Existing law provides an optional procedure for the disposition of personal property remaining on the premises at the termination of a commercial tenancy, as specified. Existing law requires a landlord to give written notice to the tenant if personal property remains after the end of a tenancy. Existing law authorizes property described in the notice to be sold at public sale except if the landlord reasonably believes that the total resale value of the personal property is the lesser of $750 or $1 per square foot of the premises occupied by the tenant, the landlord is authorized to retain the property for his or her own use or dispose of it in any manner.

This bill would change the calculation of the total resale value of the personal property, for purposes of these provisions, to either $2,500 or an amount equal to one months rent for the premises the tenant occupied, whichever is greater.

Existing law provides an optional procedure for the disposition of personal property remaining on the premises at the termination of a commercial tenancy, as specified. Existing law requires a landlord to give written notice to the tenant if personal property remains after the end of a tenancy. Existing law authorizes property described in the notice to be sold at public sale except if the landlord reasonably believes that the total resale value of the personal property is the lesser of $750 or $1 per square foot of the premises occupied by the tenant, the landlord is authorized to retain the property for his or her own use or dispose of it in any manner.

This bill would change the calculation of the total resale value of the personal property, for purposes of these provisions, to either $2,500 or an amount equal to one months rent for the premises the tenant occupied, whichever is greater.

Existing law provides an optional procedure for the disposition of personal property remaining on the premises at the termination of a commercial tenancy, as specified. Existing law requires a landlord to give written notice to the tenant if personal property remains after the end of a tenancy. Existing law authorizes property described in the notice to be sold at public sale except if the landlord reasonably believes that the total resale value of the personal property is the lesser of $750 or $1 per square foot of the premises occupied by the tenant, the landlord is authorized to retain the property for his or her own use or dispose of it in any manner.

This bill would change the calculation of the total resale value of the personal property, for purposes of these provisions, to $10,000 either $2,500 or 2 times the total rent due each month of an amount equal to one months rent for the premises the tenant occupied, whichever is greater.

Existing law provides an optional procedure for the disposition of personal property remaining on the premises at the termination of a commercial tenancy, as specified. Existing law requires a landlord to give written notice to the tenant if personal property remains after the end of a tenancy. Existing law authorizes property described in the notice to be sold at public sale except if the landlord reasonably believes that the total resale value of the personal property is the lesser of $750 or $1 per square foot of the premises occupied by the tenant, the landlord is authorized to retain the property for his or her own use or dispose of it in any manner.

This bill would change the calculation of the total resale value of the personal property, for purposes of these provisions, to $10,000 or 2 times the total rent due each month of the premises the tenant occupied, whichever is greater.

 CONSENT  

Bill No: AB 2173

Author:

:

Vote:

SENATE JUDICIARY COMMITTEE: 7-0, 6/12/18

AYES: Jackson, Moorlach, Anderson, Hertzberg, Monning, Stern, Wieckowski

ASSEMBLY FLOOR: 69-0, 4/5/18 - See last page for vote

SUBJECT:

SOURCE: California Business Properties Association

DIGEST:

This bill increases the threshold amount that triggers a commercial landlord’s duty to auction off personal property left behind when a commercial tenant vacates. In addition, this bill makes findings and declarations highlighting the difference between commercial and residential tenancies and justifying, on that basis, setting a higher threshold amount for the disposal of abandoned personal property in the commercial context.

ANALYSIS:

Existing law:

1. Provides for the disposition of personal property remaining on the vacated premises at the termination of a commercial tenancy. (Civ. Code Sec. 1993 et seq.)
2. Requires commercial landlords, when personal property remains on the vacated premises, to provide written notice informing former commercial tenants of the commercial tenant’s right to reclaim the property by a specified date (within 15 days if notice is personally delivered, or 18 days if notice is mailed). The notice must describe the remaining personal property; inform the former commercial tenant where and by what date the property may be reclaimed; and inform the former commercial tenant that reasonable storage costs may be charged before the property is returned. (Civ. Code Sec. 1993.03.)
3. Provides that if the landlord reasonably believes that the total resale value of the personal property remaining on the premises at the termination of commercial tenancy is less than $750 or $1 per square foot of the premises occupied by the tenant, whichever amount is lesser, then the landlord may keep the property for his or her use or dispose of it in any manner. However, if the value of personal property exceeds this threshold amount, then the landlord must hold a public sale by competitive bidding, as specified. (Civ. Code Sec. 1993.07.)
4. Defines “reasonable belief” for purposes of calculating the value of personal property left when a commercial tenant vacates, to mean the actual knowledge or belief a prudent person would have without making an investigation, except as specified. (Civ. Code Sec. 1993(e).)

