| Since the COVID-19 pandemic is the overriding business concern for most of our firm clients and friends, we are dedicating this issue to the legal concerns and questions that have frequently been raised to us in the past few weeks. The legal and regulatory landscape around these issues is, however, in a constant state of flux. Therefore, if you have specific legal questions or want the timeliest information, please contact us directly. Thank you and stay safe.
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Summer Newsletter - COVID-19 Special Issue
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Since the COVID-19 pandemic is the overriding business concern for most of our firm clients and friends, we are dedicating this issue to the legal concerns and questions that have frequently been raised to us in the past few weeks. The legal and regulatory landscape around these issues is, however, in a constant state of flux. Therefore, if you have specific legal questions or want the timeliest information, please contact us directly. Thank you and stay safe.
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California Court Closings Open Door to Overdue Tech Support
By Isabelle Vidro, Associate
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There was very little transition time between "normal" life and the "new normal" COVID-19 pandemic life. In a matter of days, Californians went from going to work, going to school, and going out with friends to leaving home only for "essential" activities. Just as life changed for all individuals, so did the operations of all California courts in an attempt to mitigate the effects of the ongoing pandemic.
First, state courts across California have generally been closed since mid-March with courthouse access restricted only to people with business before the court on a particular day. This means that there are fewer cases overall, with hearings postponed, depositions canceled or rescheduled, and deadlines extended, as all non-essential court cases were effectively put on hold. Accordingly, some of the urgency that normally accompanies the practice of law has been alleviated.
Importantly, the Chief Justice of the California Supreme Court, chair of the Judicial Council of California, set forth emergency rules in civil cases effective immediately. One such emergency rule tolls the statutes of limitation for all civil causes of action that exceed 180 days from April 6, 2020 to October 1, 2020. Another rule allows deponents, at their election or the election of the deposing party, to appear at a deposition remotely through electronic means, superseding current law requiring a deponent to attend a deposition in person and to appear remotely only with the permission of the court upon a finding of good cause. Additionally, yet another rule allows courts to require judicial proceedings and court operations to be conducted remotely though video or telephone, including remote appearances, electronic exchange of documents or e-service, and remote reporting.
It is no secret that courts and the legal system in general are a little archaic in their adoption of technology. For example, in the Central District of the Los Angeles Superior Court, electronic filing of documents only recently became mandated. Before that, cases before the court dealt largely with paper documents, which were stored in the court, resulting in disorganization and even, at times, lost documents. With the pandemic keeping everyone at home, the court system, and the legal profession as a whole, has had to adapt to doing business electronically even more so than before, as evidenced by the Judicial Council's emergency orders. The question remains whether or not courts will continue to embrace the use of technology in these areas after the pandemic is over.
Moving forward, the California court system will be forced to balance the timely administration of justice and certain rights afforded by law with technology use. Although the emergency orders are temporary, they will likely have significant lasting impacts on lawsuits for months, and possibly years, after the rules are no longer in effect.
For example, before the pandemic, the California judicial system was already underfunded and overloaded. The time that judges have to review motion papers as hearings are pushed out further and trials are set further out from the time the case was filed will only exacerbate these issues in both pending and future cases.
Additionally, courts and attorneys may be more inclined to use certain technology moving forward. If technology were used regularly, lawyers, parties, and third-parties may not need to travel to court or to depositions or mediation in order to participate, but could do so remotely. This would likely make the legal system more accessible and more efficient as attorneys and parties could focus their time and attention on legal issues versus the logistics of attending proceedings.
It is difficult to know how the Judicial Council will proceed long term given that the Emergency Rules were enacted quickly. Perhaps new or different rules will be enacted. Even more uncertain is how each county will use its discretion to issue its own general orders and local rules.
For example, the San Francisco Superior Court has issued a general order temporarily tolling the period of time to move to quash, file a demurrer, move to strike, or otherwise response to a complaint and the time to respond to discovery, file objections, move for protective order, or move to compel. Other counties have issues similar but different general orders. On the other hand, there is no similar order in the Los Angeles Superior Court as to most of these motions - existing deadlines remain the same. Indeed, litigants should look not only to the Judicial Council but to the county in which their case has been filed in order to determine how their case has been impacted.
Certainly, technology will continue to play a role in the evolution of the modern legal system. For example, in Fresno, California, judges have begun to appear via the popular video conference application Zoom, its screens filling up with attorneys, a judge, and other courtroom staff. For now, this technology is being used only for criminal arraignments, but its application could easily be transferred to all types of matters.
