergency, locally-declared emergency, or county stay-at-home order; or (ii) any other emergency declarations or orders related to COVID-19.

As the Ordinance is set to expire at the same time as California’s Executive Order N-28-20 (currently on May 31, 2020), only rent through May 31, 2020, will be deferred.  But for such rent, protected tenants will have up to 120 days after expiration of Executive Order N-28-20 (i.e. until September 28, 2020), including any extensions, to pay their landlord all unpaid rent without any related late fees.

Conclusion

AALRR has a team of commercial litigation attorneys who will be able to assist you to navigate tenancy issues, ranging from rent abatement and obligations due to business interruption, force majeure, impossibility, impracticability, and frustration of purpose doctrines, and commercial evictions.  The rules and protections for your commercial lease may be subject to change by the local governing body and application of the various rules is highly fact-specific and may or may not apply to your business.  If you have any questions about which substantive limitations or protections pertain to your specific commercial lease agreement, contact the authors or your usual business law counsel at Atkinson, Andelson, Loya, Ruud & Romo for a thorough analysis of your lease and the impact of any rules or protections in your jurisdiction.

^{[1] Landlords may also be able to request waivers to the moratorium with the San Francisco Office of Economic and Workforce Development in order to avoid significant financial hardship — but requests for hardship waivers will be highly scrutinized.}

_{This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR presentation/publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process.} 

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