When COVID-19 closed the doors of Tracey Sylvester’s Pilates studio in the Mission last march, she burned through her business and personal savings to pay rent for four months. She then negotiated with her landlord to pay half rent. She got two rounds of federal relief and a loan she’ll be paying back for the next 30 years, but she still owes about $46,000 in back rent.
“Everything has been depleted. We’re hanging on by a thread and looking for whatever type of relief we can to see that there is a future,” Sylvester, owner of EHS Pilates Studio, said. “We’re not going to let this pandemic take us down, but it has been a struggle.”
For business owners like Sylvester, there’s potentially help on the way. Supervisor Dean Preston plans to introduce legislation Tuesday that would excuse them from paying rent when required to shut down under pandemic health orders. The legal underpinning of the legislation is a state law that excuses a party from a contract because fulfilling it has become impossible. Preston’s legislation would presume that law applies to rent during COVID-19, unless the lease specifically states otherwise. Businesses across the country have used a similar legal defense in the pandemic, to varying success, and landlords are likely to push back hard.
Small businesses that made equal to or less than $25 million in gross income in tax year 2019 could benefit. Companies with offices wouldn’t qualify, unless they were registered as a 501c3 nonprofit.
Preston said rent debt is the “single biggest cost” preventing small businesses from reopening and recovering. San Francisco businesses owe up to $400 million in back rent, according to a city report in March. The city has given out more than $50 million to small businesses, including more than $24 million to help with rent, payroll and other bills, to fill in gaps from state and federal loans.
While vital, the relief hasn’t been enough to cover total debt and some loans require tenants to repay fully, Preston said. He knows some landlords delayed, reduced or even waived rent, but others haven’t budged.
“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.
Small business tenants praised his proposal, which would tip the scales in their favor, but some commercial landlords and a real estate attorney criticized it, saying it could face legal challenges.
The pandemic has also hurt landlords, some of whom are small business owners themselves.
Sylvester said the prospect of rent forgiveness “would be a huge relief,” but she understands it could hurt her landlord, an elderly man who needs the income from the sole property to support his wife, who has Alzheimer’s.
“We’re both surviving,” Sylvester said. She added her situation is unique, with some of her peers not able to negotiate with larger institutional landlords.
Hans Hansson, an owner and broker at Starboard Commercial Real Estate, which leases retail, office and industrial space, slammed the proposal.
“This is a nightmare,” he said. “This is flawed in so many different ways ... it’s going to lead to lawsuits left and right.”
Hansson said he believed the law would open the city to liability because it only covered businesses of certain kinds and sizes, and landlords might sue San Francisco, blaming public health orders for creating the conditions that let tenants off the hook.
He also said the proposal was “late in the game” considering most landlords have already worked out a deal or sued for nonpayment, which he did to a company that rented office space from him.
Steven Adair MacDonald, a San Francisco attorney who represents tenants and landlords, said his firm has looked seriously at the legal defenses of “frustrated purpose” and “force majeure” - an unforeseen act of God.
MacDonald said the key question is who assumed the risk, and given that pandemics existed before COVID-19, he concluded the tenant assumed that risk.
MacDonald said he also had “very serious questions about the constitutionality of the government saying to a bunch of tenants you don’t have to pay the rent.”
“It is another thing if the government wants to foot the bill, like is happening on the residential side of things, with a lot of federal and state money,” MacDonald said. “But, just letting one party off the hook is very much open to challenge.”
Preston said he believed the ordinance was “consistent with existing contract law” and on “firm legal ground.” He defended his decision to write legislation to favor tenants.
“For the most part as a class, the owners of commercial properties are better able to withstand some loss of revenue than most small businesses shut down during the pandemic,” he said. “If there is particular hardship that folks want to talk about, we’re all ears.”
John Coté, spokesman for the city attorney, said he is “familiar with the proposal but cannot comment further due to the attorney-client privilege.”
Mayor London Breed’s spokesman seemed skeptical of the proposal.
“It’s unclear what new benefit this is conferring on small businesses as the law relating to lease contracts is largely dictated by state law,” Jeff Cretan said. “However, supporting small businesses is key for our City and the Mayor has focused on providing both immediate relief through grant and loans programs.”
Mallory Moench is a San Francisco Chronicle staff writer. Email: mallory.moench@sfchronicle.com Twitter:@mallorymoench
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