With unpaid rent piling up, San Francisco landlords sued the city over an ordinance that sought to cancel rent for businesses that were forced to shut down during the pandemic.
Two property owners’ associations, the San Francisco Apartment Association and the Small Property Owners of San Francisco Institute, accused the city of illegally favoring tenants through a local ordinance that would excuse businesses from having to pay rent if public health orders forced them to close during the pandemic.
The ordinance, passed by the Board of Supervisors in July, cited a state law that excuses a party from a contract if unforeseen circumstances make it impossible to fulfill the contract. Landlords argue that the city’s interpretation of that law, however, is illegal and vague in part because it doesn’t make it clear which businesses would qualify.
The lawsuit, filed on Sept. 17 at S.F Superior Court, is the latest chapter in an ongoing standoff between landlords and small businesses scrambling to settle debts and keep their doors open as the pandemic drags into its nineteenth month.
A report released by the Budget & Legislative analyst this week estimated that unpaid commercial rent has climbed as high as $637 million as of August, with an eviction moratorium set to expire on Sept. 30.
Bennett Montoya, owner of LUV nightclub at the bottom of North Beach, said that his business accrued $400,000 in rent debt after a planned reopening in March 2020 was waylaid by the pandemic. Montoya said he’d signed a personal guarantee for the club’s lease back when business was booming, meaning he’s personally on the hook for rent.
“The nightlife industry has not really bounced back,” said Montoya, whose club carries a normal capacity of 300 people per night. “It's just hard trying to work with my landlord. I understand his situation—you know, he still needs to pay his bills as well. Unfortunately for us, we can’t just walk away from the lease.”
In the meantime, members of the San Francisco Board of Supervisors are aiming to force landlords and business tenants to the negotiating table using a promise of grants for unpaid rent.
On Tuesday, Supervisors voted unanimously in favor of creating a commercial rent relief fund that would require landlords and tenants to work out a deal for unpaid rent. Landlords would be eligible for grants of up to $35,000 each, which must be applied towards back rent.
Supervisor Ahsha Safai, who introduced the relief plan, said he is currently negotiating with the Mayor’s office to fund the pool of relief money and pointed to the city’s emergency reserves as a potential source of funding.
He said that a suggested $25 million pool of funding was “a start,” ahead of the Sept. 30 eviction deadline, that could buy more time to lobby the federal or state government for greater relief.
“We’ve had the PPP loan program; we've had the restaurant assistance loan program. However, if you talk to a lot of these folks, a lot of the smaller businesses and legacy businesses, they haven't been able to access that money,” he said. “We also know that once the landlords are asked to come sit down at the table, there will be a large portion of rent forgiveness. So we don't believe that we're going to be able to help everyone, but we don't want to sit back and not do anything.”
Small business leaders expect that the Sept. 30 expiration of the commercial eviction moratorium could compound a wave of closures that has hit the restaurant and retail sectors particularly hard.
“There are an incredible amount of variables that we have to fight through to even figure out how we're going to pay an employee,” said Antwan Capla of Trademark & Copyright gastropub in South of Market. Like many other businesses, it went into debt trying to keep its doors open amid a halting post-pandemic recovery.
The Budget & Legislative analyst estimated that the vast majority of unpaid rent per month in San Francisco is attributable to retail tenants, which includes bars and restaurants. Those businesses accrued up to $25.8 million in rent debt per month this year, accounting for roughly 90% of total unpaid rent.
Right now, it appears that San Francisco is already bleeding restaurants: Permit renewals show that the number of restaurants closing up shop outnumber the number of newly opened restaurants by nearly two to one. Year to date, there were 440 closures versus 249 openings as of June, according to permit data from the Department of Public Health.
“I expect this to get worse later this year as folks who are not open will more than likely not pay to keep the permits they have in place,” said Laurie Thomas, executive director of the Golden Gate Restaurant Association.