This bill:

1. Finds and declares that special circumstances that apply to commercial tenancy, but not necessarily to residential tenancy, may justify setting a higher threshold amount for property abandoned on commercial real estate, as compared to the corresponding threshold amount for property abandoned on residential real estate.
2. Provides that, in the case of a commercial tenant, if a landlord reasonably believes that the value of the remaining personal property is worth less than either $2,500 or an amount equal to the total rent due each month, whichever is greater, then the landlord may dispose of the abandoned personal property in any manner, including retaining it for the landlord’s own use.
3. Modifies the statutory “Notice of Right to Reclaim Abandoned Property” to reflect the new method of calculating the threshold value.

Background

When commercial tenants vacate and leave personal property behind, the commercial landlord’s duties depend on the value of the personal property left behind. Under existing law, if the commercial landlord reasonably believes that the total resale value of the abandoned personal property is less than $750 or $1 per square foot of the premises, whichever is lower, then the commercial landlord may dispose of the abandoned personal property in any way the commercial landlord sees fit, including retaining it for the landlord’s own use. (Civ. Code Sec. 1993.07(a).)

The current threshold amount of $750 or $1 per square foot was set in 2008. AB 2025 (Silva, Chapter 161, Statutes of 2008) According to the sponsors of this bill, that current threshold is too low. They point out that a very small quantity of abandoned property will quickly reach the existing threshold and the actual cost of storing the abandoned property and conducting a public auction is significant. As a practical matter, therefore, commercial landlords frequently lose significant amounts of money when their tenants leave personal property behind. (See Comments, below, for detailed examples of this problem.)

This bill at least partially alleviates the problem by raising the threshold amount that triggers the duty to auction abandoned property publicly to the greater of $2,500 or one month’s rent.

Comments

Examples of the problem the bill is intended to address

As evidence of the problem that this bill is intended to address, the author provides the following examples:

A Long Beach company left a small inventory behind when it shut down its business and vacated its retail space. The commercial landlord sent notices to the former tenant and known secured creditors, but no one claimed anything. Because the value of the inventory exceeded $750, the commercial landlord was legally obliged to conduct a public auction. The landlord hired legal counsel in connection with the auction, paid the auctioneer’s fee and the fee charged by the newspaper to publish the sale notices. The process took two months to complete during which time the space could not be leased to a new tenant. The property owner reports losing $5,580.52 in rent per month for an additional two months while waiting for the auction process to be finish. The auction netted a total of $837.50, which did not even cover the auctioneer’s fee. There were no proceeds to distribute to anyone.

A Riverside business closed its doors and disappeared, leaving a small inventory of furniture behind. The landlord sent notices to the former tenant and known secured creditors, but nothing was claimed. The value of the furniture was more than $750, so the landlord conducted a public auction, netting a total of $367.00 in the process. According to the landlord, this amount was insufficient to cover the auctioneer fees, never mind the legal costs and the fee for placing notice in the newspaper. In addition, the landlord was unable to rent out the space while the auction was pending. Ultimately, there were no proceeds to distribute to the tenant or any creditor.

A Massachusetts company closed down its San Jose office, leaving behind approximately $3,000 worth of old desks, cubes, filing cabinets, chairs, and assorted office furniture. The former tenants claimed to be making arrangements for their property, but never actually picked it up. Because of the bulk of the items and their low value, the auctioneer refused to move the stuff to his warehouse to auction and would only auction it in place. Between the statutory notice period, the auction, and preparing the unit for the next tenant, three months passed. According to the landlord’s counsel, the whole process cost the Landlord approximately $30,000 to $35,000.

Distinguishing the commercial tenancy context from the residential context

This bill raises the threshold amount that triggers a landlord’s duty to conduct a public auction of abandoned property in the commercial context only. It would not affect the threshold amount that applies to residential properties. The policy considerations are quite different. Personal property left behind by residential tenants often includes items which, though of little monetary value, have tremendous personal value to the tenant: things like photographs and family heirlooms. Moreover, while the decision to abandon personal property in the commercial context typically occurs as the result of deliberate weighing of costs and benefits, abandonment of valuable personal property in the residential context often takes place because the tenant lacks the resources or ability to remove the personal property.

This bill explicitly and carefully draws the distinction between the commercial and residential contexts through the inclusion of findings and declarations. Those findings and declarations point out the differences between how commercial and residential tenants are situated. On that basis, the finding and declarations conclude that setting a higher threshold amount for commercial tenants, as this bill would do, may be justified.

Inflationary considerations

The Legislature last raised the threshold amount triggering a commercial landlord’s duty to conduct a public auction in 2008, when it increased the threshold from $300 to $750 (AB 2025). If the threshold had kept pace with inflation, it would now be $887, according to the federal Bureau of Labor Statistics. The increase contemplated by this bill is, accordingly, far more than what would be required to adjust for inflation alone. Proponents of this bill believe the increase is nonetheless justified. They point out that the commercial threshold amount is low because, until a decade ago, it was tied to the residential threshold amount.

