Senate Bill No. 1103 ("SB 1103"), which goes into effect on January 1, 2025, establishes a number of new protections for "qualified commercial tenants," which is a newly defined class of tenants of commercial properties. For commercial landlords, understanding whether SB 1103 will impact their properties begins with an analysis of whether they are entering into a lease with a "qualified commercial tenant."
What is a Qualified Commercial Tenant?
A "qualified commercial tenant" generally means
a tenant of commercial real property that:
(a) is a "microenterprise," a restaurant with fewer than 10 employees or a private, nonprofit organization with fewer than 20 employees, and
(b) has provided the landlord a written notice that the tenant is a qualified commercial tenant and a "self-attestation" regarding its number of employees.
A "microenterprise" is defined under the Business and Professions Code as a sole proprietorship, partnership, limited liability company or corporation with five or fewer part time or full time employees (including the owner) that generally lacks sufficient access to loans, equity, or other financial capital. Nonprofits must be qualified organizations under IRS code section 501(c)(3). The timing and frequency of the "self-attestation" notice that the tenant needs to provide (ranging from at lease execution to within the previous 12 months or annually during the term) depends on the duration of the tenancy.
Notice Requirement for Certain Lease Terminations
Existing law provides that if a lease is for an unspecified term or
the tenant remains in possession after the expiration of the lease
term and the landlord accepts rent from the tenant, the lease term
is generally deemed to be extended on a "month-to-month"
basis. The new law requires that landlords desiring to terminate
such a lease with a qualified commercial tenant give notice at
least 60 days prior to the proposed termination date if the
qualified commercial tenant occupied the property for more than one
year. Landlord can still give 30 days' notice if the qualified
commercial tenant occupied the property for less than one year.
Notice Requirement for Rent Increases
SB 1103 imposes new notice requirements to increase rent when the
term of the lease is week-to-week, month-to-month or any period
less than a month. Generally, commercial landlords leasing to
qualified commercial tenants now must give at least 30 days'
notice before the effective date of the increase if the rent is
increased by 10% or less and 90 days' notice if the rent
increase is greater than 10%.
Restrictions on Operating Cost
Pass-Throughs
SB 1103 establishes strict rules for landlords charging building
operating costs (defined as costs for the operation, maintenance,
or repair of commercial real property) to qualified commercial
tenants. These costs are generally passed through to tenants of
commercial properties in triple net leases. Now, in order to
recover these costs from a qualified commercial tenant, the
landlord must comply with Civil Code Section 1950.9(a)(1)-(6),
which imposes limitations on when the expense must have been
incurred and how such expense is proportionately allocated between
the tenants of the commercial property. In particular, the new law
provides that landlords can only recover building operating costs
which have been incurred within the past 18 months or are
reasonably expected to be incurred within the next 12 months, based
on reasonable estimates. Most landlord-oriented leases do not
contain the foregoing restriction. Additionally, before executing
the lease, the landlord must have provided the prospective
qualified commercial tenant with a paper or electronic notice
stating that the tenant may inspect any supporting documentation of
building operating costs upon written request. If the tenant
requests such supporting documentation, the landlord must provide
it within 30 days of the tenant's request.
There are significant penalties for violations of this provision. A violating landlord will be liable for actual damages and reasonable attorneys' fees and costs. However, if the qualified commercial tenant can show that the landlord or its agent acted willfully or with oppression, fraud, or malice, the landlord will be liable for three times the amount of actual damages and punitive damages.
This section applies to leases executed or tenancies commenced or renewed on or after January 1, 2025 and leases executed or tenancies commenced before January 1, 2025, but only if those pre-January 1, 2025 leases do not contain "a provision" regarding building operating costs. The statute is unclear about how much detail regarding building operating costs must be included in "a provision" of a lease to avoid retroactive application of the statute. Another issue with the retroactive application of this section is that if a signed lease does not contain a provision regarding building operating costs then, in order to recover building operating expenses, the statute requires (among other things) that the landlord to provide the notice regarding the tenant's right to inspect supporting documentation before signing the lease. Since the statute would retroactively apply to a lease that has already been signed, it will be impossible for a landlord to comply with this obligation. The statute does not provide for any mechanism for a landlord to "cure" this issue.
Translation Requirements
If a landlord primarily communicates or negotiates with a tenant in
Spanish, Chinese, Tagalog, Vietnamese, or Korean, it is required to
give a translation of every term and condition in the written
contract or agreement in the language in which the contract or
agreement was negotiated. This requirement applies to leases,
subleases, rental contracts or agreements or other term of tenancy
contracts or agreements covering a nonresidential-zoned commercial
space entered into between a landlord and a qualified commercial
tenant on or after January 1, 2025. The statute gives these tenants
the right to rescind the lease if the landlord did not comply with
these provisions.
Ultimately, SB 1103 imposes substantial administrative and financial burdens on impacted commercial landlords. We are available to discuss the application and specific requirements of the new laws with commercial landlords who are concerned that their properties or leases may be subject to SB 1103 and to help update their leasing practices to ensure compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
