Corporate Litigation Archives - Page 3 of 4

Chapter 420 Bankruptcy?: How In re United Cannabis Could Open the Doors to Bankruptcy Relief for Cannabis-Adjacent Businesses

September 12, 2020/in All Blog Posts, Cannabis, Corporate Litigation/by Jake Ayres

Let’s say you’re a hemp/CBD business (that also services the cannabis industry in a limited capacity) and COVID-19 has hit you. Hard. You’ve stretched your resources as far as you can, but you’re still on the ropes financially. The California eviction moratorium has been rolled back and your local eviction moratorium—the only thing protecting commercial tenants (in San Diego County and many others)–is about to expire at the end of September. The CDC has issued an order forbidding evictions until the end of the year, but only for residential tenants. Your landlord is waiting in the wings to be paid in full for the back rent you couldn’t afford to pay during the lockdown.

The b-word—bankruptcy—rears its head in your mind. But can you, as a business that is still federally illegal, file for bankruptcy—a creature of federal law?

One would think the answer is “absolutely not.” However, a relatively recent District of Colorado Bankruptcy Court ruling, and its soon-to-be progeny, may eventually provide a glimmer of hope for the distressed cannabis-adjacent business.

On April 20, 2020—a date not without significance for the cannabis industry—United Cannabis Corporation and its associated entity UC Colorado Corporation filed for bankruptcy in the District of Colorado. Shortly thereafter, on April 22, 2020, Bankruptcy Judge Joseph G. Rosania, Jr. issued an Order to Show Cause why the bankruptcy should not be dismissed, citing the rule that businesses whose operations constitute federal crimes cannot take advantage of the federal bankruptcy system. Arenas v. United States Tr. (In re Arenas), 535 B.R. 845, 847 (B.A.P. 10th Cir. 2015).

Despite this seemingly impassable roadblock, the debtors are hoping to take advantage of a narrow gap in the case law hinted at by an earlier bankruptcy case from the District of Colorado—In re Way to Grow, Inc., 610 B.R. 338 (D. Colo. 2019). In that case, the debtors were a group of business entities selling hydroponic agriculture equipment. On December 14, 2018, the Bankruptcy Court dismissed the petition, citing the fact that although hydroponic equipment can be used to grow any number of crops, the overwhelming majority of debtors’ sales were to cultivators. In re Way to Grow, Inc., 597 B.R. 111 (Bankr. D. Colo. 2018). The debtors appealed to the District Court, citing Congress’ passage of the Agriculture Improvement Act of 2018—also known as the 2018 Farm Bill—which legalized hemp on December 20, 2018, mere days after the Bankruptcy Court dismissed debtors’ petition. 610 B.R. at 355. The debtors argued that their products could have been used by their customers for the now-legal cultivation of hemp, as opposed to cannabis. Id. The court demurred, stating “[t]his Court does not opine on whether the timing of the Agriculture Improvement Act’s passage excuses Debtors’ failure to develop a proper record or to advance the argument” that “‘the legalization of hemp means that they could reorganize based on the hemp market.’” Id. at 355-56.

This brief discussion of the tension between federally illegal cannabis and federally legal hemp as it relates to bankruptcy eligibility left the door ajar for a debtor like United Cannabis. United Cannabis has filed a petition tailored to fit through that narrow gap, arguing that its chapter 11 reorganization can be funded by its non-cannabis income. United Cannabis argues that its $4 million bankruptcy estate is overwhelmingly derived from legal hemp/CBD business whose only cannabis-related holding is ownership of stock in WeedMD, a Canadian medical cannabis company whose shares are publicly traded in the United States.

In other words, United Cannabis has placed the exact question the District of Colorado dodged in Way to Grow squarely before the District of Colorado Bankruptcy Court: Can a company with some income derived from cannabis be allowed to file for chapter 11 bankruptcy if it can fully fund its reorganization without that cannabis-derived income?

As of now, that question remains unanswered. The debtor and the U.S. Trustee have filed their responses to the court’s OSC and now the parties—as well as industry watchdogs—eagerly await the court’s decision. The court’s ruling on the Order to Show Cause has been pending since mid-May 2020 and the court has allowed the bankruptcy to proceed as normal in the interim. Although the court itself has offered no timeline for when it will issue its decision on the Order to Show Cause, nor has it indicated why its decision has been pending for nearly four months, one can only speculate that the court may be waiting for guidance from Congress or elsewhere before issuing its decision. Moreover, the length of time that has elapsed since the parties in interest submitted their responses to the Order to Show Cause suggests that the court does not view the issue as a black-and-white one—or, at the very least, as a political hot potato.

Regardless of when the decision will be issued, if the court allows the debtors’ petitions to survive its OSC , it could be a watershed moment for businesses who service the industry in a small capacity by opening the door to bankruptcy relief, provided that they can fund their reorganization without cannabis money. However, the court could easily bypass this question just as the court did in Way to Grow. The U.S. Trustee, citing United Cannabis’ own marketing materials, argued in its response to the OSC that United Cannabis marketed itself largely as a cannabis company, not as a legal hemp/CBD company. Per the U.S. Trustee, United Cannabis had, in the recent past, identified numerous cannabis/THC products that it sold and distributed. If the court finds this evidence credible, it could easily find that United Cannabis is not entitled to bankruptcy relief because it cannot fund its reorganization with non-cannabis money, regardless of whether that route would be a viable path to bankruptcy.

COVID-19 has taken its toll on a wide swath of industries—including the “essential” cannabis industry. Despite this designation, cannabis businesses have been cut off from Paycheck Protection Program loans and bankruptcy, among other federal forms of economic relief. However, if the United Cannabis court decides that mixed hemp/cannabis companies can file for bankruptcy if they can reorganize without cannabis money, that pushes the cannabis industry an inch closer to enjoying the governmental benefits that its non-cannabis business counterparts enjoy.

California Bill to Substantially Increase the Homestead Exemption Goes to Governor Newsom for Signing (AB 1885)

September 3, 2020/in All Blog Posts, Corporate Litigation, Real Estate/by Ajay Gupta

With all the craziness around eviction moratoriums, COVID-19, and election politics dominating the headlines, the California legislature quietly passed AB 1885 (its Senate Corollary was SB 832) on Tuesday, September 2nd. AB 1885 increases the California homestead to the greater of $300,000 or the countywide median sale price of a single-family home in the calendar year prior to the year in which the judgement debtor claims the exemption, not to exceed $600,000. As a frame of reference, the following are projections for a few of California’s major metropolitan areas:

San Diego County: $600,000 (estimated $628,500 Median)
Los Angeles County: $600,000 (estimated $664,500 Median)
San Francisco County: $600,000 (estimated $1,444,000 Median)
Riverside County: $400,500

The homestead exemption protects the value of a homeowner’s home in the event of a bankruptcy or a judgment creditor enforcing a judgment. The exemption provides that a specified portion of equity in a homestead, as defined, is exempt from the execution to satisfy such debts. However, the exemption does not protect against voluntary liens, such as a deed of trust or even a homeowner’s association lien. In addition, federal and state tax liens are generally not subject to any homestead protections. Depending on certain characteristics of the homestead’s residents, the law currently prescribes that the amount of the homestead exemption is either $75,000, $100,000 or $175,000—a stark difference from the potential $600,000 exemption now permitted under new AB 1885.