Because of the changes proposed by this bill, future inflationary adjustments should not be necessary. This bill sets the threshold amount at $2,500 or the amount of the monthly rent, whichever is greater. Since commercial rental rates are subject to inflation, the future threshold amount will presumably increase as consumer prices rise generally.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 6/14/18)

California Business Properties Association (source)

BizFed

Building Owners and Managers Association of California

Commercial Real Estate Development Association

International Council of Shopping Centers

OPPOSITION: (Verified 6/14/18)

None received

ARGUMENTS IN SUPPORT: According to the author:

Under existing law, when a business moves out of a commercial property and leaves behind unwanted items, the property owner/manager must hold a public auction if the materials are believed to be $750 or more in value or the equivalent of $1 per square foot of the rental for the property. If a company moves out of a leased space and purposefully leaves behind unwanted property they don’t want to deal with (i.e. an old server rack, a few desks and chairs, or obsolete computer equipment) that $750 threshold is very easily met.

As part of the abandoned property process, large costs are often incurred by the property owner/manager as they must store abandoned items while the proscribed Auction Notice process runs its course, while the auction is advertised, and until the auction is held and new buyers – if any can be found – take possession of the property. All of this for a relatively small amount of money on items that were unwanted to begin with.

Property owners/managers are also often left footing the bill for mandated recycling and waste management fees on old electronics, as well. Quite simply, property managers may never recoup the incurred costs of this process under current threshold limits.

AB 2173 will better reflect the practical realities of the commercial real estate industry by setting a new commercial threshold, which more closely aligns with the actual costs of storage and disposal of abandoned property.

As sponsor of the bill, the California Business Properties Association writes:

AB 2173 better reflects the practical realities in the commercial real estate industry by setting a new commercial threshold. This proposed new threshold amount more appropriately aligns with the actual costs of storage and disposal of abandoned property in commercial real estate.

In further support of the bill, BizFed writes:

Holding a public auction can be expensive and time consuming. Auctioneers’ typical 20% fee should net at least $500 to make it worth their time. Most auctioneers do not want to hold an auction of office furniture, tools, inventory, etc., unless they expect to see it gross at least $2,500.

Often the cost of the auction far exceeds the value of the property and wastes both time and money on an antiquated process. Further, the auction process means that business tenants are delayed in moving into their commercial space. Business owners need a fair and economical process that protects the tenant’s interest as well as the landlord’s.

ASSEMBLY FLOOR: 69-0, 4/5/18

AYES: Acosta, Aguiar-Curry, Arambula, Baker, Berman, Bigelow, Bloom, Bonta, Brough, Burke, Caballero, Calderon, Carrillo, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Eduardo Garcia, Gipson, Gloria, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Muratsuchi, Nazarian, Obernolte, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Salas, Santiago, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Rendon

NO VOTE RECORDED: Travis Allen, Cristina Garcia, Gonzalez Fletcher, Mullin, O'Donnell, Patterson, Steinorth, Wood

Prepared by: Timothy Griffiths / JUD. / (916) 651-4113

6/15/18 10:26:46

**** END ****

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2017-2018 Regular Session

Bill No: AB 2173 (Author:Santiago)

Version: March 22, 2018

Hearing Date: June 12, 2018

Fiscal: No

Urgency: No

Consultant: TSG

SUBJECT

Commercial real property: termination of tenancy: disposition of personal property

DESCRIPTION

This bill would increase the threshold amount that triggers a commercial landlord’s duty to auction off personal property left behind when a commercial tenant vacates. In addition, this bill would make findings and declarations highlighting the difference between commercial and residential tenancies and justifying, on that basis, setting a higher threshold amount for the disposal of abandoned personal property in the commercial context.

BACKGROUND

When commercial tenants vacate and leave personal property behind, the commercial landlord’s duties depend on the value of the personal property left behind. Under existing law, if the commercial landlord reasonably believes that the total resale value of the abandoned personal property is less than $750 or $1 per square foot of the premises, whichever is lower, then the commercial landlord may dispose of the abandoned personal property in any way the commercial landlord sees fit, including retaining it for the landlord’s own use. (Civ. Code Sec. 1993.07(a).)

The current threshold amount of $750 or $1 per square foot was set in 2008. AB 2025 (Silva, Ch. 161, Stats. 2008) According to the sponsors of this bill, that current threshold is too low. They point out that a very small quantity of abandoned property will quickly reach the existing threshold and the actual cost of storing the abandoned property and conducting a public auction is significant. As a practical matter, therefore, commercial landlords frequently lose significant amounts of money when their tenants leave personal property behind. (See Comment 2, below, for detailed examples of this problem.)

This bill would at least partially alleviate the problem by raising the threshold amount that triggers the duty to auction abandoned property publicly to the greater of $2,500 or one month’s rent.

CHANGES TO EXISTING LAW

Existing law provides for the disposition of personal property remaining on the vacated premises at the termination of a commercial tenancy. (Civ. Code Sec. 1993 et seq.)

