Beginning Jan. 1, 2025, California commercial property owners will have to contend with new (and expanded) tenant protections for any small business or nonprofit that is a “qualified commercial tenant” under SB 1103. More specifically, the new law makes rent increase and lease termination notice requirements applicable to certain commercial tenants, introduces documentation requirements for the pass through of operating expenses, and imposes lease translation requirements. The new rules will apply to new leases and, in some cases, existing leases.
Here is what commercial landlords in California need to know:
1. Definition of “qualified commercial tenant”: The new law’s protections apply to a tenant that (a) is a microenterprise (i.e., having five or fewer employees, including the owner, and lacking sufficient access to loans, equity or other financial capital), a restaurant with fewer than 10 employees, or a 501(c)(3) nonprofit with fewer than 20 employees; and (b) notifies the landlord in writing at or prior to lease execution and at least annually thereafter that the tenant is a qualified commercial tenant (as defined in (a) above) and provides an attestation as to their employee count.
2. Notice of Rent Increases and of Termination of Month-to-Month Leases: Landlords will need to provide: (a) at least 90 days’ advance notice of rent increases exceeding 10%, and (b) for qualified tenants who have occupied the property for over 12 months, at least 60 days’ prior written notice before nonrenewal or termination (with the tenant retaining the right to end the tenancy on 30 days’ notice). These requirements apply to leases entered before or after Jan. 1, 2025, though it is unclear if the requirement to notify of rent increases exceeding 10% extends to previously agreed-upon increases stemming from the exercise of a lease extension option.
3. Operating Expense Pass-Through Documentation Requirements: To pass through operating expenses (e.g., common area maintenance costs (CAMs), common utilities and property taxes, excluding business improvement district assessments), landlords will need to provide qualified tenants with supporting documentation, specifically, a dated and itemized quote, contract, receipt or invoice from a service provider that includes: (a) a tabulation showing how the costs are proportionately allocated among tenants per a method based on square footage or other substantiated method; and (b) the landlord’s signed and dated attestation that the documentation and costs are true and correct. Qualified tenants can only be responsible for operating expenses incurred in the previous 18 months or reasonably expected to be incurred in the next 12 months based on reasonable estimates. Qualified tenants may (and landlords must notify tenants before lease execution that they may) request documentation supporting incurred or expected operating expenses. Moreover, qualified tenants are entitled to prior written notice of changes to the method of allocating operating expenses that increase the tenant’s share of such costs. Violations of these rules could give tenants an affirmative defense in eviction cases and render landlords liable for the tenant’s actual damages and legal fees and, in cases of fraud or malice, treble and punitive damages. District attorneys, city attorneys and county counsel are empowered to enforce these provisions. In addition to applying to leases executed or tenancies commenced or renewed on or after Jan. 1, 2025, these rules apply to existing leases “that do not contain a provision regarding building operating costs.”
4. Translation Requirements: The law mandates that leases negotiated primarily in Spanish, Tagalog, Chinese, Vietnamese or Korean and signed on or after Jan. 1, 2025, must be translated into that language. If a landlord communicates primarily in one of these languages during negotiations, they must provide a translation of the lease before it is signed, regardless of whether a translator was used. Failure to comply grants tenants an ongoing right to rescind the lease. While the English version of the lease remains the controlling document, the translated version can be used in court to demonstrate no contract was entered due to a substantial difference in material terms and conditions between the lease and translation.
What now?
Possible ramifications of the new law include:
- Discouraging leasing to small businesses outlined in the bill;
- Raising barriers to entry for commercial landlords;
- Causing eviction delays and other legal disputes; and
- Precursing further small business tenant protections (e.g., commercial rent control).
Commercial property owners and property managers leasing to these small businesses should consult with legal counsel on compliance and updating leasing procedures, practices and forms. Given that noncompliance with certain of the new law’s requirements could lead to rescission, treble and punitive damages, and potential tangles with local district attorneys, landlords need to carefully review the new law to avoid liability.
This document is intended to provide you with general information regarding new protections for qualified commercial tenants in California. The contents of this document are not intended to provide specific legal advice. If you have any questions about the contents of this document or if you need legal advice as to an issue, please contact the attorneys listed or your regular Brownstein Hyatt Farber Schreck, LLP attorney. This communication may be considered advertising in some jurisdictions. The information in this article is accurate as of the publication date. Because the law in this area is changing rapidly, and insights are not automatically updated, continued accuracy cannot be guaranteed.