California SB-939 Signals Potentially Major Changes in Real Estate Leasing

Businesses in California will have an opportunity to rehash traditionally long-term leases if Senate Bill 939 is passed. Applicable to commercial tenants who have experienced a decline in average monthly revenue equal to or exceeding 20% since government restrictions altered the economic landscape, many could qualify “to engage in good faith negotiations with [landlords] in order to modify any rent or economic requirements.”

This provision applies to tenants in food and beverage, entertainment, and performance venues. By its terms, SB-939 would not appear to cover law firms and other professional services companies. Moreover, the bill was recently amended to eliminate perhaps its most far-reaching tenant protection – the ability of commercial tenants to walk away from leases while capping their financial exposure.

Although the protections afforded tenants under SB-939 are narrowing, it is clear that COVID-19 and its aftermath have fundamentally changed commercial real estate. After decades of leaving commercial landlords and tenants to negotiate their own deals and live with the results, the last few months have seen prohibitions on the eviction of commercial tenants and other government interventions that would have seemed unthinkable a few months ago.

In this environment, some law firms are likely to take aggressive action to renegotiate leases. As consultants to law firms, we have already been contacted by managing partners looking to reduce their square footage, especially as relatively few lawyers have expressed enthusiasm about returning to work in a high-rise office.

It would be a mistake for law firms to conclude that they can just walk away from their lease obligations. In this legal and economic environment, it would be easy for law firms to overplay their hands in discussions with landlords. The next few months do, however, provide law firm managing partners with a rare opportunity to address their real estate needs and perhaps negotiate a more appropriate lease.