Existing law requires commercial landlords, when personal property remains on the vacated premises, to provide written notice informing former commercial tenants of the commercial tenant’s right to reclaim the property by a specified date (within 15 days if notice is personally delivered, or 18 days if notice is mailed). The notice must describe the remaining personal property; inform the former commercial tenant where and by what date the property may be reclaimed; and inform the former commercial tenant that reasonable storage costs may be charged before the property is returned. (Civ. Code Sec. 1993.03.)

Existing law provides that if the landlord reasonably believes that the total resale value of the personal property remaining on the premises at the termination of commercial tenancy is less than $750 or $1 per square foot of the premises occupied by the tenant, whichever amount is lesser, then the landlord may keep the property for his or her use or dispose of it in any manner. However, if the value of personal property exceeds this threshold amount, then the landlord must hold a public sale by competitive bidding, as specified. (Civ. Code Sec. 1993.07.)

Existing law defines “reasonable belief” for purposes of calculating the value of personal property left when a commercial tenant vacates, to mean the actual knowledge or belief a prudent person would have without making an investigation, except as specified. (Civ. Code Sec. 1993(e).)

This bill would find and declare that special circumstances that apply to commercial tenancy, but not necessarily to residential tenancy, may justify setting a higher threshold amount for property abandoned on commercial real estate, as compared to the corresponding threshold amount for property abandoned on residential real estate.

This bill would provide that, in the case of a commercial tenant, if a landlord reasonably believes that the value of the remaining personal property is worth less than either $2,500 or an amount equal to the total rent due each month, whichever is greater, then the landlord may dispose of the abandoned personal property in any manner, including retaining it for the landlord’s own use.

This bill would modify the statutory “Notice of Right to Reclaim Abandoned Property” to reflect the new method of calculating the threshold value.

COMMENT

1. Stated need for the bill

According to the author:

Under existing law, when a business moves out of a commercial property and leaves behind unwanted items, the property owner/manager must hold a public auction if the materials are believed to be $750 or more in value or the equivalent of $1 per square foot of the rental for the property. If a company moves out of a leased space and purposefully leaves behind unwanted property they don’t want to deal with (i.e. an old server rack, a few desks and chairs, or obsolete computer equipment) that $750 threshold is very easily met.

As part of the abandoned property process, large costs are often incurred by the property owner/manager as they must store abandoned items while the proscribed Auction Notice process runs its course, while the auction is advertised, and until the auction is held and new buyers – if any can be found – take possession of the property. All of this for a relatively small amount of money on items that were unwanted to begin with.

Property owners/managers are also often left footing the bill for mandated recycling and waste management fees on old electronics, as well. Quite simply, property managers may never recoup the incurred costs of this process under current threshold limits.

AB 2173 will better reflect the practical realities of the commercial real estate industry by setting a new commercial threshold, which more closely aligns with the actual costs of storage and disposal of abandoned property.

As sponsor of the bill, the California Business Properties Association writes:

AB 2173 better reflects the practical realities in the commercial real estate industry by setting a new commercial threshold. This proposed new threshold amount more appropriately aligns with the actual costs of storage and disposal of abandoned property in commercial real estate.

In further support of the bill, BizFed writes:

Holding a public auction can be expensive and time consuming. Auctioneers’ typical 20% fee should net at least $500 to make it worth their time. Most auctioneers do not want to hold an auction of office furniture, tools, inventory, etc., unless they expect to see it gross at least $2,500.

Often the cost of the auction far exceeds the value of the property and wastes both time and money on an antiquated process. Further, the auction process means that business tenants are delayed in moving into their commercial space. Business owners need a fair and economical process that protects the tenant’s interest as well as the landlord’s.

2. Examples of the problem the bill is intended to address

As evidence of the problem that this bill is intended to address, the author provides the following examples:

A Long Beach company left a small inventory behind when it shut down its business and vacated its retail space. The commercial landlord sent notices to the former tenant and known secured creditors, but no one claimed anything. Because the value of the inventory exceeded $750, the commercial landlord was legally obliged to conduct a public auction. The landlord hired legal counsel in connection with the auction, paid the auctioneer’s fee and the fee charged by the newspaper to publish the sale notices. The process took two months to complete during which time the space could not be leased to a new tenant. The property owner reports losing $5,580.52 in rent per month for an additional two months while waiting for the auction process to be finish. The auction netted a total of $837.50, which did not even cover the auctioneer’s fee. There were no proceeds to distribute to anyone.

A Riverside business closed its doors and disappeared, leaving a small inventory of furniture behind. The landlord sent notices to the former tenant and known secured creditors, but nothing was claimed. The value of the furniture was more than $750, so the landlord conducted a public auction, netting a total of $367.00 in the process. According to the landlord, this amount was insufficient to cover the auctioneer fees, never mind the legal costs and the fee for placing notice in the newspaper. In addition, the landlord was unable to rent out the space while the auction was pending. Ultimately, there were no proceeds to distribute to the tenant or any creditor.