The Los Angeles Superior Court, the largest trial court in the country, recently announced vast changes to integrate technology into its courtrooms as part of its "Here For You | Safe For You" plan in response to COVID-19. Some of those changes include:
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- Civil, probate and family law cases will he heard through the new LACourtConnect system (LACC). LACC will interface with the Court's existing case management system so lawyers should be able to schedule hearings and handle other matters through LACC.
- LACC will roll out as follows:
▫ Probate and settlement judges – June 22;
▫ Civil cases at the Spring Street Courthouse – July 6;
▫ Civil cases at the Stanley Mosk courthouse – July 20;
▫ Civil cases in all other courthouses – August 3;
▫ Traffic cases – August 10;
▫ Small Claims, Unlawful Detainers, Collections cases – August 10; and
▫ Family Law cases – August 17.
- Criminal, dependency, delinquency and mental health cases will be heard through WebEx.
- LACC and WebEx may eventually replace CourtCall, the telephonic system used by LASC and across California courts for many years.
- Court calendars will be cut to approximately 50% of their normal operating load and cases will be staggered to allow for social distancing in the courtrooms.
- Criminal Jury Trials take priority and will start in mid-July, Civil non-jury trials may also start in July, with preference Civil jury trials starting in late August, and non-preference Civil jury trials starting in September or October. The backlog of criminal trials and arrests will significantly delay civil jury trials, however, with civil trials possibly not starting until 2021.
- Remote appearances are not mandatory but are encouraged for hearings. Remote trials in civil or criminal matters are possible if all parties agree.
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Given the continuances of many hearing and trial dates in the past several months, it is very likely that courts will be busier than ever when they are finally permitted to operate as normal. Hopefully the use of technology will enable the courts to move expeditiously through the matters that have no-doubt piled up during the pendency of the pandemic.
When the state of emergency involving the pandemic is over, times will certainly be different. With any luck, we are able to use some of the tools developed during the pandemic moving forward in order to navigate through new and unprecedented territory.
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Commercial Tenancies During the COVID-19 Pandemic and Beyond
By Glenn Coffman, Associate
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Although the literal and figurative state of emergency caused by the COVID-19 pandemic is now only a few months old, its unprecedented economic and social impact was not only felt immediately but will continue to be felt for the foreseeable future. One such impact on the vast majority of Californians and Americans in some way has been to commercial tenancies.
At a basic level, the mandatory closure of businesses and much of the economy has heavily impacted individual incomes, and accordingly, the ability of individuals to make their own residential rental payments. This spurred immediate government action to avoid mass evictions in the midst of a global pandemic. In addition, while the troubles facing residential tenancies have arguably been more immediate, governments at the national, statewide, and local level have been forced to address the issues facing commercial tenancies as well. Unfortunately, the COVID-19 pandemic has created a conflict between commercial tenants and landlords (not necessarily at the fault of either) but for which current, and future legislation will be crucial.
Like with residential tenancies, mandatory business closures and restrictions have significantly hurt business revenues, and affected businesses' ability to make rental payments on their commercial leases. As such, many businesses have faced or will face the unfortunate reality of either permanent closure and default on their leases, or if they are fortunate enough to re-open, they face difficulty making their rental payments.
On March 16, 2020, Gavin Newsom signed Executive Order N-28-20, suspending causes of action for unlawful detainer under Code of Civil Procedure 1161, et seq., which could be used to evict commercial and residential tenants, if the basis of the nonpayment of rent arose out of a substantial decrease in business income (including opening hours and consumer demand) caused by the COVID-19 pandemic, or any government responses to the pandemic, and was documented.
Similarly, on April 6, 2020, the Judicial Council of California issued eleven emergency rules, effective immediately, for its state courts. Of note, Emergency Rule 1 states that a court cannot (subject to an exception to protect public health and safety) issue a summons on a complaint for unlawful detainer, or enter a default or default judgment in an unlawful detainer action (again, subject to a limited exception). This rule is to remain in effect for 90 days after California's state of emergency related to the COVID-19 pandemic is lifted, or the Emergency Rules are amended or repealed by the Judicial Council.
Following Executive Order N-28-20 (and its extensions) and the Judicial Council's Emergency Rules, local governments throughout California have imposed their own regulations supplementing these rules for their constituents at the city and county level.
Furthermore, California is currently in the process of voting on Senate Bill 939, which would greatly affect commercial tenancies, and significantly extend rights to commercial tenants. On May 22, 2020, California's Senate Judiciary Committee voted to pass SB 939, but moved to amend the bill and send back to the Appropriations Committee for fiscal impact review.