Proponents of AB 1885 argue that the current homestead standards are designed for an era when properties were simply worth less. The California homestead exemption protected almost the full value of a median priced home 45 years ago; but, today the homestead exemption covers barely 15%. Also, many other states with much lower home costs have far higher exemption amounts, with 8 states providing their homeowners with an unlimited exemption. Finally, proponents argue that COVID-19 mandates higher exemptions because a higher exemption will allow for individuals, who would otherwise lose their homes, to access bankruptcy relief during this economic disaster.

Creditors’ rights advocates argue that increasing the homestead exemption six-fold for most Californians is unwarranted and the product of political pandering during a once in a lifetime pandemic. While most opponents do not dispute that the homestead exemptions are outdated, they push for a graduated increase that is less severe and that takes age and disabilities into account.

Regardless of your opinion, this bill is sitting on Governor Newsom’s desk and is expected to be signed into law. If signed, the bill is likely to be effective on January 1, 2021; however, there may be procedural mechanisms for the Governor to make it effective immediately.

If you’d like to weigh in on this signature, now is the time. Send your emails to the governor at leg.unit@gov.ca.gov.

Discussion: California Legislature Set to Halt COVID Related Evictions on August 31st Through AB 3088

August 29, 2020/in All Blog Posts, Corporate Litigation, Real Estate/by Ajay Gupta

On August 13th, the California Judicial Council amended its emergency rules to lift the statewide ban on evictions. In doing so, the Courts effectively passed the baton to the California Legislature to develop and pass a bill to address the looming eviction crisis set to erupt on September 1, 2020 when the statewide eviction ban is formally withdrawn. After weeks of drafts, negotiation and compromises between lawmakers, tenant advocates and landlord organizations, Governor Newsom has announced Assembly Bill 3088, known officially as the Tenant, Homeowner, and Small Landlord Relief and Stabilization Act of 2020 (the “AB 3088”). The Relief Act will be voted on in the Senate on August 31, 2020 and will need a 2/3 majority vote to pass and be sent back to the Assembly.

AB 3088 is intended to serve as a statewide eviction moratorium bill, applicable only to residential landlords and tenants. Commercial tenants will have to continue to rely on local eviction moratoriums, many of which (including San Diego) are due to expire at the end of September 2020. In large part, AB 3088 will serve as a “stop-gap” measure to address California’s eviction crisis, until the California Legislature reconvenes early next year. While AB 3088 is incredibly nuanced and detailed, the general points of the Relief Act are as follows:

For rent due between the covered period of March 1, 2020 through August 31, 2020, residential tenants cannot be evicted if they declare under penalty of perjury that they have experienced a “COVID-19-related financial distress”;
Only high income tenants (those earning 130% of the County’s median income) would be required to show proof of COVID-19-related financial distress;
For rent due between the transition period of September 1, 2020 through January 31, 2021, tenants would still be required to pay 25% of the outstanding balance, and such payment would be due by January 31, 2021;
All unpaid rent would be converted to consumer debt and residential landlords would be permitted to collect such debt in Small Claims court, beginning March 1, 2021;
The Relief Act would preempt any local ordinance, resolution, regulation, or administrative actions such that eviction moratoriums previously passed by cities and counties will be grandfathered in, but they won’t be able to pass any extensions.

To learn more about AB 3088, its specific provisions, how it may be interpreted in Courts, as well as several other interesting and related real estate topics, please check out the discussion we held (coincidentally) just hours after the Relief Act was announced.

PANELISTS

Founder, Gupta Evans and Associates
Ajay Gupta, Esq

Attorney Ajay Gupta is a certified bankruptcy specialist and has been working on real estate and bankruptcy matters since 2005. He is a thought leader on real estate matters in California with an emphasis on secured transactions and foreclosures. Mr. Gupta founded Gupta Legal Center, now Gupta Evans and Associates, in 2008. He has represented debtors and creditors as well as landlords and tenants in over hundreds of litigation matters over the past 15 years both in state and federal court.

Senior Attorney, Partner, Gupta Evans and Associates
Chris Evans, Esq

Chris Evans is a skilled litigator and Partner at Gupta Evans and Associates, with a focus on the Firm’s real estate and business litigation matters. Over the course of his career, Chris has successfully litigated or reached favorable settlements for both individual and entity clients in an array of matters ranging from lease disputes in both the commercial and residential context, commercial and residential eviction proceedings, disputes between business owners (often styled as the “business divorce”), fraud and fiduciary claims and complex real estate investment fraud. Chris graduated magna cum laude and Phi Beta Kappa from San Diego State University in 2010 and immediately pursued his legal career by graduating from the University of San Diego School of Law in 2013. In law school, Chris served as an Editor for the San Diego Journal of Climate & Energy Law and a member of the Phi Delta Phi Honors Society.

Broker Associate, Team Steven Wener, eXp Realty of California, Inc.
Steven Wener

Steven Wener is a thought leader, author and entrepreneur who currently works as a coach, mentor, and licensed real estate broker. He started door knocking at the age of ten with his father, became a licensed real estate agent in 1993, consistently receives numerous top performer awards and has helped thousands of families transact real estate. Steven has also been a radio show host, as well as spoken on stages across the United States, sharing his message of judgement, justification, vulnerability, accountability, commitment and personal story. Steven focuses on the personal, versus simply transactional points of view and developed an engaging, disarming and professional approach to both business and personal relationships. Steven is married to his beautiful wife Rebekah and they have 3 incredible children together which are his pride and joy.

Senior Attorney, Gupta Evans and Associates
Jake Ayres, Esq

Jake Ayres is an experienced and versatile attorney and the senior associate at Gupta Evans and Associates, PC. Drawing on his depth of experience in litigation from two AmLaw 200 firms, Jake represents individuals and businesses in both real estate litigation and transactional matters, including disclosure and HOA disputes, foreclosures, asset purchases, and private placements. Jake also is also part of the vanguard of service providers to the legal cannabis and hemp industries, advising businesses therein regarding compliance with regulations and dispute resolution.

Senior Vice President and Director, Hughes Marino
Star Hughes-Gorup

Star Hughes-Gorup is a senior vice president and director at Hughes Marino, San Diego’s leading commercial real estate firm that exclusively represents tenants and buyers. Star is a licensed broker in eight states, handling complex transactions for her clients throughout the country. She is a five-time winner of The Irvine Company’s prestigious “Broker of the Year” award, a three-time winner of San Diego Magazine’s “Woman of the Year” award, a three-time winner of the Business Journal’s “Women Who Mean Business” award, a two-time winner of San Diego Metro Magazine’s “40 Under 40” award, among many other honors.