A Massachusetts company closed down its San Jose office, leaving behind approximately $3,000 worth of old desks, cubes, filing cabinets, chairs, and assorted office furniture. The former tenants claimed to be making arrangements for their property, but never actually picked it up. Because of the bulk of the items and their low value, the auctioneer refused to move the stuff to his warehouse to auction and would only auction it in place. Between the statutory notice period, the auction, and preparing the unit for the next tenant, three months passed. According to the landlord’s counsel, the whole process cost the Landlord approximately $30,000 to $35,000.

3. Distinguishing the commercial tenancy context from the residential context

This bill would raise the threshold amount that triggers a landlord’s duty to conduct a public auction of abandoned property in the commercial context only. It would not affect the threshold amount that applies to residential properties. The policy considerations are quite different. Personal property left behind by residential tenants often includes items which, though of little monetary value, have tremendous personal value to the tenant: things like photographs and family heirlooms. Moreover, while the decision to abandon personal property in the commercial context typically occurs as the result of deliberate weighing of costs and benefits, abandonment of valuable personal property in the residential context often takes place because the tenant lacks the resources or ability to remove the personal property.

This bill would explicitly and carefully draw the distinction between the commercial and residential contexts through the inclusion of findings and declarations. Those findings and declarations point out the differences between how commercial and residential tenants are situated. On that basis, the finding and declarations conclude that setting a higher threshold amount for commercial tenants, as this bill would do, may be justified.

4. Inflationary considerations

The Legislature last raised the threshold amount triggering a commercial landlord’s duty to conduct a public auction in 2008, when it increased the threshold from $300 to $750. (AB 2025, Silva, Ch. 161, Stats. 2008.) If the threshold had kept pace with inflation, it would now be $887, according to the federal Bureau of Labor Statistics. The increase contemplated by this bill is, accordingly, far more than what would be required to adjust for inflation alone. Proponents of this bill believe the increase is nonetheless justified. They point out that the commercial threshold amount is low because, until a decade ago, it was tied to the residential threshold amount.

Because of the changes proposed by this bill, future inflationary adjustments should not be necessary. The bill sets the threshold amount at $2,500 or the amount of the monthly rent, whichever is greater. Since commercial rental rates are subject to inflation, the future threshold amount will presumably increase as consumer prices rise generally.

Support: BizFed; Building Owners and Managers Association of California; Commercial Real Estate Development Association; International Council of Shopping Centers

Opposition: None known

HISTORY

Source: California Business Properties Association

Related Pending Legislation: None known

Prior Legislation:

AB 2521 (Blumenfield, Ch. 560, Stats. 2012) increased the threshold value for residential properties from $300 to $700 and revised notification and other rules in the residential context.

AB 2025 (Silva, Ch. 161, Stats. 2008) separated the requirements for personal property abandoned on commercial premises into several new sections of the Civil Code, and also raised the threshold value to $750 for commercial properties.

Prior Vote:

Assembly Floor (Ayes 69, Noes 0)

Assembly Judiciary Committee (Ayes 10, Noes 0)

**************

ASSEMBLY THIRD READING

ATR Bill Id:AB 2173

Author:(Santiago)

As Amended Ver:March 22, 2018

Majority vote

SUMMARY: Increases the threshold value of personal property left behind by a commercial tenant, upon vacating the premises, that triggers certain procedural requirements for the landlord in disposing of the property. Specifically, this bill:

1. Provides that, in the case of a commercial tenant, if a landlord reasonably believes that the value of the remaining personal property is worth less than either $2,500 or an amount equal to the total rent due each month, whichever is greater, then the landlord may retain the property for his or her use or dispose of it in any manner.
2. Modifies the statutory "Notice of Right to Reclaim Abandoned Property" accordingly, to reflect the new method of calculating the threshold value, described above.
3. Finds and declares that special circumstances that apply to commercial tenancy, but not necessarily to residential tenancy, may justify setting a higher threshold amount for property abandoned on commercial real estate, as compared to the corresponding threshold amount for property abandoned on residential real estate.

FISCAL EFFECT: None

COMMENTS: According to the sponsor of this bill, the California Business Properties Association (CBPA), the threshold value for property abandoned on commercial real estate specified by current law does not reflect the actual costs of removal, storage and conducting a public auction to dispose of the property. This bill seeks a moderate increase to the threshold amount that, if not exceeded by the value of the abandoned property, would allow a commercial landlord to avoid incurring the costs of the public auction requirements and instead dispose of the property in any other manner. According to CBPA:

When a business moves out of a commercial property and leaves behind unwanted items, the property owner/manager must hold a public auction if the materials are believed to be $750 or more in value or the equivalent of $1 per square foot of the rental for the property. If a company moves out of a leased space and purposefully leaves behind unwanted property (i.e. an old server rack, a few desks and chairs, or obsolete computer equipment) that $750 threshold is very easily met. Under current law, the property owner/manager is then obligated to go through an expensive public notification and auction process for relatively small amounts of money on items that were unwanted to begin with.

