Businesses closed by pandemic may get S.F. rent relief
San Francisco supervisors unanimously passed a controversial ordinance Tuesday that will give businesses forced to shut down during the pandemic an excuse to not pay back rent — and an upper hand over landlords who opposed the measure.
The legislation is based on a state law excusing a party from a contract because fulfilling it becomes impossible. The ordinance creates a presumption, that could be challenged in court, that the law applies to rent for small San Francisco businesses during the time they were completely shut down during the pandemic, unless the lease specifically states otherwise. Businesses nationwide have used a similar legal defense during the
pandemic, to varying success.
For businesses such as gyms, bars and movie theaters, it could cancel rent for most of the pandemic. For retailers, it could apply to months when the city ordered them closed. The ordinance doesn’t apply to properties leased from the city or most office spaces.
In San Francisco, businesses owe up to $400 million in back rent, a city report estimated in March.
“We know many small businesses are hanging on by a thread and trying to figure out if there is a path to real recovery and to remaining in business in the upcoming years,” Supervisor Dean Preston, a former tenants’ rights attorney who proposed the legislation, said to a board committee Monday. “This is not a cureall for the entire issue of back debt, but we do see it a significant step forward.”
While desperate business owners crippled by back rent cheered the move, landlords criticized it as unfair to property owners who may also be small businesses. A real estate attorney who represents both tenants and landlords questioned the measure’s constitutionality and anticipated a deluge of lawsuits.
The legislation will serve as a tool in the arsenal for some tenants battling with landlords over back rent that will “dramatically change the negotiating dynamic between commercial landlords and small businesses,” Preston said Tuesday. For both parties, tangible help may be around the corner, with $25 million possibly coming to a cityrun commercial rent relief fund in September.
Tim Obert, CEO of The Seven Stills Brewery and Distillery, said he owes $420,000 in rent for his Mission Bay flagship location, an Outer Sunset taproom and a Bayview site shut after the lease expired in February. Obert said his current two landlords forgave some rent – two months at one location and nine months at another – but are now expecting repayment of the rest.
An excuse to not pay rent would be a “lifesaver,” he said. While his restaurants were technically able to operate with takeout and delivery during the pandemic, his production branch was closed for a few months.
“I don’t understand why we’re expected to pay all this back when we were forced to shut down,” Obert said. “I’m honestly scrambling now to figure out how to pay rent and pay back our debt now with the current level of business that we’re doing. There’s just no way. It’s just looking at it to see how long we can stay alive for.”
One of Obert’s landlords is Johnny Jaramillo, the executive director of nonprofit PlaceMade that rents space to more than a dozen businesses and nonprofits. During the pandemic, the organization offered some rent forgiveness to tenants on a casebycase basis, not wanting or planning to evict anyone, but was “especially hard hit by COVID” and had to request an interest deferral from its lender, he said.
He agreed with the concept of the legislation, but worried “it would inadvertently undermine a missiondriven nonprofit that’s unique like us.” If a tenant did use the law, it would “absolutely
hurt us,” he said.
Tracey Sylvester, the owner of EHS Pilates Studio in the Mission, which was closed for most of the lockdown, previously said the prospect of rent forgiveness “would be a huge relief.” She still owes $26,000 to her landlord, a man in his 80s who supports himself and his wife with Alzheimer’s with the rental income, but wasn’t sure if she would lean on the new law since it would negatively affect him.
Other commercial landlords said they too are struggling financially – but San Francisco legislation often favors tenants over landlords who may also be smallbusiness owners.
Charley Goss with the San Francisco Apartment Association, which represents some commercial landlords, said during a committee meeting Monday that the group opposed the law. He wanted only businesses that could demonstrate financial hardship and earned less than $2.5 million in gross receipts in 2019, instead of less than $25 million, to be eligible.
To appease landlords, Preston amended the legislation to exempt situations where landlords and tenants negotiated a deal to waive or extend the deadline for rent repayment. He said Tuesday he understood landlords’ financial pressures from lenders and said he would legislate that if he could – but can’t.
San Francisco attorney Steven Adair MacDonald said his firm concluded
the legal defense that the new legislation hinges on doesn’t absolve tenants of responsibility since they assumed risk. He also had “very serious questions about the constitutionality” of the government letting one party off the hook without footing the bill. MacDonald predicted landlords would sue the city and tenants, although smaller ones would likely settle.
“Those small, commercial tenants will probably have their bargaining power increased in those negotiations by the existence of this saving grace piece of legislation,” he said in an email. “The larger ones will probably duke it out all the way through the appeals process, if millions are at stake.”
Preston said Tuesday he is “optimistic that if we were challenged on this ordinance that it would survive in court.”
Obert said he was sympathetic to his landlords and hoping to work out a deal. He’s frustrated with evolving regulations and little relief that makes it seem like the government is “having small businesses’ back, but what they’re doing is not helping at all.” As the Delta variant surges and the Bay Area returns to wearing masks indoors, Obert fears another lockdown that could doom his business.
“Nobody is going to be able to weather the storm again,” he said.