Residency Program Director, New York Presbyterian
Dr. Manish Garg MD

Dr. Manish Garg MD is a Professor of Emergency Medicine and the current Residency Program Director in the New York-Presbyterian health system. He holds a dual faculty appointment at Cornell & Columbia medical schools and works clinically in their hospitals. Dr. Garg was on the front-lines of the New York City epicenter of the COVID-19 pandemic caring directly for patients. As a researcher, Dr. Garg has secured grant funding that originated from the National Institutes of Health and the Centers for Disease Control & Prevention to investigate emerging infectious diseases. He has authored many scientific literature contributions including multiple COVID-19 manuscripts.

Update for California Landlords and Renters: California’s Eviction Ban Is Expected to Be Lifted

August 12, 2020/in All Blog Posts, Corporate Litigation/by Dylan Contreras

On August 13, 2020, the Judicial Council of California will vote on a proposal to lift California’s statewide eviction ban. If the ban is lifted, starting September 1, 2020, California State Courts can resume all unlawful detainer proceedings that came to a sudden halt in April of 2020 and begin processing all unlawful detainer complaints filed during the eviction freeze.

In response to the Coronavirus pandemic, on April 6, 2020, the Judicial Council of California, the policymaking body of California State Courts, adopted multiple Emergency Rules including Emergency Rule No. 1 (the “Emergency Rule”). The Emergency Rule froze all on-going eviction proceedings—regardless of whether the tenant was affected by COVID-19—and prohibited all California State Courts from issuing a summons for any unlawful detainer complaint. The Emergency Rule essentially serves as a blanket suspension on all commercial and residential evictions across California.

The Judicial Council’s intent to lift the statewide eviction ban and amend the Emergency Rule is founded on the rationale that the Emergency Rule was always meant to be temporary. California Chief Justice Tani G. Cantil-Sakauye has repeatedly insisted that the inevitable eviction crisis is best left to the legislative and executive branches of government where open and transparent meetings and hearings can be had to determine “permanent measures and permanent solutions.”

The Judicial Council’s likely decision to lift the Emergency Rule comes at an uncertain time during our nation’s fight against the novel Coronavirus pandemic. Federal unemployment benefits were recently reduced from $600 to $400 per week, and California’s unemployment rate still lingers around 16.3 percent—four percentage points higher than it was during the Great Recession. However, the Emergency Rule’s purpose was less of a tenant relief measure and more a measure meant to alleviate stress on the Courts. Stress caused by a reduction in Court workers, mandatory stay-at-home orders, and an overall lack of infrastructure to support a wave of unlawful detainer filings that would otherwise flood the resource-strapped Courts.

Given the unstable economic condition, the Judicial Council’s plan to lift the Emergency Rule may only worsen California’s renters’ financial struggles, but only if the legislative and/or executive branches do not take swift action. To this point, California lawmakers are already asking the Judicial Council to postpone the vote to lift the eviction ban for another three weeks.

Although the Emergency Rule has protected California renters from eviction, landlords have argued that the Emergency Rule is too broad. For over five months, the Emergency Rule has prevented landlords from taking any legal action against any tenant, regardless of whether the tenant has been affected by COVID-19. Landlords claim that the Emergency Rule prevents them from evicting a tenant that has simply chosen not to pay rent knowing that the landlord has no recourse. In this instance, the Emergency Rule effectively permits tenants to occupy the property rent-free, while the landlord carries the burden of paying for the property’s mortgage and other related expenses.

Another complaint amongst landlords is a tenant that refuses to vacate the property, despite the landlord serving the tenant with proper notice of lease termination. Again, the landlord is forced to tolerate a tenant that occupies the property unlawfully and likely rent-free while also paying for the property’s mortgage and other expenses.

The California Legislature is intent on passing a solution to afford relief to residential tenants. One such measure that the State Legislature is considering is AB 1436, which strikes a balance of protecting financially impacted tenants from eviction while also preserving landlords’ rights.

AB 1436 prohibits landlords from evicting tenants that cannot pay rent due to the economic effects of COVID-19. However, the proposed law permits landlords to evict a tenant that is not financially affected by COVID-19 and fails to pay rent, or a tenant that occupies the property unlawfully. In its current form, AB 1436 satisfies landlords’ interests and concerns and protects tenants that have felt the financial impacts of COVID-19. AB 1436 does not apply to commercial tenancies.

The first time the Judicial Council attempted to lift the statewide eviction ban caused by the Emergency Rule, back in early-June, tremendous pushback from State Legislature and tenant organizations caused the Judicial Council to, ultimately, delay its vote. The Judicial Council recently received similar complaints from tenants that fear they will become homeless if the Emergency Rule is repealed and small landlords that face losing their livelihoods or filing for bankruptcy if the Emergency Rule remains in effect. If the Judicial Council does in-fact lift the eviction ban, the Emergency Rule will sunset on September 1, 2020. Check back to our website for updates about the Emergency Rule and AB 1436.

Reading the Sativa Leaves: Between the Lines of the FDA’s Report to Congress on Hemp and CBD Testing

July 17, 2020/in All Blog Posts, Cannabis, Corporate Litigation/by Jake Ayres

On July 8, 2020, the United States Food and Drug Administration (FDA) recently issued a highly anticipated report to Congress regarding the results of its preliminary campaign of testing of cannabidiol (CBD) products on the market for both mislabeling and adulteration. Although the authors of the report were careful to include numerous caveats about the conclusions that can be drawn from the report[1], the report does provide some potential indications about the future of the industry.

In its report—mandated by the 2018 Farm Bill which federally legalized hemp and CBD derived from hemp—the FDA found, broadly speaking, that adulteration of CBD with potentially harmful chemicals like heavy metals and pesticides was not significant. On the other hand, the report indicated a potentially more widespread problem with mislabeling of CBD products—particularly so regarding inaccurate label representations of the amount of CBD contained in the product.

Overall, given the ocean of caveats that necessarily accompany it, the FDA report—read within its four corners—is not particularly illuminating. However, it could be a bellwether for the future direction of FDA regulation of hemp and CBD products. Despite the fact that the 2018 Farm Bill legalized hemp and hemp-derived CBD, the FDA’s sluggishness to adopt regulations has placed hemp and CBD businesses in an awkward legal netherworld. Hemp businesses often find financial institutions unwilling to lend to them, despite urging from industry groups and the 2018 Farm Bill’s congressional sponsors, because of the risks associated with banking for an as-yet unregulated industry.[2] Moreover, recent court decisions dismissing or staying litigation surrounding hemp and CBD businesses until the FDA issues its regulations pursuant to the “primary jurisdiction” doctrine have underscored the urgency for the FDA to take action. As a result, anticipating where the FDA will focus its regulatory and enforcement powers can be valuable for a hemp/CBD business looking to allocate limited compliance resources.

The FDA report collates two sets of testing performed by the FDA—“historical” testing from 2014 to 2018, conducted prior to the enactment of the 2018 Farm Bill, and testing from 2019 conducted in response to the enactment of the 2018 Farm Bill.