AB 2173 will better reflect the practical realities in the commercial real estate industry by setting a new commercial threshold. This proposed new threshold amount more appropriately aligns with the actual costs of storage and disposal of abandoned property in commercial real estate.

In general, CBPA reports that tenants leave behind unwanted inventory as well as restaurant, retail, or office fixtures such as cubicle partitions, desks, tables, filing cabinets, and kitchen equipment. Even though the aggregate market value of these goods exceeds the current threshold of $750, CBPA contends the costs of moving, storing, and disposing of the items exceeds any value to the tenant. Nonetheless, because the items collectively have a market value greater than $750, the landlord is obligated to conduct a public sale or auction in order to comply with current law.

According to CBPA, commercial landlords often suffer lost rental income because auction houses may refuse to move and store abandoned property if they do not believe they will recover sufficient costs from the sale of the abandoned property. As a result, commercial owners and property managers sometimes store abandoned property on site until a public sale can commence and are thus unable to rent the property to a new tenant during that timeframe.

Prior to 2008, California law made no distinction between abandoned property left on commercial real estate and abandoned property left on residential real estate. The necessary procedures and public auction requirements were identical, and the same threshold value ($300) applied in both situations. That changed in 2008 with enactment of AB 2025 (Silva), Chapter 161, Statutes of 2008, which separated the requirements for property left on commercial premises into several new sections of the Civil Code, and also raised the threshold value to $750 for commercial properties. Until 2012, the threshold value remained $300 for residential properties and $750 for commercial properties. Then, in 2012, the Legislature enacted AB 2521 (Blumenfield), Chapter 560, Statutes of 2012, which increased the threshold value for residential properties from $300 to $700 and revised notification and other rules in the residential context.

Threshold value for property abandoned in commercial real estate increased from $750 to $2500. Current law, enacted by AB 2025 (2008), provides that if the landlord reasonably believes that the total resale value of the personal property remaining on the premises at the termination of commercial tenancy is less than $750 or one dollar per square foot of the premises occupied by the tenant, whichever amount is lesser, then the landlord may keep the property for his or her use or dispose of it in any manner. This bill would revise the method for determining the threshold value in commercial real estate by establishing a modest increase in the amount to $2,500 or an amount equal to one month of rent, whichever is greater. This provides a "sliding scale" approach to the calculation by allowing a higher threshold for properties with monthly rents in excess of $2,500. Because monthly rents vary greatly depending upon the local market, threshold amounts may correspondingly vary as well. Moreover, the more valuable the rental space, the more likely it is that the commercial tenant can bear the costs of removing or reclaiming property within a reasonable time frame.

Commercial tenants are differently situated than residential tenants. This bill reinforces the Legislature's determination, beginning with enactment of AB 2025 (2008), that commercial tenants are differently situated than residential tenants, and that the law governing abandonment of property on rental premises should recognize that principle. Unlike residential tenants, commercial tenants may make a calculated business decision to abandon unwanted inventory, office equipment, or unwieldy fixtures on the premises, thereby generating higher removal and storage costs than would be expected for a residential tenant. In addition, commercial tenants are generally more likely than residential tenants to have the resources to collect and remove all their property before vacating the rental premises.

Additionally, existing notice requirements and time frames may not be adequate for residential tenants, and raising the threshold that applies in residential property could negatively impact tenants, especially low-income ones. For example, the personal possessions of a residential tenant having low market value at a public auction might be worth much more than that to the tenant, who would otherwise need to replace his or her belongings. In addition, a low-income residential tenant may not be able to afford storage costs for abandoned property or may not be able to arrange for storage within the prescribed period.

Accordingly, the bill finds and declares that special circumstances that apply to commercial tenancy, but not to residential tenancy, may justify setting a higher threshold amount for property abandoned on commercial real estate, as compared to the corresponding threshold for residential real estate. The author and supporters of this bill emphasize that this bill is based on policy concerns strictly in the commercial real estate context, and is not intended to justify any increase to the threshold value for abandoned property in residential real estate.

Analysis Prepared by: Anthony Lew / JUD. / (916) 319-2334 FN: 0002629

Date of Hearing: March 20, 2018

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

ABPCA Bill Id:AB 2173

Author:(Santiago) – As Introduced Ver:February 12, 2018

As Proposed to be Amended

SUBJECT: COMMERCIAL REAL PROPERTY: TERMINATION OF TENANCY: DISPOSITION OF PERSONAL PROPERTY

KEY ISSUE: should the threshold value of personal property left behind by a commercial tenant that determines how a landlord may dispose of that property be significantly increased to more closely reflect the costs of disposing of such property?