As of the May 29, 2020 amendment, SB 939 would prohibit a commercial landlord from serving a notice of eviction on a commercial tenant until 90 days after California's state of emergency is lifted and if specified criteria apply, including that the commercial tenant serve a written notice on the landlord affirming, under penalty of perjury, that the commercial tenant is an "eligible COVID-19 impacted commercial tenant."
The bill would define an "eligible COVID-19 impacted commercial tenant" as "a commercial tenant that operates primarily in California, that occupies commercial real property pursuant to a lease, and that meets one of the following criteria: (A) It is a commercial tenant that has experienced a decline of 20 percent or more in average monthly revenue over the two most recent calendar months when compared to one or both of (i) its average monthly revenue for the two calendar months before a state or local government shelter-in-place order took effect or (ii) its average monthly revenue for the same calendar months in 2019; (B) it is a commercial tenant that was prevented from opening or required to delay opening its business because of the state of emergency; or (C) it is a commercial tenant that has suffered a decline of 15 percent or more in capacity due to compliance with an official public health order or occupational health and safety guideline for preventing the spread of COVID-19."
SB 939 would further provide that specified notices of eviction served on commercial tenants are void under specified circumstances, including that the commercial tenant was an eligible COVID-19 impacted commercial tenant at the time the notice of eviction was served, and would also provide a means for stopping an eviction in process, prohibit nonpayment of rent during the state of emergency from being grounds for an unlawful detainer action, limit when late fees can be imposed on a commercial tenancy, and require the landlord to provide written notice of the protections afforded by these provisions. The bill would also prohibit the landlord from willfully harassing, intimidating, threatening, or retaliating against a commercial tenant with the intent to terminate the occupancy, and would subject the landlord to various damages if found by a court to have engaged in that behavior.
Moreover, the bill would authorize small businesses that operate primarily in California as an eating or drinking establishment, place of entertainment, or performance venue to engage in good faith negotiations with commercial landlords to modify their rent. If an eligible landlord and tenant cannot reach an agreement within a certain timeframe, the tenant would be eligible to terminate the lease. Lastly, and importantly, SB 939 would make these provisions operative until December 31, 2021, or 2 months after the state of emergency is lifted, whichever is later.
Most recently, SB 939 was heard before the Senate Appropriations Committee on June 9, 2020. The Committee voted to move the bill to the suspense file, which is reserved for bills having a fiscal impact of $150,000.00 or more, and will be subject to further hearing after the state budget has been prepared.
Thus, while the various orders and regulations that have arisen due to the COVID-19 pandemic have been relatively friendly to tenants' rights, SB 939 may provide a substantial expansion of these rights to commercial tenants. The status of SB 939 is certainly a development to observe for both commercial landlords and tenants alike.
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Businesses in a Pandemic: Litigation and Challenges Ahead
By Natalie Rastegari, Associate
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While we are only at the end of the first inning, the COVID-19 pandemic has already presented various challenges for businesses to stay in their game. The road ahead is uncertain for many, and businesses across every sector are keen to address these uncertainties and exploit current opportunities available to them – whether by renegotiating contracts with third parties, restructuring resources and operations, or managing liabilities to ease financial pressures.
Even with these mitigating efforts, businesses cannot afford every risk and cannot control every aspect of their environment. One thing is for certain - the litigation landscape will see many more business disputes arising as a result of this pandemic. Let's address some of these expected cases and assess how they will reshape business strategies moving forward:
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- Commercial Lease Agreements. Given mandatory business closures, many businesses have been impacted by the COVID-19 crisis, and commercial landlords and tenants may need to enter into amendments or modifications to their lease agreements. Many businesses will be unable to meet their payment obligations, even if they receive any relief from the various local, state, or federal eviction moratoriums. In this scenario, without meaningful resolution between the contracting parties, landlords will bring breach of lease claims against their tenants for their failure to pay rent. Tenants, in turn, will seek affirmative relief or assert defenses to such claims to delay or excuse their obligations.
- Service Agreements. Likewise, many businesses and individuals will be unable to meet their contractual obligations beyond the landlord-tenant context. This will include service agreements, and contractual issues arising under employment agreements - affecting all players from event caterers, to marketing agencies, to property management companies, to trade show and live event businesses. Certainly, the disruption of various industries, impediments to travel, vendor shutdowns, and other similar factors will contribute to a party's inability to perform their contractual obligations. Parties that rely on currently strained international trade will be hit especially hard. Breach of contract actions based on these types of agreements will primarily include claims that the services promised were not performed, as well as claims that invoices on services actually rendered have gone unpaid. Employers will claim that they are unable to comply with their contractual obligations during the crisis and will have to defend against claims by employees for breach of contract.