The historical testing was geared toward identifying the presence of various types of cannabinoids in CBD products on the market. Throughout the four-year period, the FDA selected 78 CBD products for inclusion in testing not on a random basis, but rather on several qualitative factors, including but not limited to: products that were widely available commercially, products that made strong health claims, and products about which the FDA had received complaints. A subgroup of 23 of the 78 CBD products were tested for consistency with their labels. Only eight of the 23 CBD products (35%) accurately stated on their packaging the amount of CBD they contained.

The FDA also tested these products for the presence of THC. THC presence rose and fell during the 2014 to 2018 period as follows: 2014 – 39%; 2015 – 83%; 2016 – 68%; 2017 – 25%; 2018 – 33%.

The 2019 study resulted from the FDA’s selection of 34 CBD products for testing both for cannabinoid content and for the presence of adulterants such as heavy metals. Like the historical studies, these products were not selected randomly, but were instead selected in response to “consumer and industry complaints . . . and [informed by] online surveillance.”

As for the adulterant testing, the FDA analyzed the 34 products for the presence of, among other things, heavy metal elements such as lead and arsenic. The FDA concluded that the “levels found in these 34 products did not raise significant public health concerns.”

As for the 2019 mislabeling testing, much like the historical testing, the FDA found evidence of CBD product packaging misstating the amount of CBD present in the product. The FDA tested 31 of the 34 products for cannabinoids. Of the 31 products, only 21 affirmatively stated the amount of CBD in the product. Of those 21 products, only seven (33%) stated the amount of CBD “within 20 percent of the amount indicated.” Furthermore, 48% of the 31 products tested for cannabinoids contained THC. However, despite what seem to be statistics indicating a widespread problem with labeling, the FDA was careful to include the disclaimer that “[t]he results obtained for these 34 products is from a limited sample size and cannot be used to draw definitive conclusions and further testing is warranted.”

The FDA also included a report on its in-progress 2020 testing, which the FDA has broken into “near-term” and “long-term” testing. This time, the FDA took a stab at randomizing its samples by purchasing 200 CBD products randomly selected from a 500-product list generated from the FDA’s online research. The FDA tested 147 of these 200 products for cannabinoids, while 133 of those 147 were also tested for arsenic, cadmium, mercury, and lead.

Consistent with the 2019 study, 132 of the 133 products tested were free of heavy metals. As for the labeling testing, of the 102 products that indicated a specific amount of CBD in their packaging, 18 products contained less than 80% of the amount of CBD indicated, 46 products contained CBD within 20% of the amount indicated, and 38 products contained more than 120% of the amount indicated. 72 of the 147 products contained THC or THCA above the .03% legal threshold imposed by the 2018 Farm Bill.

In particular, based on the results of its testing so far, the FDA seems likely to focus its regulatory and enforcement efforts on the recurring mislabeling issue. Although the studies summarized in the report were commissioned to evaluate concerns over both adulteration and mislabeling, the adulteration issue takes a definitive backseat in the FDA’s discussion because most samples tested by the FDA disclosed insignificant levels of heavy metal adulterants. The FDA’s data, however flawed, does show frequent mislabeling of the CBD content of the products. Having impliedly recognized this as a problem, the FDA now must choose how lenient to be to the CBD/hemp industry in drafting their regulations. That is, the FDA will likely draft a margin for error into the regulations regarding packaging and labeling claims for the concentration of CBD in a given product. The FDA could take its cues from the California regulations for THC content label claims and provide that a product is in compliance as long as the claimed CBD content is within 10% accuracy in either direction. 16 Cal. Code Regs. § 5307.1(a). However, the FDA could easily go above or below the 10% variance figure depending on the results of their further testing and/or political pressure.

Regardless of where the FDA’s regulations land, it seems clear that mislabeling of CBD concentrations will be top of mind for both regulators and plaintiffs’ attorneys. In light of that, hemp and CBD businesses should make sure to invest in reputable and repeatable testing to ensure that the actual CBD content of their products is as close as possible to the amount of CBD claimed on the product’s label or packaging.

[1] These difficulties in accurate measurements are in part a feature, not a bug, of the cannabis and hemp systems, because testing protocols in the industry are far from uniform and two tests of the same substance can generate widely varying results.

[2] However, FinCEN did recently issue guidance to the financial industry stating that Suspicious Activity Reports are not automatically required for transactions involving hemp business.

Update: San Diego City Council Extends Moratorium on Evictions and Approves $15.1 Million Rental Assistance Program

July 6, 2020/in All Blog Posts, Corporate Litigation/by Dylan Contreras

On June 30, 2020, the San Diego City Council (the “City Council”) voted to extend the moratorium on commercial and residential evictions through September 30, 2020, and approved a $15.1 million rental assistance program that will provide qualified households with a one-time payment to pay for past-due or upcoming rent.

Extension of Moratorium on Commercial and Residential Evictions

At the outset of the novel Coronavirus, the City Council issued a city-wide moratorium on commercial and residential evictions (the “Order”). The Order essentially provides that if a residential or commercial tenant is unable to pay rent due to the effects of COVID-19, then landlords cannot take any action to evict the tenant for non-payment of rent that was due on or after Mach 12, 2020. Landlord actions prohibited by the Order are broad in scope and not only prohibit filing or prosecuting unlawful detainer actions, but also prohibits simply serving a 3-Day Notice to Pay or Quit.

This initial Order was set to be effective through May 31, 2020; however, with the pandemic continuing to affect commercial and residential tenants, the City Council has previously extended the effective date of the Order. Now, as the Order was set to expire at the end of June 2020, the City Council again extended the effective date of the Order through September 30, 2020.

The City Council’s election to extend the Order did not change or alter any of the requirements that commercial and residential tenants must satisfy to defer rental payments. The three requirements that tenants must satisfy are explained below.

First, the tenant must be unable to pay rent due to the “financial impacts” “related to COVID-19.”

The term “financial impacts” is defined as a substantial decrease in household income for a residential tenant, or business income for a commercial tenant, due to business closure, loss of compensable hours of work or wages, layoffs, or substantial out-of-pocket medical expenses.
A financial impact is “related to COVID-19” if: it is caused by the COVID-19 pandemic or any governmental response to the COVID-19 pandemic, including complying with any public health orders or recommended guidance related to COVID-19 from local, state, or federal governmental authorities.

Second, the tenant must notify the landlord of its inability to pay rent due to the financial impacts of COVID-19 and must do so on or before the day rent is due. The tenant’s notice must be in writing, which can be in the form of an email, letter, or even a text message. The San Diego Housing Commission has provided a sample letter that tenants can use, which can be accessed here: Sample Letter.

Third, within a week of providing notice to the landlord, the tenant must then give the landlord “objectionably verifiable information” that shows how COVID-19 and the related governmental responses have negatively impacted the tenant’s financial condition. Common examples of “objectionably verifiable information” are:

pay stubs that show a decrease in wages or hours;
a letter from a past or current employer that states the tenant was laid off or his/her hours were reduced;
bank statements that illustrate a decrease in income; or
any other reliable documentation that shows the effects of COVID-19 has negatively impacted the tenant’s income or stream of revenue.

