Attorney John Thyne has filed a lawsuit against the City of Santa Barbara claiming that the rent for The Harbor Restaurant is “unconscionable” and based on “obsolete” market conditions.
The city owns Stearns Wharf. Thyne, his wife, Olesya, and business partners Gene Sanchez and his wife, Carolina Jimenez, own The Harbor Restaurant. They pay $61,403 per month, plus $6,000 in deferred rent.
Thyne and his business partners filed the 131-page lawsuit in Santa Barbara County Superior Court on Friday. They want the city to renegotiate the lease terms.
“The lease was entered at a time when economic conditions, visitors to Santa Barbara County, and the restaurant landscape of Santa Barbara was vastly different than today,” the lawsuit claims. “The lease contains certain terms that Plaintiff asserts have become economically obsolete.”
The lawsuit and its outcome could have vast implications for restaurants throughout the South Coast, and properties owned by the city in particular.
It states that the lease was agreed upon at a time when there were far fewer restaurants, and that the rent doesn’t take into account the vastly different restaurant landscape.
“The lease must be reformed because its current terms are unconscionable in light of the City’s actions that have dramatically decreased Plaintiff’s gross sales, including allowing development of the Funk Zone and other nearby areas that has resulted in hundreds of new restaurants now competing with The Harbor Restaurant in Santa Barbara which is drastically more than at the time the lease was entered,” the lawsuit states.
The lease was signed in 2002 and goes through 2028 with three five-year options to extend through 2043. This group purchased the Harbor restaurant in 2023.
Thyne also argues that the city’s failure to invest in a tourism-related effort, “harmful” parking policies that included the cancellation of the parking validation program, allowance of unpermitted food trucks and kiosks, and failure to adopt a business improvement district are among the other problems for the Harbor Restaurant that were created by the city.
The lawsuit claims that the rent, property taxes, insurance and maintenance far exceed 20% of the gross receipts of the restaurant, which make the lease “unsustainable.”
In an interview with Noozhawk, Thyne said, “Restaurants are not making enough money to pay 20% of gross receipts. It’s just not possible for any restaurant to cover that. They cannot pay this rate and stay viable.”
Thyne said a fair amount is somewhere between 6% and 10% of gross receipts.
City officials, when contacted by Noozhawk for comment, rejected the claims and said the allegations are “without merit” and that the city “intends to defend this matter vigorously.”
“The city has not received required rent payments for several months and is pursuing its own legal remedies,” City Administrator Kelly McAdoo said. “This property is a public asset, and the city has an affirmative obligation to manage it in a manner that serves the public interest, not solely the interests of any single tenant.”
Thyne in the lawsuit outlines the history of the harbor, the lease terms and the condition of the property when he and his business partners got involved.
He said they spent $1.15 million to rehab the property, and the city refused to partner in any of the costs. From December 2023 through January 2024, The Harbor Restaurant experienced severe water intrusion from heavy rains.
“The water intrusion revealed the dilapidated nature of the infrastructure of the premises, including severe mold, outdated wiring, rotted wood and building materials, mildewed carpets, broken equipment, and failed framing,” the suit claims.
The owners put in new floors, replaced wires, added new bathrooms, replaced the ceiling, the drywall and kitchen equipment, and painted, among other changes. The repairs meant The Harbor Restaurant was closed for 11 months.
The business partners invested more than $3 million to purchase the restaurant and “operate at a loss.”
At one point, the city renegotiated some terms with The Harbor Restaurant and allowed the owners to defer rent for six months. The current outstanding balance is $358,000 to be amortized until Dec. 31, 2028, at a rate of approximately $6,000 a month on top of the minimum base rent.
Further tangling matters, The Harbor Restaurant did not pay property taxes for three years because of operational losses, and the county earlier this year seized $304,109.35 from The Harbor Restaurant bank account. The money in the account had been reserved to pay a settled rent amount if negotiations were successful.
“This caused the owners to have to pay payroll to their employees out of their pocket,” the lawsuit states.