San Francisco landlords sue city over new debt forgiveness law

Two landlord groups have sued the City of San Francisco over a new law that forgives rent debt for some commercial tenants who were forced by pandemic health orders to close their businesses.

Even if the goals of the legislation are worthwhile, they argued, the city chose to help small businesses by shifting the burden to property owners, many of which are small businesses themselves. Harming small property owners will “chill the investment climate,’’ and imperil the city’s recovery, said Cody Harris of Keker, Van Nest and Peters, one of the attorneys representing the landlords.

“Everyone agrees that small businesses need help. But the ordinance acts as a windfall to certain small businesses while forcing other small businesses to bear the full brunt, with no help or compensation at all. That’s both unfair and shortsighted,” Harris said.

The suit, filed in Superior Court by the San Francisco Apartment Association and the Small Property Owners of San Francisco, takes aim at a new law that was
passed unanimously by the San Francisco Board of Supervisors in July and enacted in September.

The city estimates the law could mean forgiveness of up to $600 million in rent debt for small businesses such as gyms, hair salons and bars that had to shut down for months during shelter-in-place restrictions.

Businesses that made up to $25 million in gross income during 2019 qualify; most companies with offices do not, unless they are registered as a 501c3 nonprofit. The new law also does not impact residential tenants, some of whom have been calling for a “debt strike” of their own.

Supervisor Dean Preston sponsored the legislation in May after $24 million in city aid to help with rent, payroll and other bills, as well as state and federal loans, had not done enough to assist small businesses still burdened by rental debt and unable to reopen, he told the San Francisco Chronicle when the legislation was introduced.

“The fact that some landlords expect to get 100% of their rent for the periods that businesses were fully shut down is totally unfair and it’s disappointing that we have to address it through legislation, but we do,” Preston said at the time.

The basis of the legislation is a state law that allows one party out of a contract if meeting its responsibilities has become impossible. The city’s legislation says that that law can apply to rent for businesses forced to close for the pandemic, unless the lease specifically states otherwise.

The “presumption” created by this interpretation of the state law is at the heart of the landlords’ case. The board “opted to enact a ham-fisted, vague, and ultimately illegal Ordinance that unfairly puts its thumb on the scale in favor of one side of countless two-party contracts,” according to the suit, which was filed Sept. 21.

The attorney said he is currently awaiting the city’s response to the lawsuit and that it’s hard to know at this point when a decision will be reached, especially if the Court of Appeal is asked to weigh in. He said he hopes for the sake of all the small businesses involved that there will be “as quick a resolution as possible” and asked property owners to “reach out” if they believe they are impacted by the legislation.

In the days after the suit was filed, Preston tweeted: “Sometimes when you push the envelope & pass seriously impactful legislation that threatens the profits of the rich, they respond by suing. Our back rent law to save small businesses — passed unanimously — is now in the hands of judges. It should be upheld.”

In the heart of Preston’s district sits the Haight Ashbury neighborhood, which has been hit hard by the pandemic-related drop in tourism. Carly Dent manages Indigo Vintage, one of Haight Street’s many vintage clothing shops. She has worked in the store since it opened in July of 2019 and said even if this legislation is upheld it will be too late for many neighborhood businesses, which she has watched shut down one after the other over the last 18 months.

“It’s nobody’s fault that COVID happened, but it shouldn’t come down on the backs of small businesses,” she said.

At the same time, she said she can see the landlords’ point that they shouldn’t have to shoulder the burden alone and need money to maintain their buildings, many of which are over 100 years old. She implored the city to “find a middle ground” before it loses more of its unique restaurants, bars and retail.

“That’s what makes San Francisco, San Francisco,” she said.