Tenants that satisfy the three requirements above are relieved from paying rent for the duration of the Order. However, tenants must pay all past rent owed six months after the Order is no longer in effect or the withdrawal of Governor Newsom’s Executive Order N-28-20, whichever occurs first. Tenants that vacate their property while Order is in effect must pay all past rent owed upon moving out.

Moreover, landlords cannot evict a tenant for a “no fault” cause if the tenant has satisfied the three requirements outlined above. A “no-fault” cause is an eviction that is not based or caused by the tenant’s actions. Common examples of “no-fault” evictions is when the landlord evicts the tenant because the landlord decides to sell or renovate the property or allows a close family member to move into the property. This subtle wrinkle prevents a potential work-around of the Order.

Last, the Judicial Council of California, Emergency Rule One, which remains in effect until 90 days after Governor Newsom lifts the State of Emergency Declaration, prohibits all California Courts from issuing a summons for any unlawful detainer proceeding. The Judicial Council of California, the policymaking body of all California Courts, enacted Emergency Rule One in response to the economic effects of COVID-19.

Although the extension of the Order and Emergency Rule One protect tenants during this uncertain time, there is nothing preventing landlords and tenants from discussing deferred rental payment options, lease addendums, or any other mutual agreement that benefits both parties involved. Tenants should always explore these options, before invoking the protections afforded under the Order.

San Diego’s Rental Assistance Program

In addition to extending the moratorium on evictions, the City Council also approved the COVID-19 Emergency Rental Assistance Program (the “Program”). The Program provides a one-time payment of up to $4,000 to qualified residential tenants to pay for any past-owed or upcoming rent. The Program is not available to commercial tenants.

To qualify for assistance under the Program, the following requirements must be satisfied:

the tenant’s primary residence must be located in the City of San Diego;
the household income as of January 1, 2020, must be no more than 60% of the median income in San Diego;
the household must not have enough money in a savings account to meet their financial obligations;
the household has eligible immigration status;
the tenant must not be a tenant of a property owned or managed by the San Diego Housing Commission; and
the household must be experiencing a financial hardship that is directly related to the effects of COVID-19.

The San Diego Housing Commission (the “SDHC”), which is in charge of administering the Program, has stated that tenants may begin applying for rental assistance payments under the Program “no later than July 20, 2020.” The SDHC will employ a “random-selection” system that prioritizes households with children and people 62 and older to determine what applicants receive rental assistance. If an applicant is chosen, then the SDHC will contact the tenant and coordinate with their landlord to disburse the rental payment directly to the landlord.

The City Council allocated $15.1 million to fund the Program, and projects that over 3,500 households will receive a rental assistance payment under the Program.

The Program, coupled with the extension of the Order, provides much needed relief to commercial and residential tenants that are struggling to pay rent during the COVID-19 pandemic. If you or your company is distressed due to the economic impacts of COVID-19 and have questions about the above, then contact a California attorney.

How Commercial & Residential Tenants Can Save Their Lease Post COVID-19

June 12, 2020/in All Blog Posts, Corporate Litigation, Real Estate/by Ajay Gupta

In a recent three-part blog article, Chris Evans discussed the moratorium on evictions and current rental obligations from a state, local, and judicial level. The blog article revealed that, among other things, San Diego tenants are protected from eviction until June 30, 2020. The article further clarified that landlords cannot initiate an unlawful detainer action until 90 days after Governor Newsom lifts the State of Emergency Declaration. These governmental actions have certainly provided some welcomed breathing room for tenants that have felt the immediate economic impacts of COVID-19 on their lease.

However, it is uncertain how much longer these orders will stay in place. As Governor Newsom recently announced, Californians have “arguably” flattened the curve, and we are in phase two of the State’s four-phase reopening plan. Additionally, San Diego County has begun permitting certain restaurants, retail businesses, and other parts of the economy to reopen. Given these new developments, commercial and residential tenants alike need to start questioning how they will protect their tenancy once the government lifts these tenant-friendly orders.

If commercial and residential tenants envision themselves on the losing side of an unlawful detainer action in the foreseeable future, they should look towards Sections 1179 and 3275 of the California Civil Code. Both statutes provide the court with broad authority to grant the tenant with “relief from forfeiture” of the lease agreement and reinstate the tenant to its former tenancy—even after the court has terminated the lease and issued a judgment in favor of the plaintiff-landlord. Indeed, tenants use both statutes as a “last hope” to save their tenancy. This article will discuss both statues in-depth and how tenants can utilize these statues in state and bankruptcy courts in a post COVID-19 world.

What Does “Forfeiture” Mean & When is a Lease Forfeited?

The term “forfeiture” simply means that the lease agreement is terminated, and the tenant has no further rights, obligations, or privileges under the contract. If the lease is “forfeited,” the tenant loses the benefits it expected to receive under the lease agreement, such as options to renew or extend its tenancy or its security deposit. A tenant forfeits a lease agreement in two ways.

First, the landlord declares a forfeiture of the lease agreement when the following four requirements have been satisfied:

The tenant breached the lease;

The landlord properly served the tenant with a notice to cure the breach within a reasonable time (i.e., a three-day notice to pay or quit);
The notice contains a provision that allows the landlord to declare a forfeiture of the lease if the tenant does not cure the breach; and
The tenant failed to cure the breach within the time permitted.[1]

Second, the lease agreement contains a clause that allows the landlord to declare a forfeiture if the other party breaches a covenant or condition of the contract. The landlord must show that the tenant’s breach was a “material breach” that affected the landlord. An unharmful or de minimis violation will not suffice.

For example, in Boston, LLC v. Juarez, the landlord was permitted to declare a forfeiture of the lease if the tenant violated any portion of the lease agreement. The court held that the tenant’s failure to obtain renter’s insurance, as required under the lease, did not amount to a “material breach” of the agreement. The court found that the condition to obtain renter’s insurance benefited the tenant, and its breach of this provision did not harm or impair the landlord’s rights under the lease agreement. As such, the landlord was estopped from declaring a forfeiture.[2]

A more common material breach is sub-leasing the property when the lease forbids sub-leasing or failing to pay rent. It is essential for tenants, primarily commercial tenants and landlords, to review their lease agreement to determine whether the contract contains a forfeiture clause.

Section 1179 of the Cal. Civ. Code

Section 1179 allows the court to grant “relief from forfeiture” if the tenant: (1) pays all past rent owed or cures its breach of the lease covenants; and (2) convinces the court that it will suffer a “hardship” if it is not restored to its prior tenancy.[1] Commercial and residential tenants often struggle to satisfy the second requirement, as courts find “hardship” in rare circumstances.

To determine whether granting relief is fair to both parties, courts engage in a three-factor test. The three factors are: (1) the nature and character of the tenant’s breach; (2) hardship of the parties if relief from forfeiture is/is not granted, and (3) whether the parties have acted in good and/or bad faith towards each other.[4] The three-factor test is certainly an extra hurdle that tenants must overcome when seeking relief. Nevertheless, courts have continuously granted relief from forfeiture when the circumstances are so dire that it would be unjust not to restore the tenant to their former tenancy.

