Zoning Defense: Ensuring Your Lease Adheres to San Francisco Zoning Laws

Since the 1990’s, San Francisco zoning laws have changed from light manufacturing and industrial use to office use of tenants of the South of Market Area, known as the SoMA District.  Tech companies like Twitter, Zynga, Salesforce.com, Square, Kabam and Zipcar have taken up residency in the SoMA District making San Francisco a leader for startups and innovation.  However, a large portion of the SoMA District is not zoned to permit office use.  As a result of low vacancy and high rental rates, many tech companies have little choice but to lease space in the SoMA District leaving them at odds with San Francisco’s zoning laws.

Until recently, many tech companies have had little to no difficulty leasing space in areas not zoned for office space.  The City Planning Department routinely issued permits for construction of office improvements and did very little to enforce non permitted office use.  However, local residents who are concerned with the increased housing costs and loss of jobs (which they attribute to tech users moving into the SoMA District) have pressured the City to take steps to curtail the number of non permitted office uses. Companies looking to lease office space in the SoMA District can no longer assume that their use is permitted, but must perform their own due diligence to assess and minimize the risk of a zoning violation.

Determining if Use is Permitted Under Zoning Law

Before signing a lease, the tenant should determine what zone the space is located in and if office use is permitted in that zone.  Prior use or existing office improvements should not be an indication of whether office use is permitted, as the City may simply have not enforced such prior non-conforming use.  Instead, a tenant should carefully review the zoning laws of San Francisco.

Fortunately, San Francisco offers an easy online tool at SF Planning Property Map that provides detailed information about a property and its zoning district.  Simply enter in the property address and click the zoning tab to find a property’s zoning district, then  click on the district to bring up the relevant language of the zoning ordinance. If you have any questions about a particular property, contact the Zoning Administrator for the city of San Francisco.

Determining whether the space is located within an area zoned for office use is not enough, because moratoriums on new office uses may exist that prohibit office use even in if zoned in a district where it is permitted.  For example, in 2014,  Supervisor Jane Kim introduced legislation temporarily prohibiting the issuing of building permits within an area known as the Central SoMA District for office space where the prior use was light industrial in buildings that had morphed into office buildings. That ordinance will currently expire on October 8, 2016; however, it is likely to extend for several years until a new zoning plan for that area is completed.

Even though a tenant discovers that San Francisco’s zoning laws will not permit the use of the proposed space for office use, some tenants may still wish to lease such space notwithstanding the risk of possible enforcement. Enforcement of zoning laws will most likely come from the City of San Francisco; however, landlords may also use such zoning violations as an opportunity to seek higher rents. Tenants should carefully evaluate the potential risks and seek means to mitigate those risks through the lease itself.

Risk of City Enforcement

San Francisco has broad enforcement powers regarding zoning violations.  The City may fine the property owner up to $250 per day, or may take more drastic steps to prohibit any further use of the property until the zoning violation is corrected.  While we have not seen the City use either of these means of enforcement, we have seen a steady rise in the City denying any building permits for office improvements that do not appear to be in line with zoning laws.  Tenants needing to modify their space to fit their needs may find their building permit denied by the City.  In some situations, the City may charge impact fees if they find a way to shoehorn the proposed use into the current zoning law.[1]

If the City elects to enforce a zoning violation, a tenant may be required to reimburse its landlord for any fines or impact fees, or worse yet it may be left with a lease for space it cannot use.  Tenants should have a discussion with the landlord during lease negotiations to agree on how the parties will allocate any fines or fees and to provide a reasonable means to unwind the lease should any resulting enforcement prohibit or restrict the tenant’s proposed use of the space[2].  Without providing a clear exit from the lease, a tenant may be forced to rely on the legal doctrine of frustration of contract to rescind the lease or be left with lease obligations for space it cannot use.