- Real Property Purchase and Sale Agreements. A real property purchase and sale agreement is another type of contract that obligates a party to perform an action – here, to convey title to real property. In this climate, many of the standard provisions in purchase and sale agreements should be modified in response to COVID-19-related issues, such as due diligence provisions and closing conditions. For agreements that have already been fully signed, the real estate market will see litigation arising under deals gone awry during the COVID-19 crisis. Buyers and sellers alike will bring claims surrounding enforcement of the agreement and termination rights, if the contingencies on closing the sale transaction are not removed by the parties' agreed upon date. Buyers will also bring claims for the return of any earnest money if such contingencies are not removed. Even after any deal closes, buyers may bring claims that the seller failed to disclose material facts affecting the subject property, such as COVID-19-related government notices or orders that adversely affect the operation on the property or require operating permits that must now be transferred.
- Construction Agreements. After finally recovering from the Great Recession, the construction sector is once again facing risks relating to yet another global crisis. In addition to the restrictions on construction activities imposed by some states, including some California counties and cities, there have been disruptions across the country relating to labor and material shortages, delayed governmental inspections, and other project factors. Courts will certainly see cases asserting breaches of construction contracts during the pandemic - against contractors and subcontractors due to the untimely completion of projects and increased costs, and against owners and developers due to nonpayment for work executed or for profit on work not executed, or improper termination or delay of projects.
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The outcomes of these cases will depend on the specific facts and contracts in each case, but should these disputes spill over into the courtroom, courts can be expected to apply well-established contract principles to evaluate the claims and defenses arising out of the COVID-19 pandemic. The first thing businesses should do is review the explicit language of their contract. Businesses should look for terms such as "force majeure," "impracticability," or "impossibility," which may be found in some contracts. Businesses should also look to the defined contingencies of any early "termination" of the contract, or any other conditions that may excuse or defer obligations.
If the agreement contains a force majeure provision, that provision excuses a party's performance of certain obligations if a specified event occurs – such as war, floods, earthquakes, government shutdowns, or any other "act of God" listed in the agreement, since performance would be impracticable. In California, the doctrine is set forth in California Civil Code section 3526, which states in full: "No man [or woman] is responsible for that which no man [or woman] can control." Compared to some other states (e.g., New York), California courts interpret these provisions broadly and generally include non-specified events within the written force majeure provision if such events were unforeseeable at the time the parties contracted.
What's more, even if a force majeure provision is not explicitly written in the contract, California courts may apply the equivalent, equitable doctrines of impossibility and frustration of purpose to analyze whether a party is excused from their obligations. These principles are codified in California Civil Code section 1511(2), which states that the performance of an obligation is excused "when it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary." California courts have specifically held that the common law contract defense of impossibility or frustration of purpose applies to excuse a party's performance when an (1) unforeseeable event, (2) outside of the parties' control, (3) renders the performance impossible or impractical.
Consequently, parties affected by the pandemic will use evidence of the various shutdowns and disruptions to show impossibility or impracticability, by pointing to the "extreme and unreasonable difficulty, expense, injury, or loss involved." Similarly, parties can use this same evidence to assert that the contract's principal purpose is substantially frustrated and thus, performance is excused - even if performance technically remains possible.
For California businesses seeking to invoke force majeure or similar principles, it is important to note that the law requires the business to demonstrate that they made reasonable efforts to avoid the consequences of the force majeure event – here, the COVID-19 pandemic. This can include, for example, securing other partners, suppliers, or other ways of performing their obligations. Such other ways could be more expensive, but still generally required by contract law if they are not "extreme or unreasonably difficult."
Courts have yet to write case law, and there is no controlling authority, on these contractual and equitable principles in the context of this pandemic. While many parties are seeking clarification on how such provisions and doctrines apply in the COVID-19 context, you can expect to see these cases play out in the courts and the results will be determined based on the unique set of facts in each case. In times like this, businesses must learn to handle contractual obligations that may be impacted by the pandemic. So, what should impacted businesses do now?