For instance, in Hamid v. Janakus, the tenant, an 89-year-old man, fractured his hip and was placed in a nursing home for a month. The elderly tenant forgot to pay his rent while rehabbing his injury and did not have any family or friends to monitor his financial affairs. Moreover, the tenant resided at the property for over 35 years, and the property was under the city’s rent control laws.

The tenant argued that he would suffer undue hardship if he were required to move because he would be unable to find a residence at the same rental rate. The tenant further claimed that due to his poor health, it was nearly impossible for him to relocate to a new home. The court found the tenant’s argument convincing and granted the tenant relief from forfeiture, but on a conditional basis. Before retaking possession of the property, the tenant was required to pay all past rent owed and reimburse the landlord for his attorney fees.[5]

The holding in Hamid v. Janakus illustrates the classic “hardship” scenario where the tenant’s circumstances are so rare that relief from forfeiture is necessary to protect the tenant’s well-being. Fortunately, not every tenant has to make such a drastic showing to obtain relief under Section 1179. Courts will grant relief from forfeiture if the tenant has invested a substantial amount of money into the property and would lose their entire investment if evicted from the premises.

In Assi Super, Inc. v. Eight Oxfords Property Management, Inc., the tenant had invested over $1.8 million in upgrades to the property and recently signed a second loan to make further improvements to the property. The tenant secured the second loan with his residence. To make matters worse, the tenant had over 30 sub-lease agreements with small business owners that operated their business in a commercial unit within the property. Most of the small business owners resided in the U.S. under “Business Investment Visas” and were at risk of being deported if the lease was forfeited.

Given these unique circumstances, the court granted the tenant’s motion to be relieved from forfeiture. Had the court not granted relief, the tenant would have lost its entire $1.8 million investment in the property, and a majority of the sub-tenants would have been deported. Similar to the order in Hamid v. Janakus, the court granted relief from forfeiture on a conditional basis. Before the tenant could retake possession of the property, it was required to cure its breach and reimburse the landlord for its attorney fees and costs.[6]

The cases cited above provide commercial and residential tenants with two points to consider. First jand foremost, the examples show that courts will grant relief from forfeiture to protect the tenant’s overall well-being or prior investments. It is also clear that courts will consider the impact on third parties if relief from forfeiture is not granted. In Assi Super, Inc., the court’s ruling was based in part on the effects a forfeiture of the lease would have on the tenant’s sub-tenants.

Second, California courts have regularly granted relief from forfeiture on the condition that the tenant must reimburse the landlord for its attorney fees and court costs. Courts believe it is unfair to reinstate the tenant to their prior tenancy and leave the landlord without a remedy against the breaching tenant. In the court’s view, if the tenant is restored to their former tenancy, then, at the least, the landlord should be restored to its original financial position had the tenant not breached the lease agreement.

Seeking Relief Under Cal. Civ. Code § 3275

Section 3275 provides tenants with another path to seek relief from forfeiture of a lease agreement. Section 3275 serves the same overall purpose as Section 1179, however, there are two critical differences between the two statutes.

The most significant distinction is that Section 3275 applies to all types of contracts, whereas Section 1179 applies to strictly commercial and residential leases only.[7] As such, a contracting party can utilize Section 3275 in any contractual dispute where forfeiture is at issue. The other key difference is that Section 3275 requires the party to prove that their breach of the contract (or lease) was not “grossly negligent, willful, or fraudulent.”[8] A party seeking relief under Section 3275 must, in addition, show that it has satisfied the two requirements of Section 1179.[9]

Last, contracting parties can effectively waive both statutes in any given contract or lease agreement. The bankruptcy court in In re Art & Architecture Books of the 21st Century held that no California statute prohibits a party from waiving its right to relief from forfeiture under Sections 1179 and 3275. The court stated that parties to a “lease should generally be free to contract with each other upon such terms as they agree,” as long as the terms do not contravene public policy. In this case, the court found the right to seek relief from forfeiture benefited the party that waived such right and, thus, did not violate the court’s public policy concerns.[10]

Given this ruling, landlords and tenants must exercise diligence when drafting and reviewing a contract or lease agreement. Landlords that wish to include the waiver provision must add specific and unambiguous language that clearly states the tenant is voluntarily waiving its statutory rights under Sections 1179 and 3275. On the other hand, tenants must carefully review their residential or commercial lease agreements to ensure that the contract does not contain such a waiver.

Overall, Section 3275 provides the same relief as the previously discussed Section 1179. The critical difference is that Section 3275 requires the requesting party to prove that their breach was not “grossly negligent, willful, or fraudulent.” At first glance, this additional hurdle seems to act as an impediment for tenants (and contracting parties) seeking relief under Section 3275. However, no court has directly ruled on whether a tenant that breached its lease agreement for no fault of its own, did so willfully or with gross negligence. Given this uncertainty, wise real estate litigators seek relief from forfeiture by employing both Sections of 1179 and 3275. Bringing the motion on both grounds allows the court to grant relief under either section of the code.

Applying Sections 1179 and 3275 in Bankruptcy Court

Sections 1179 and 3275 are not strictly reserved for California State Courts and are applicable in a bankruptcy proceeding.[11] Section 365 of the Bankruptcy Code allows the Trustee to assume a residential or commercial lease of the debtor, as long as the lease did not terminate before the bankruptcy petition was filed. However, most debtor-tenants that file a bankruptcy petition do so after the termination of the lease agreement, which prevents the Trustee from assuming (and saving) the lease under Section 365.

Fortunately, the landmark case of In Re Windmill Farms addressed this deficiency.[12]In that case, the court held that if a two-factor test is satisfied, the bankruptcy court can grant relief from forfeiture under Sections 1179 or 3275 and reinstate the lease. If the bankruptcy court reinstates the lease, the Trustee can then assume the lease under Section 365 of the Bankruptcy Code, as the lease is no longer terminated. The holding in In Re Windmill Farms bridges the gap between the strict language of Section 365 and California’s anti-forfeiture statutes, allowing tenants to save their lease through a bankruptcy proceeding.

The first factor is determining when the lease agreement was terminated. If the lease was terminated before the bankruptcy petition was filed, then the debtor will have to proceed to the second factor. On the other hand, if the lease was terminated after the bankruptcy petition was filed, the Trustee can assume the lease under Section 365, provided the Trustee promptly cures the debtor-tenant’s default.

The second factor is applying Sections 1179 and 3275 and the case law that flows from those statutes to the case at hand. If the court determines that relief is proper, then the debtor-tenant must cure its default before retaking possession of the property. If the two factors are satisfied, then the lease is reinstated, and the Trustee may assume (and save) the lease under Section 365 of the Bankruptcy Code.

