California’s Commercial Tenant Protection Act (SB-1103) took effect on January 1, 2025. Conceived as a transparency and displacement prevention measure for small businesses, the new law creates tenant protections for small enterprises and nonprofits leasing commercial property that resemble those more typically found in residential leases. A tenant who self-attests that it is a “Qualified Commercial Tenant” (“QCT”) within the meaning of SB-1103 may receive longer notice periods for rent increases and lease terminations, as well as new rights and remedies with respect to passthroughs of operational costs. Under certain circumstances, the law also requires landlords to provide translations for QCTs who negotiate leases in any of California’s five most common non-English languages.
The new notice requirements and expense passthrough restrictions alter the structure of lease negotiations for commercial landlords in California.
Covered Leases
SB-1103 applies to all leases of “commercial real property,” a defined term encompassing all real property in California except for dwelling units, mobile homes, and recreational vehicles.
Who is a Qualified Commercial Tenant?
A tenant seeking to become a “Qualified Commercial Tenant” must provide a landlord with written notice self-attesting that they are, at the time of the notice, “a microenterprise,” a restaurant with fewer than 10 employees, or a nonprofit organization with fewer than 20 employees. The prospective QCT must provide this attestation before or at the execution of the lease and annually thereafter.
- A “microenterprise” as defined in California’s Business & Professions Code § 18000 is a sole proprietorship, partnership, or limited liability company that both (1) has five or fewer employees, including the owner and (2) “generally lacks sufficient access to loans, equity, or other financial capital.”
- Nonprofits for the purposes of SB-1103 are organizations recognized as tax-exempt under section 501(c)(3) of the Internal Revenue Code.
The responsibility to vet the prospective tenant’s attestation that it is a QCT falls on the landlord. Since the statute is silent on whether “employees” includes part-time or seasonal workers or remote employees, a more conservative approach is to assume those workers do not count toward a restaurant or nonprofit prospective QCT’s total employee number.
The statute is ambiguous as to whether a tenant in a fixed-term lease who becomes qualified after the lease’s inception could claim SB-1103 protections. Until this is tested and clarified by courts, landlords should anticipate that a tenant whose enterprise shrinks below the requisite number of employees could attest to their QCT status in the middle of a lease term, claiming SB-1103 protections even if those terms would contradict the original lease terms.
Protections Afforded to Qualified Commercial Tenants
Notice Requirements for Rent Increases.The new law amends California Civil Code § 827 to alter notice requirements for rent increases. A landlord proposing to increase a QCT’s rent by 10 percent or less as compared with the rent charged at any time in the prior 12 months must give the QCT written notice at least 30 days before the effective date of the rent increase. For rent increases exceeding 10 percent, the landlord must provide 90 days’ notice. Written notice may be delivered to the QCT personally or by mail service.
Notice Requirements for Certain Lease Terminations
The general rule under California Civil Code § 1945 is that when a tenant remains in possession and the landlord accepts rent, the parties are presumed to have renewed a lease on the same terms and for the same period as the prior tenancy. Either party under this general rule may terminate with 30 days’ notice.
SB-1103, on the other hand, requires that landlords provide 60 days’ written notice to terminate a QCT’s periodic tenancy. The notice must include “information on the provisions of [California Civil Code § 1946.1].” If the QCT has occupied the premises for less than one year, then the landlord only needs to provide 30 days’ notice. QCTs, however, may terminate with a notice period equal to the number of days in the periodic lease term (i.e., 30 days for a month-to-month lease).
Language Translation Requirements for Landlords
SB-1103 amends California Civil Code § 1632 to require any person engaged in a trade or business who negotiates a contract in Spanish, Chinese, Tagalog, Vietnamese, or Korean to provide, prior to execution, a translation of the contract in the language in which it was negotiated. This section explicitly applies to leases, subleases, rental contracts, or other term of tenancy contracts between landlords and QCTs that cover nonresidential-zoned commercial spaces and are executed on or after January 1, 2025. The translation must address every key term of the contract and must be provided to each signee.
Failure to comply with these new § 1632 translation requirements creates a right in the “aggrieved person,” presumably the QCT, to rescind the contract.
Provisions Affecting Building Operating Cost Pass-Throughs
The most significant provisions of the Commercial Tenant Protection Act are those affecting operating costs.
SB-1103 adds a new section to the California Civil Code, § 1950.9, which restricts the landlord’s ability to pass through building operating costs to the QCT or to alter the way such costs are calculated. The building costs encompassed are those “incurred on behalf of a tenant for the operation, maintenance, or repair of the commercial real property, including, but not limited to, maintenance of common areas, utilities that are not separately metered, and taxes or assessments charged to the landlord pursuant to property ownership.”
Section 1950.9 applies to essentially all leases of commercial property. The statute lists: (1) leases executed or tenancies commenced or renewed on or after January 1, 2025, (2) week-to-week, month-to-month, or other leases with terms less than one month, and (3) existing leases and tenancies executed or commenced before January 1, 2025 that do not already contain a provision concerning building operating costs. Longer-term leases already containing operating expense passthrough provisions would not be covered by this section unless renewed on or after January 1, 2025.
Under this section, a landlord may not charge a fee to a QCT for building operating costs unless the costs are (1) “allocated proportionately per tenant, by square footage, or another method as substantiated through supporting documentation provided by the landlord” to the QCT and (2) “have been incurred within the previous 18 months, or are reasonably expected to be incurred within the next 12 months based on reasonable estimates.”
The same section creates a significant pre-signing notice requirement for the landlord and inspection right for the QCT throughout the lease term. Prior to execution of the lease, the landlord must provide a prospective QCT with notice that the QCT “may inspect any supporting documentation of building operating costs upon written request.” Once requested, a landlord has 30 days to respond with the supporting documentation. This obligation exists throughout the lease term.[1]
Even if a QCT never makes a request for supporting documentation for building operating costs, a subsequent portion of Section 1950.9 seems to imply that no building operating costs can be passed through until supporting documentation has been provided.
The supporting documentation required is extensive, including at least “a dated and itemized quote, contract, receipt, or invoice from a licensed contractor or a provider of services that includes, but is not limited to, both . . . A tabulation showing how the costs are allocated among tenants [i.e., proportionately per tenant or by square footage] . . . and [a] signed and dated attestation by the landlord that the documentation and costs are true and correct.”
Importantly, Section 1950.9 restrictions are not waivable by the QCT, and violations carry penalties for the landlord, including punitive damages, treble damages, attorneys’ fees, and injunctive relief. Further, a QCT can use a landlord’s violation of this section as an affirmative defense in any wrongful detainer or ejectment action arising from its failure to pay building costs.
SB-1103’s amendments and additions of SB-1103 will change the structure and nature of lease negotiations for commercial landlords and their smaller tenants. Please contact us for information on how this can affect your business.
FOOTNOTES
[1] Supporting documentation and written notice are also required for the landlord to make any alteration to the method of computing operating costs in a way that increases the QCT’s cost share. § 1950.9(c).