SYNOPSIS

This bill, sponsored by the California Building Properties Association, amends existing law relating to the disposition of personal property that is left behind on the premises of commercial real estate. Under existing law, enacted in 2008, a commercial landlord may generally dispose of property in one of two ways. If the estimated value of the abandoned property is less than $750 or an amount equal to one dollar per square foot of the premises, whichever is less, then the landlord may keep the property for his or her own use, or simply dispose of the property in any manner; if the estimated value exceeds that threshold figure, then the landlord must sell the property at public sale. If the property is sold at public sale, any proceeds, after deducting for storage and other costs associated with the sale, is turned over to the county and may be claimed by the tenant or owner within one year after the county receives the money.

Supporters of this bill contend that the current threshold value for property abandoned on commercial real estate does not reflect the actual costs of removal, storage, and conducting a public auction to dispose of the property. As proposed to be amended, this bill would change the threshold in the commercial context so that the landlord could dispose of the property in any manner (and avoid public auction requirements) if the value of the remaining property is less than either $2,500 or the amount of rent due for the last full month, whichever is greater. Supporters contend that this new threshold will more closely align with the actual costs of storage and disposal of abandoned property experienced and documented by commercial landlords today. The author and supporters of the bill emphasize, however, that this bill is based on policy concerns strictly in the commercial real estate context, and is not intended to justify any increase to the threshold value for abandoned property in residential real estate. There is no known opposition to this bill.

SUMMARY: Increases the threshold value of personal property left behind by a commercial tenant, upon vacating the premises, that triggers certain procedural requirements for the landlord in disposing of the property. Specifically, this bill:

1. Provides that, in the case of a commercial tenant, if a landlord reasonably believes that the value of the remaining personal property is worth less than either $2,500 or an amount equal to the total rent due each month, whichever is greater, then the landlord may retain the property for his or her use or dispose of it in any manner.
2. Modifies the statutory "Notice of Right to Reclaim Abandoned Property" accordingly, to reflect the new method of calculating the threshold value, described above.
3. Finds and declares that special circumstances that apply to commercial tenancy, but not necessarily to residential tenancy, may justify setting a higher threshold amount for property abandoned on commercial real estate, as compared to the corresponding threshold amount for property abandoned on residential real estate.

EXISTING LAW:

1. Provides for the disposition of personal property remaining on the vacated premises at the termination of a commercial tenancy. (Civil Code Section 1993 et seq. All further references are to this code unless otherwise stated.)
2. Provides that if the landlord reasonably believes that the total resale value of the personal property remaining on the premises at the termination of commercial tenancy is less than $750 or $1 per square foot of the premises occupied by the tenant, whichever amount is lesser, then the landlord may keep the property for his or her use or dispose of it in any manner. However, if the value of personal property exceeds this threshold amount, then the landlord must hold a public sale by competitive bidding, as specified. (Section 1993.07.)
3. Requires the landlord, when personal property remains on the vacated premises, to provide written notice informing the former commercial tenant of his or her right to reclaim the property by a specified date (within 15 days if notice is personally delivered, or 18 days if notice is mailed). Further provides that the notice must describe the remaining personal property; inform the former tenant where and by what date the property may be reclaimed; and inform the former tenant that reasonable storage costs may be charged before the property is returned. (Section 1993.03.)
4. Defines "reasonable belief" to mean the actual knowledge or belief a prudent person would have without making an investigation, except as specified. (Section 1993(e).)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: According to the sponsor of this bill, the California Business Properties Association (CBPA), the threshold value for property abandoned on commercial real estate specified by current law does not reflect the actual costs of removal, storage and conducting a public auction to dispose of the property. This bill seeks a significant increase to this threshold amount that, if not exceeded by the value of the abandoned property, would allow a commercial landlord to avoid incurring the costs of the public auction requirements and instead dispose of the property in any other manner. According to CBPA:

When a business moves out of a commercial property and leaves behind unwanted items, the property owner/manager must hold a public auction if the materials are believed to be $750 or more in value or the equivalent of $1 per square foot of the rental for the property. If a company moves out of a leased space and purposefully leaves behind unwanted property (i.e. an old server rack, a few desks and chairs, or obsolete computer equipment) that $750 threshold is very easily met. Under current law, the property owner/manager is then obligated to go through an expensive public notification and auction process for relatively small amounts of money on items that were unwanted to begin with.

AB 2173 will better reflect the practical realities in the commercial real estate industry by setting a new commercial threshold. This proposed new threshold amount more appropriately aligns with the actual costs of storage and disposal of abandoned property in commercial real estate.

To support their call for raising the threshold value for abandoned property, CBPA has provided the Committee with several testimonials from commercial property owners faced with the prospect of incurring significant costs of storage, removal, lost rent, and holding a public auction for abandoned items. For example, CBPA writes:

At an industrial space in Riverside, a company shut down its business and disappeared, but left a small inventory of furniture behind. Notices were sent to the former tenant and known secured creditors. Nothing was claimed. Because the value was over $750, the owner was required to hold an auction. The property owner paid for legal counsel, the fee charged by the auctioneer and the fee charged by the newspaper for the required publication of the sale notice. The process took two months during which time the space could not be leased. The property owner lost rent at $6,124 per month. The auction netted a total of $367 which did not come close to covering expenses. There were no proceeds to distribute to the tenant or any creditor.

