SF small businesses closed due to a pandemic could not pay the rent

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San Francisco regulators unanimously passed a controversial ordinance on Tuesday giving companies forced to shut down during the pandemic an excuse not to repay rent – and an upper hand over landlords who opposed the measure.

The Legislation is based on a state law to release a party from a contract because performance becomes impossible. The ordinance creates a judicially challengeable presumption that the law applies to small business leases in San Francisco during the period they were fully closed during the pandemic, unless the lease specifically states otherwise. Corporations across the country have deployed similar legal defenses during the pandemic, with varying degrees of success.

For businesses like gyms, bars, and movie theaters, rent could be canceled for most of the pandemic. For retailers, it could apply for months that the city has closed them. The ordinance does not apply to properties rented by the city or most office space.

In San Francisco, companies owe up to $ 400 million in rents, a city report estimated in March.

“We know a lot of small businesses are hanging by a thread and trying to see if there is some path to real recovery and business going in the years to come,” said supervisor Dean Preston, a former tenant rights attorney who led the Proposed law, said a board committee on Monday. “This is not a panacea for the entire debt backlog problem, but we see it as a significant step forward.”

While desperate business owners paralyzed by rent arrears hailed the move, landlords criticized it as being unfair to property owners, who may also be small businesses. A real estate attorney who represents both tenants and landlords questioned the constitutionality of the measure and expected a flood of lawsuits.

The legislation will serve as a tool in the arsenal of some tenants battling landlords for back rent payments, which “will drastically change the dynamics of negotiations between commercial landlords and small businesses,” Preston said Tuesday. Tangible help could be on the doorstep for both parties as $ 25 million may flow into a city-run commercial rental fund in September.

Tim Obert, CEO of The Seven Stills Brewery and Distillery, said he owed $ 420,000 in rent for his flagship location in Mission Bay, a taproom in Outer Sunset, and a location in Bayview that closed after the lease expired in February has been. Obert said his current two landlords had waived part of the rent – two months in one location and nine months in another – but now awaiting repayment of the remainder.

An excuse not to pay the rent would be a “lifesaver,” he said. While his restaurants were technically able to work with take away and delivery during the pandemic, his production facility was closed for a few months.

“I don’t understand why we are expected to repay all of this when we were forced to close,” said Obert. “I am honestly desperate now as to how to pay the rent and repay our debts now with the current level of business that we operate. There is just no way. It’s just one look to see how long we can stay alive. “

One of Obert’s landlords is Johnny Jaramillo, the executive director of the nonprofit PlaceMade, which rents space to more than a dozen companies and nonprofits. During the pandemic, the organization offered tenants a certain amount of lease leave on a case-by-case basis, did not want or planned to quit, but was “particularly badly affected by COVID” and had to request an interest deferral from its lender said.

He agreed with the concept of the legislation but feared “it would inadvertently undermine a mission-driven not-for-profit that is unique like us”. If a tenant were to apply the law, it would “absolutely harm us,” he said.

Tracey Sylvester, the owner of the EHS Pilates studio on the Mission, which was closed for most of the lockdown, previously said the prospect of rent waiver would be “a great relief”. She still owed $ 26,000 to her landlord, a man in his 80s who used the rental income to get himself and his wife off with Alzheimer’s, but wasn’t sure she would rely on the new law as it would affect him negatively .

Other commercial landlords have said they have financial problems too – but San Francisco legislation often favors tenants over landlords, who may also be small business owners.

Charley Goss of the San Francisco Apartment Association, which represents some commercial landlords, said during a committee meeting Monday that the group was against the law. He wanted only companies to be eligible that had a proven financial hardship and earned less than $ 2.5 million in gross income in 2019 instead of less than $ 25 million.

To appease landlords, Preston changed legislation to exempt situations where landlords and tenants have negotiated an agreement to waive or extend the rental repayment deadline. He said Tuesday he understood the financial pressures on landlords from lenders and said he would waive it if he could – but can’t.

San Francisco attorney Steven Adair MacDonald said his law firm closed the legal defense on which the new legislation depends does not absolve tenants of responsibility as they have taken the risk. He also said he had “very serious questions about the constitutionality” of the government, which let a party off the hook without paying the bill. MacDonald predicted landlords would sue the city and renters, though smaller ones would likely settle.

“The bargaining power of these small commercial tenants is likely to be increased in these negotiations by the existence of this saving piece of legislation,” he said in an email. “The bigger ones will likely prevail during the appeal process when it comes to millions.”

Preston said Tuesday he was “optimistic that if we were challenged this ordinance it would stand up in court”.

Obert said he sympathized with his landlords and hoped to negotiate a deal. He is frustrated with the evolving regulations and the little relief that makes it seem like the government “has small businesses on their backs, but what they do doesn’t help at all”. When the Delta variant increases and the Bay Area is wearing masks indoors again, Obert fears another lockdown that could bring his business to failure.

“Nobody will be able to survive the storm again,” he said.

Mallory Moench is the author of the San Francisco Chronicle. Email: [email protected] Twitter: @mallorymoench


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