California’s Senate Bill 939 is Not the Answer to Lift the Economy.

In my blog of May 19, 2020, I gave a brief overview of SB 939. Here, I expand on this proposed legislation and its misguided approach to aid in economic recovery.

The key “miss” in SB 939 is overlooking the practical steps necessary to advance or recover economically out of the pandemic shutdown. The lifting of economic restrictions due to improving public health indicators ushers in the review of steps necessary to restore economic health or vitality.

The initial steps in to return to economic health and vitality have begun. For example, one major step involves the massive infusion of public money in the private sector as a bridge between shut down and “normal” operations. Maintaining employment supports the economy’s primary engine: consumer spending and consumer confidence. However, among the dashboard of predictable consequences from a massive infusion is a fall out of confidence.

This scenario leads to “deflation” which means not enough people are consuming so the momentum necessary to sustain the economy falters. Consequently, business debt goes unpaid. In this turbulence, those businesses that survive will do so by responding appropriately – by getting lean. But this process of getting “lean” is frustrated or made impractical when the other party to contractual obligations is allowed all leverage in negotiations. Both parties to agreements must act rationally in an economic sense. One primary and avoidable example of irrational economic behavior would involve a commercial tenant who does not have any downside to their breach of a lease agreement or their unreasonable demand for lower rent payments or for more tenant improvements.

California should consider allowing the economy to sort out its economic recovery in this commercial landlord-tenant sector without public intervention. In fact, the process of rational workouts between commercial interest is already happening. Recently, the BBC covered a leading UK retailer of high-end product(s) (Marks & Spencer). The retailer has experienced crisis before and, in facing today’s crisis, has employed its arsenal of strategies to get leaner by cutting costs (marketing) tightening supply chain (local distribution) and discontinuing lease agreements at old or under-performing locations. The BBC report states commercial landlords “won’t be at all surprised” about a rent disruption. It points out a shopping mall giant with prominent locations in Glasgow, Scotland recently informed its creditors this week to brace for their lending conditions to be broken, as rents simply aren’t paid. The implicit message: if you collapse this business, good luck finding another one that can work the asset any better.”

Bottom line: California should not interfere by enacting SB 939 terms and conditions in lease negotiations. Rather, California should let the market participants operate rationally in the marketplace as they are the ones who understand their business and its demands and who are in the best position to “work the asset”.

Christopher A. Johnson is a shareholder and transactional law attorney at Reid & Hellyer, APC, a legacy law firm in Riverside. For his full bio, visit https://rhlaw.com/attorneys/christopher-johnson/

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