Zoning Law Enforcement by the Landlord

Landlords may attempt to use a zoning violation as an opportunity to evict a tenant.  In a recent case we litigated, a landlord desired to remove a tenant paying low rent to seek a new tenant willing to pay higher rent and used the City’s zoning violation as grounds to evict the tenant under California Code of Civil Procedure section 1161(4).  California Code of Civil Procedure §1161(4) permits a landlord to evict the tenant if the tenant is using the premises for an unlawful purpose.  However, the Court in Rowe v. Wells Fargo Realty Servs., Inc. (1985) 166 Cal.App.3d, 310, 318, determined that the use was an “unlawful use” for purposes of §1161(4) if the use (i) stigmatizes the building; (ii) impedes the landlord’s ability to collect rent; or (iii) creates a risk of personal safety, harm to the building etc.  In this recent case, the court applied the Rowe factors and concluded that no “unlawful use” occurred from the tenant’s office use and therefore the landlord could not use the zoning violation as a means to evict the tenant.

While the recent case resulted in a favorable outcome for our client, it is unclear whether other courts will come to the same result.  More importantly, a well drafted landlord lease may include language which restricts the permitted use under the lease to only those uses permitted under the current zoning law.  Given that clauses in leases restricting the use of the premises are generally considered a material term, such violation may provide the landlord with grounds to  evict the tenant for violating the use clause as opposed to simply violating the zoning law.

To minimize the risk of landlords using a zoning violation as grounds for eviction, tenants should pay particular attention to the use provisions in the lease and avoid any language which ties the permitted use to zoning laws.  The use provision should clearly spell out that the tenant may use the premises for office use without any restriction as to zoning laws.  Furthermore, to address the test in Rowe, the lease should contain specific language which provides that the tenant’s use does not stigmatize the building, impede the landlord’s ability to collect rent or create a risk of personal safety or harm to the building.

Zoning Law Enforcement by Tenant

What if a tenant has already signed a lease without addressing these issues, and now finds it is prohibited from using its space as it had planned or it is precluded from constructing its improvements?  What rights does a tenant have to terminate its lease without express provisions?  In such an event, a tenant’s options may be limited.  Many lease provisions provide that it is the tenant’s responsibility to determine whether zoning is appropriate for its intended use and to do its own investigation as to any legal requirements.  Furthermore, the general rule is that absent express provisions of the lease to the contrary, it is the tenant’s responsibility to obtain any necessary permits for its use or any improvements it intends to make to the premises.  A tenant may ultimately have a difficult time arguing that the landlord must address the zoning issue or let the tenant out of the lease.

When negotiating the lease which calls for improvements, a tenant should require the landlord to construct the initial improvements on behalf of the tenant.  If the building permits are denied as a result on non-conforming use, it will be landlord’s burden to work out a lease termination with the tenant.  However, tenants should be cautious of lease language which requires the tenant to assume liability that the premises comply with all laws if a landlord proceeds
to do the improvements without a required permit.  If additional improvements were required as a condition of such permit (i.e., new improvements under the Americans with Disabilities Act), the tenant may find itself responsible to do so such additional work at a later date if it assumes a broad responsibility to make sure its premises comply with all laws.  Tenants should make sure that their landlord remains responsible for all risks associated with pursuing any improvement work without a permit.

Conclusion

While it is not our recommendation to lease office space that is not zoned for office use, it is inevitable that many tenants in San Francisco will need to pursue such leases.  It is important that any potential lease be carefully reviewed and revised accordingly by an attorney to minimize the risks to the tenant. Hopkins & Carley has one of the most successful real estate teams to address leasing issues in San Francisco, both transactionally as well as in litigation.  If you have any questions about San Francisco zoning laws, please contain David Brown at dbrown@hopkinscarley.com.

[1] An example is a zone which permits “administrative use.  Such use has traditionally been for typists and similar administrative functions; however, in some cases the City has permitted office use under such use. [2] We generally recommend providing an immediate termination right if the tenant’s permits for its improvements are denied, and a window of up to 6 months for any subsequent enforcement to provide the tenant time to locate a new space.