News & Insights

With a stated goal of protecting a new category of small business tenants, on September 30, 2024, California Governor Newsom signed into law the Commercial Tenant Protection Act (SB 1103). 

The bill is claimed to be the nation’s first to provide commercial tenant protections for small business owners. Beginning on January 1, 2025, landlords of commercial properties will be required to follow new practices when entering into lease agreements or tenancies with “qualified commercial tenants” – defined as tenants that are a microenterprise, a restaurant with fewer than 10 employees or a nonprofit organization with fewer than 20 employees.  Microenterprises are defined as a sole proprietorship or business entity that has five or fewer employees including the owner, who may be part-time or full-time and “generally lacks sufficient access to loans, equity, or other financial capital.”  To be treated as a qualified commercial tenant, the tenant also must have provided the landlord with written notice of its qualification as well as a self-attestation regarding the number of its employees within the time frames provided in the statute. 

The law will only apply to qualified commercial tenants and encompasses the following key protections:

1.  Limitations on pass-through operating expenses. For (a) leases executed or tenancies commenced or renewed on or after Jan. 1, 2025, (b) a tenancy that is month-to-month or lesser periods (e.g. week-to-week), or (c) leases executed or tenancies commenced before Jan. 1, 2025, and that do not contain an existing building operating costs provision; landlords face restrictions on charging qualified commercial tenants for operating costs unless specific conditions are met, a few of which are discussed below. Landlords must now provide itemized supporting documentation (specifically described in SB 1103), attested to by the landlord, and must limit operating costs passed through to the qualified commercial tenant to those costs that are incurred for the “operation, maintenance and repair” of the property.

Qualifying operating costs must be allocated proportionately per tenant by square footage or another method substantiated through supporting documentation and provided to the tenant. Landlords are also prohibited from altering the method or formula used to allocate operating costs in a way that increases costs during the tenancy of the qualified commercial tenant, unless the landlord has provided the tenant with prior written notice of the change in method or formula with supporting documentation for the basis of the alteration.

Among the various provisions of SB 1103, the provision addressing operating expenses has the most teeth. The remedies available to the qualified commercial tenant include the following: (a) landlord’s liability to the tenant in a civil action for all of the following: actual damages, potentially attorneys’ fees, punitive damages and treble damages when the landlord has acted willfully or with oppression, fraud, or malice, (b) in an action for unlawful detainer or action to recover possession from the qualified commercial tenant based on the tenant’s failure to pay a fee to recover building operating costs, landlord’s violation of the requirements is an affirmative defense for the tenant, and (c) the district attorney, city attorney, or county counsel for the property’s jurisdiction may seek injunctive relief against the landlord in the name of the city or county. These operating expense protections to the qualified commercial tenant are not waivable.

1.  Translation of leases. If a landlord negotiates a lease agreement primarily in one of the five languages – Spanish, Tagalog, Chinese, Vietnamese, and Korean – either orally or in writing, that landlord must provide to the other party and to any other person who will be signing the agreement, a true and correct written translation of the lease agreement in the language of the negotiations before execution of the agreement. The translation requirement is unwaivable, and applies even if the tenant uses a translator during the negotiations. If the landlord fails to comply with this requirement, a qualified commercial tenant (and only a qualified commercial tenant) may rescind the agreement. Unlike other provisions of SB 1103, this provision does not appear to be impacted by the length of the lease term.

2.  Rent increases and other modifications of short-term leases. For tenancies less than one month or month-to-month or shorter (e.g., week-to-week), a commercial real property landlord must now provide advance written notice for any rent increase. The time periods for the required notice depend upon the amount of the rent increase and can be as long as 90 days before the effective date of the increase. A rent increase is not effective until the end of the notice period. Violations of this requirement do not entitle a qualified commercial tenant to civil penalties.

All other non-rent modifications to a lease that are week-to-week, month-to- month or any other period less than a month, also require notice from the landlord. If the lease term is less than a month, the change will be effective after a period of at least as long as the lease term itself. For lease terms of month-to-month, the change will be effective not less than 30 days after the notice, however, the parties can agree in writing that a notice of changed terms can be given not less than seven days before the expiration of the term and effective upon the expiration of the term.

3. Termination notices. Unless one of the parties gives written notice of intent to terminate the lease, under certain conditions the newly enacted law extends to a holdover qualified commercial tenant (after the landlord accepts rent during such holdover), a deemed renewal of the lease on the same terms and lease length not to exceed one year. The length of the renewal is limited by the length of the original term. A landlord must give a qualified commercial tenant who has occupied the property for less than one year at least 30 days prior notice of the proposed termination date. If a qualified commercial tenant has occupied the property for one year or more, the landlord must give the qualified commercial tenant a 60-day written notice of termination.

It is important to note that this specially created class of commercial tenant can create unique issues for landlords that they may not have addressed in the past. A few examples are as follows:

• With respect to all of the provisions of SB 1103, qualified commercial tenant issues do not arise unless and until the landlord has received from the tenant a written notice of the tenant’s qualifications, and a self-attestation regarding the number of the tenant’s employees within the time frames provided by the SB 1103. There is no express requirement in the legislation requiring the landlord to make an inquiry of the tenant.
• Regarding building operating costs, the legislation does not provide examples of the other acceptable methods (beyond allocation by square footage) to proportionately allocate the building operating costs to the tenants.
• The statute does not distinguish between triple net leases, gross leases, or other forms of lease. Therefore, it is not clear whether rent paid by a tenant under a gross lease, which inherently would provide for rent at levels that are intended to cover the landlord’s building operating costs, would constitute a “fee” that triggers the proportionate allocation of building operating costs among the tenants.
• The statute fails to address situations in which a tenant speaks in one of the five languages specified in the legislation during the negotiations and does not satisfy the notice and self-attestation requirements to be considered a qualified commercial tenant. Presumably, the failure to satisfy the criteria for a qualified commercial tenant alleviates the need for the landlord’s delivery of a translation of the lease. When negotiations are conducted in one of the five languages, the landlord might consider providing a translation of the lease in the language of the negotiations, even if the tenant is not a qualified commercial tenant. As currently written, however, a non-qualified commercial tenant is not entitled to that translation.
• The legislation does not permit a landlord to rely upon the use of interpreters for negotiations with qualified commercial tenants to satisfy the translation requirements of SB 1103. Landlords who anticipate the regular need for translation services for their leases may wish to create a relationship with a translation service company to achieve some discounts for repeat business.
• Some of the provisions of the legislation only apply to short-term leases, e.g., weekly, short-term term less than one month, or month-to-month. For those provisions, a lease term of more than a month may help to avoid the application of those provisions.
• The application of some of the provisions of the legislation can be limited by providing the qualified commercial tenant with supporting documentation within the time periods of the legislation. A landlord should be prepared to provide supporting documentation in those circumstances to avoid delays when the landlords attempt to take timely action.

Owners that are leasing, or planning to lease, commercial space to qualified commercial tenants are encouraged to carefully review SB 1103, consider its impact to their operations and take into account the documentation and practices that need to be implemented to achieve compliance with the new law. However, there are a number of ambiguities in the legislation – clarity is only likely to result from further legislation or court cases that fill those voids. Until then, landlords should proceed cautiously.

Steven Otto is a partner, and Dorothy Groza is senior counsel with CGS3. The article is published in The Daily Journal and The Daily Transcript.