Finally, debtor-tenants and their counsel must be familiar with the basics of lease assumption in a bankruptcy proceeding. If the debtor wants to retain the lease, the debtor will move to assume it, and must do so within 120 days of filing the bankruptcy petition. The court can extend this time period without the landlord’s consent for 90 additional days, making a total of 210 days, but any further extensions require the landlord’s prior written consent.[13] If the lease is not assumed (or assumed and assigned) within this period, the lease automatically will be deemed rejected and the debtor-tenant will have to vacate the property.[14]

In order to assume the lease, the debtor must cure any defaults or provide assurance that it will promptly do so.[15] This is at least true with respect to monetary defaults. There is a split in the case law as to whether non-monetary defaults must be cured in order to assume a lease (or other executory contracts). The debtor-tenant must also compensate the landlord for “any actual pecuniary loss” resulting from the debtor’s breach.[16] And the debtor must “provide adequate assurance of future performance.”[17]

Any tenant that files a bankruptcy petition must understand that Sections 1179 and 3275 can save their tenancy in a bankruptcy proceeding. This is especially true during this time, as many small and large businesses seek bankruptcy protection.

Seeking Relief from Forfeiture in a Post COVID-19 World

The economic effects of COVID-19 have left one in every four San Diego residents unemployed and forced notable businesses to either wind up their operations or file for bankruptcy protection. These drastic results certainly provide a basis for commercial and residential tenants to seek relief from forfeiture under Sections 1179 and 3275, whether in state or bankruptcy courts. The only hurdle for tenants is showing the “hardship” they will suffer from if relief from forfeiture is not granted.

As mentioned above, hardship can be shown by the rental rate one currently pays compared to the market values, the past investments one has made into the property, or the effects forfeiture will have on third parties, such as employees. Given the uncertain economic times, along with the unique facts of each case, courts will undoubtedly broaden its definition of “hardship” and grant relief from forfeiture when necessary.

If you find that you are on the brink of eviction or may be served with an unlawful detainer action in the near future, contact a California attorney immediately.

[1] Cal. Civ. Code § 1174 (a)

[2] Bos. LLC v. Juarez, 245 Cal.App.4th 75, 82 (2016)

[3] Cal. Civ. Code § 1179

[4] See Thrifty Oil Co. v. Batarse, 174 Cal.App.3d 770, 777 (1985) See also Hignell v. Gebala, 90 Cal. App. 2d 61, 71 (1949)

[5] Hamid v. Janakus, No. BV 024000, 2003 WL 26128877, at *3 (Cal. App. Dep’t Super. Ct. May 13, 2003)

[6] See Assi Super, Inc. vs. Eight Oxfords Property Management, Inc., No. Bc319425, 2006 WL 4749574

[7] Cal. Civ. Code § 3275; see also Hignell v. Gebala, 90 Cal. App. 2d 61, 70 (1949) (holding that “section [1179] is special in its nature, applying only to unlawful detainer proceedings, while section 3275 is general”).

[8] Cal. Civ. Code § 3275

[9] Cal. Civ. Code § 3275; see also Am. Bankers Mortg. Corp. v. Fed. Home Loan Mortg. Corp., 75 F.3d 1401, 1413 (9th Cir. 1996) (finding that the requesting party must “must plead and prove facts entitling it to relief under the section [3275]”)

[10] In re Art & Architecture Books of the 21st Century, 518 BR 43 (Bankr. C.D. Cal. 2014)

[11] In re Burke, 76 F. Supp. 5, 8 (S.D. Cal. 1948) (“[t]he proposition that Section 1179, Cal. C.C.P., is applicable in and by the Bankruptcy Courts is so plain, that the point need not be further labored.”)

[12] In re Windmill Farms, Inc., 841 F.2d 1467, 1472 (9th Cir. 1988)

[13] 11 U.S.C. § 365 (d)(4)(A)

[14] Id.

[15] 11 U.S.C. § 365 (b)(1)(A-C)

[16] Id.

[17] Id.

Partition Actions

April 21, 2020/in All Blog Posts, Corporate Litigation/by Ajay Gupta

Generally, when two people purchase property together neither are thinking about what will become of it if they separate. This can become a major problem if such a situation arises, but there are steps that can be taken to guard against excessive losses. While forming a contingency plan for the end of any kind of partnership may not be pleasant, partition actions are for the good of both parties.

Documentation of all expenses related to a purchase, and the amount each party contributed, is essential for planning, as well as resolution of any eventualities. This way, accurate reimbursements can be agreed upon with minimal dispute.

When worst does come to worst, the most common remedy is mediation. It is a standard first step in dispute resolution and tends to be highly effective, particularly in partition. That said, it can still be expensive, certainly much more so than a well made separation plan.

Commercial and Residential Evictions in California in the time of COVID-19 (Part 1 of 3) Updated as of: August 13, 2020

April 10, 2020/in All Blog Posts, Corporate Litigation/by Chris Evans

As we continue to adjust to the “new normal” of a world battling the Coronavirus pandemic, previously meaningless words and phrases like the “curve,” “social distancing,” or “shelter in place” have become everyday vernacular. New directives continue to be issued that impact our daily lives and add to an already confusing landscape of do’s and don’ts. While good intentioned, the order has resulted in sudden, unanticipated changes in the way businesses can operate, if they can continue to operate at all. This has caused businesses, and the individuals they employ or once employed, to experience severe financial stress with no clear end in sight.

As a result, residential and commercial tenants experiencing Coronavirus-induced financial pressures are asking themselves not only how they will be able to pay rent this month, but for the foreseeable future. In response, state and local leaders in California have raced to enact legislation aimed at alleviating the enormous anxiety and stress felt by residential and commercial tenants as a result of this pandemic. Additionally, most recently, the Judicial Council of California adopted 11 categories of COVID-19 emergency rules, one of which suspends nearly all evictions in California.

While the passage of these orders and rules was a good first step, a sufficient understanding of what they mean is a necessary next step.

This three-part article, originally posted on April 10, 2020 and updated here to reflect changes over the past four months, aims to provide information for landlords and tenants alike with respect to rental obligations and evictions in: California; the City of San Diego; and how the Courts are similarly addressing these issues.

Statewide California Eviction Moratorium

First, on March 16, 2020, Governor Newsom issued Executive Order N-28-20, which was essentially a nudge to local municipalities that they can (and should) enact their own eviction and/or rent moratoriums for tenants that are unable to pay rent because of COVID-19. This Order, however, would pave the groundwork for local cities and towns across the state to institute their own eviction protections.

In just a week’s time, the landscape continued to shift; namely, California issued its statewide Stay At Home Order and many national and state banks and credit unions agreed, and continue to agree, to mortgage payment deferments or assistance for business and homeowners. This shift enabled further action by Governor Newsom in the context of rent and evictions.

On March 27, 2020, Governor Newsom added his necessary first boost to his prior eviction order and issued Executive Order N-37-20. The Order prohibited landlords from evicting residential tenants for nonpayment of rent caused by COVID-19 and prohibited enforcement of eviction orders by law enforcement or courts. This protection only lasted through May 31, 2020 and the Order did not apply to commercial leases.