In general, CBPA reports that tenants leave behind unwanted inventory as well as restaurant, retail, or office fixtures such as cubicle partitions, desks, tables, filing cabinets, and kitchen equipment. Even though the aggregate market value of these goods exceeds the current threshold of $750, CBPA contends the costs of moving, storing, and disposing of the items exceeds any value to the tenant. Nonetheless, because the items collectively have a market value greater than $750, the landlord is obligated to conduct a public sale or auction in order to comply with current law.

According to CBPA, commercial landlords often suffer lost rental income because auction houses may refuse to move and store abandoned property if they do not believe they will recover sufficient costs from the sale of the abandoned property. As a result, commercial owners and property managers sometimes store abandoned property on site until a public sale can commence and are thus unable to rent the property to a new tenant during that timeframe.

Prior to 2008, California law made no distinction between abandoned property left on commercial real estate and abandoned property left on residential real estate. The necessary procedures and public auction requirements were identical, and the same threshold value ($300) applied in both situations. That changed in 2008 with enactment of AB 2025 (Silva), Chap. 161, Stats. 2008, which separated the requirements for property left on commercial premises into several new sections of the Civil Code, and also raised the threshold value to $750 for commercial properties. Until 2012, the threshold value remained $300 for residential properties and $750 for commercial properties. Then, in 2012, the Legislature enacted AB 2521 (Blumenfield), Chap. 560, Stats. 2012, which increased the threshold value for residential properties from $300 to $700 and revised notification and other rules in the residential context.

Proposed amendments reflect a more modest increase to the threshold value for property abandoned in commercial real estate. Current law, enacted by AB 2025 (2008), provides that if the landlord reasonably believes that the total resale value of the personal property remaining on the premises at the termination of commercial tenancy is less than $750 or one dollar per square foot of the premises occupied by the tenant, whichever amount is lesser, then the landlord may keep the property for his or her use or dispose of it in any manner. As currently in print, this bill would revise that threshold value to either $10,000 or two times the total rent due, whichever is greater. This represents a significant increase of, at a minimum, 1333% over the current threshold—and even more for commercial properties where the rent exceeds $5,000 per month.

Proposed author's amendments now reflect a more modest increase to the threshold value for commercial real estate. As proposed to be amended, the bill would establish a threshold amount of $2,500 or an amount equal to one month of rent, whichever is greater. This provides a "sliding scale" approach to the calculation by allowing a higher threshold for properties with monthly rents in excess of $2,500. Because monthly rents vary greatly depending upon the local market, threshold amounts may correspondingly vary as well. Moreover, the more valuable the rental space, the more likely it is that the commercial tenant can bear the costs of removing or reclaiming property within a reasonable time frame.

Commercial tenants are differently situated than residential tenants. This bill reinforces the Legislature's determination, beginning with enactment of AB 2025 (Silva) in 2008, that commercial tenants are differently situated than residential tenants, and that the law governing abandonment of property on rental premises should recognize that principle. Unlike residential tenants, commercial tenants may make a calculated business decision to abandon unwanted inventory, office equipment, or unwieldy fixtures on the premises, thereby generating higher removal and storage costs than would be expected for a residential tenant. In addition, commercial tenants are generally more likely than residential tenants to have the resources to collect and remove all their property before vacating the rental premises.

Additionally, existing notice requirements and time frames may not be adequate for residential tenants, and raising the threshold that applies in residential property could negatively impact tenants, especially low-income ones. For example, the personal possessions of a residential tenant having low market value at a public auction might be worth much more than that to the tenant, who would otherwise need to replace his or her belongings. In addition, a low-income residential tenant may not be able to afford storage costs for abandoned property or may not be able to arrange for storage within the prescribed period.

Proposed amendments-- findings and declarations. Accordingly, as proposed to be amended, the bill finds and declares that special circumstances that apply to commercial tenancy, but not to residential tenancy, may justify setting a higher threshold amount for property abandoned on commercial real estate, as compared to the corresponding threshold for residential real estate. The author and supporters of the bill emphasize that this bill is based on policy concerns strictly in the commercial real estate context, and is not intended to justify any increase to the threshold value for abandoned property in residential real estate.

REGISTERED SUPPORT / OPPOSITION:

Support

California Business Properties Association (CBPA) (sponsor)

Building Owners and Managers Association of California

International Council of Shopping Centers

NAIOP of California, the Commercial Real Estate Development Association

Opposition

None on file

Analysis Prepared by: Anthony Lew and Sandra Nakagawa / JUD. / (916) 319-2334