As lockdowns across the US are beginning to subside, it appears that many small and medium businesses have been significantly crumbling under the weight of the coronavirus pandemic. Particularly in California, where many of those businesses are reliant on a thriving tourist and hospitality, the situation is even worse. Many commercial businesses such as restaurants, bars, and cafes were forced to shut their doors in wake of strict social distancing measures; now that the mandatory lockdowns are being lifted, the hospitality sector has no choice but to adjust to a new post-pandemic reality.
This reality however, is all but sustainable. Due to reduced customer capacity, many of these small and medium businesses will have to face significantly declining revenues and as such, will have difficulty making lease payments. In response, the California Senate Judiciary Committee has decided to advance a new bill that would allow tenants to modify their existing lease contracts with their commercial landlords if they experience at least a 40% reduction in revenue in the aftermath of the coronavirus pandemic.
Albeit Senate Bill 939 is a sign of relief for many struggling to meet their overhead costs, it is being met with an onslaught of opposition. Initially the bill was introduced as a means of preventing commercial landlords from evicting tenants that were unable to meet rent obligations during lockdown emergencies. Then, the bill was amended to allow the struggling tenants the option to re-negotiate the terms of their lease if they have experienced a significant reduction in revenue; however, if the two parties are unable to come to an agreement, the tenant can then legally terminate the lease agreement without facing any future repercussions.
Matthew Hargrove, who is the senior VP of government relations for the California Business Properties Association (CBPA), expressed his discontent with the amended bill. According to him, such a bill dis-proportionally favors the tenant, leaving the commercial landlord with the potential inability to make their mortgage payments. Hargrove is instead advocating to throw the problem in the hands of the government, suggesting the state should provide tenants with financial assistance if they are struggling, instead of dragging commercial landlords down with them.
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However, the entire reason the bill was introduced in the first place was because many of these commercial landlords were refusing to allow any leeway in terms of easing tenant financial burdens. A lot of the landlords are expecting the tenant to continue paying the excessively-high pre-pandemic rents, when in reality such a scenario is no longer attainable in the post-pandemic reality. Nonetheless, if the bill is passed this month, the tenant-landlord relationship will certainly be soured.
Information for this briefing was found via Zero Hedge and the Commercial Observer. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