In the time between Executive Order N-37-20 being issued and its expiration at the end of May, hundreds of local municipalities across California began to utilize the power entrusted to them by Governor Newsom (via his first Executive Order N-28-20) and instituted their own eviction moratoriums, often applicable to both residential and commercial leases. However, the ability of local municipalities to afford tenants protection from eviction was slated to expire on May 31, 2020, pursuant to Executive Order N-28-20, Paragraph 2. In other words, local eviction moratoriums would not be able to last into June.

With California residents confronted with a looming expiration of their eviction protections, Governor Newsom first issued Executive Order N-66-20 on May 29, 2020 (extending the timeframe 60 days to July 28, 2020); and then Executive Order N-71-20 on June 30, 2020, which extended the timeframe through September 30, 2020. As a result, local governments and municipalities were given the power to extend their eviction moratoriums through September.

Assuming a tenant’s local city, town or municipality elects to extend eviction moratorium, there are still requirements that tenants must meet in order to be protected under Governor Newsom’s Order(s). Specifically, unless a local ordinance specifies otherwise, a tenant will not be protected if they do not abide by the following requirements:

Prior to March 27, 2020, the tenant paid rent to the landlord pursuant to the lease agreement.
The tenant notified the landlord in writing before the rent is due, or within a reasonable period of time afterwards not to exceed seven days, that the tenant needs to delay all or some payment of the rent because of an inability to pay the full amount due to reasons related to COVID-19 (examples of reasons found in the Order);
The tenant must retain verifiable documentation explaining the tenant’s changed financial circumstances to support the tenant’s assertion of an inability to pay. The tenant is not required to submit the documentation to the landlord at the time of notice, but will be required to provide the landlord with documentation of his/her inability to pay no later than the time of payment of back rent owed.

It is important to note that the unpaid rent is not waived or excused and must still be paid to the landlord once the Order is no longer in effect. Additionally, subject to local ordinances specifying otherwise, landlords appear to still be allowed to terminate leases for non-payment and other, legal causes (e.g. serve 3-Day Notices To Pay or Quit); but, are simply banned from enforcing any evictions and removing tenants while the Order is in effect. While this ensures that those residential tenants that fall within the Order’s scope will not be physically removed from their homes during the pandemic, it does not alleviate the root problem of being unable to pay rent. Moreover, the Order does not provide any protection to commercial tenants (i.e. the thousands of businesses struggling to stay afloat.)

San Diego’s eviction moratorium, on the other hand, goes a bit further, and is addressed here.

The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this web site or any of the e-mail links contained within the site do not create an attorney-client relationship. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

Commercial and Residential Evictions in California in the time of COVID-19 (Part 2 of 3) Updated as of: August 13, 2020

April 10, 2020/in All Blog Posts, Corporate Litigation/by Chris Evans

Part 1 of this three-part article, which addresses Governor Newsom’s statewide eviction moratorium in California, can be found here. Part two covers San Diego’s actions in the pandemic.

City of San Diego Eviction Moratorium

On March 25, 2020, the City of San Diego[1] adopted its own temporary eviction ban when the San Diego City Council unanimously adopted Ordinance No. O-21177. The Ordinance not only halted both residential and commercial evictions through May 31, 2020, but also provided affected tenants with approximately six months to repay any unpaid rent as a result of the Coronavirus pandemic.

Since passage of the Ordinance, the San Diego City Council has since extended the eviction protections twice—first to June 30, 2020, and then again to September 30, 2020.

Like the California Order, tenants must meet specific benchmarks in order to receive the protections of the City’s Ordinance. If a commercial or residential tenant does not meet these specific benchmarks, the tenant will not be protected under the City of San Diego Ordinance and a landlord will be permitted to immediately pursue any applicable rent enforcement or eviction actions, to the extent permitted by law. Tenants must satisfy all of the following criteria:

Unable to timely pay rent due on or after March 12, 2020;
Tenant’s inability to pay rent is due to financial impacts related to COVID-19;
- “Financial impacts” are specifically defined as: a substantial decrease in household income for a residential tenant, or in business income for a commercial tenant, due to business closure, loss of compensable hours of work or wages, layoffs, or substantial out-of-pocket medical expenses.
- A financial impact is “related to COVID-19” if: it is caused by the COVID-19 pandemic or any governmental response to the COVID-19 pandemic, including complying with any public health orders or recommended guidance related to COVID-19 from local, state, or federal governmental authorities.”
On or before rent due date, tenant must provide written notice to the landlord of inability to pay (e-mail or texts message is sufficient); and
- A sample letter that tenants can use to provide notice can be found at the San Diego Housing Commission’s website.
Within one week of giving landlord notice of inability to pay, the tenant must provide landlord with documents or objectively verifiable information that the tenant is unable to pay rent because of the financial effects of COVID-19
- Examples of documentation: note or letter from employer regarding tenant’s loss or substantial reduction in employment; payroll records showing substantial loss of income due to COVID-19; bank statements that illustrate a drop in income; or other documentation that proves that tenant has not been generating the same level of income due to COVID-19.

An obvious, and significant, difference in the City of San Diego’s Ordinance relative to both Orders previously issued by Governor Newsom is the application to commercial tenants, in addition to residential tenants. This paves the way for struggling San Diego businesses to get a much-needed reprieve from paying rent after their income stream has been drastically reduced, or disappeared, effectively overnight.

Additionally, the City’s Ordinance also prohibits landlords from “taking any action to evict a tenant,” which is explicitly defined to include serving notices (e.g. serve 3-Day Notices To Pay or Quit), as well as charging late fees. The prohibition against serving notices is a notable difference from the statewide eviction moratorium in that service of a notice to pay rent or quit, which would very likely expire and terminate tenancies, would effectively hand tenants a ticking eviction timebomb set to go off once the Ordinance was no longer in effect.

An interesting wrinkle in the ordinance is with respect to “no-fault” evictions—evictions not based on the tenant’s actions, such as the landlord removing the property from the rental market or performing renovations. If a tenant falls within the scope of San Diego’s Ordinance, as specified above, landlords are also prohibited from pursuing a “no-fault eviction.” This would appear to be an effort to avoid landlords that my try and do and end-around the Ordinance by disguising non-payment of rent (at-fault) evictions as no-fault evictions.

Lastly, it is important to note that the City’s Ordinance does not relieve the tenant of liability for unpaid rent after expiration of the provisions this Ordinance (currently September 30, 2020). Rather, the obligation to pay rent is simply deferred for up to six months, unless the tenant moves out sooner, in which case all unpaid rent becomes due upon move out. If the rent balance remains unpaid after six months, the landlord may pursue collection and eviction remedies immediately.

In addition to the relief efforts at the state and local level to avoid to evictions, the Judicial Council of California has also endeavored to cut to the chase and suspend all evictions across the State of California for the foreseeable future, but that may be coming to and end very soon—all of which is discussed in Part 3 of this article here along with next steps going forward.

[1] Imperial Beach, Chula Vista, San Marcos and Oceanside are also taking similar steps to shield renters from eviction.