If there's anything we've learned from this pandemic, it's that businesses must be proactive. Businesses may benefit from drawing up pre-litigation game plans, which can include preemptively clarifying key issues, amending relevant agreements, or engaging in informal dispute resolution (e.g., mediation) with opposing parties. Upon consultation with legal counsel, businesses may also consider early commencement of declaratory relief actions to obtain a court order clarifying the parties' rights and obligations – prior to any breach of contract claim being filed against them. Such declaratory relief actions could potentially save a business time, money, and resources down the line, given that these equitable claims can be decided by the judge, without a jury or protracted litigation. Proactive litigation strategies will benefit businesses affected by COVID-19 by increasing their leverage in any settlement or resolution of the relevant claims, and by providing much needed clarity on their exposure to liabilities.
In the end, some businesses will strike out, some will tie, and some will reach home safely. Some will even lose to win by putting themselves at the mercy of the courts rather than face the uncertainty of a protracted fight. The COVID-19 pandemic is a long-term game, and businesses should evaluate their activities and be prepared to deal with what lies ahead.
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Advice for Commercial Landlords During the Pandemic
By Salisian Lee LLP Staff
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In response to the COVID-19 outbreak worldwide, a number of emergency orders have been issued by governmental bodies statewide over the past several months. On April 6, 2020, the Judicial Council of California issued Emergency Rules to take immediate effect in California courts, which include two rules specific to landlord tenant relationships. These rules essentially prohibit unlawful detainers (i.e. eviction actions) and foreclosure actions until 90 days after Governor Newsom lifts the state of emergency or until the rule is amended or repealed by the Judicial Council.
While there has been some loosening of shelter-in-place restrictions statewide in recent weeks, there does not seem to be any wiggle room around these particular rules – which essentially leave commercial landlords without remedy for the foreseeable future, at least in through the court system. Additionally, multiple counties in California have issued moratoriums on evictions and other local regulations that apply to both commercial and residential tenants, also without any sign of when these will be lifted. So what's a commercial landlord to do?
First, it is important to understand the type of evictions that are prohibited. Specifically, the moratoriums apply only to evictions that result in the non-payment of rent because a tenant has demonstrated that their inability to pay is as a result of the financial impacts of COVID-19. Different cities and counties in California have different criteria for how to demonstrate that inability and what qualifies as "financial impacts."
Additionally, each city or county has specific protocols that commercial tenants must follow to receive the benefit of these new protections – procedures like providing written notification to the landlord within in a set period of time and documentation to support the claimed financial impact.
As well, the moratorium notably does not eliminate the obligation to pay rent – it simply delays it. Therefore, each city or county also sets forth how much time tenants will have after the moratorium is lifted to repay the rent. For example, in Los Angeles it's only three months, while Santa Monica allows for six months. Late fees are prohibited.
As a commercial landlord during this time, one of the most important things you can do is to maintain open and constant communication with your tenants and keep good records of those communications and any documentation provided. Understand the time frames available to tenants and the criteria they must meet in order to qualify for moratorium protection. Try to be helpful and promote their ability to pay – now or down the line – with supportive procedures like waiving late fees indefinitely, offering flexible payment plans and payment methods, sharing information about any available government or community programs that might offer some relief, and helping them to develop the sort of response plans and COVID-19 exposure mitigation plans that will get them back in business as soon as possible and permitted.
Given the uncertainty, it may make sense for commercial landlords to budget around non-payment or limited payment of rent for the foreseeable future. Landlords should also look to see what types of zero or low-interest loans are available to them as well, such as under the Small Business Administration's Economic Injury Disaster Loan Program or Paycheck Protection Program. A loan could help with the mortgage payments that are not included under the moratoriums. Landlords should also explore ways to lower operating costs, limit personnel at and around properties, and cut unnecessary expenses or planned improvements in the meantime. Anytime cost-cutting is considered however, landlords will want to make sure that they do not fall short of their maintenance and service obligations under the leases, or the shoe could easily go on the other foot – giving tenants potential affirmative defenses or counterclaims during an eviction action down the line.
The situation surrounding these commercial landlord tenant relationships is incredibly fluid such that, even as this goes to print, we may be seeing new rules and deadlines emerge as the situation changes on the frontline. For example, a bill currently pending in the California Senate would expand protections to commercial tenants if specified criteria are met. For this reason, it is always advisable to retain counsel when exploring options to navigate the landlord tenant relationships during these challenging times.
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Legal Disclaimer: The information contained in this newsletter is provided for informational purposes only, and should not be construed as legal advice on any subject matter. No recipients of content from this newsletter, clients or otherwise, should act or refrain from acting on the basis of any content included in the site without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the state of California.
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