Commercial Landlords Are Spooked by New California Law

Starting January 1, 2025, commercial landlords leasing to certain small tenants will be subject to a host of new requirements and obligations including, notice requirements for rent increases, restrictions on operating expense pass throughs, and additional termination notice requirements.

Senate Bill 1103, signed into law in late September, requires commercial landlords to follow these new restrictions when leasing to small businesses that meet the criteria of “qualified commercial tenants” (“QCTs”). QCTs are defined as tenants that are either (i) “microenterprises,” (ii) restaurants with 10 or fewer employees, or (iii) 501(c)(3) nonprofit organizations with less than 20 employees. Microenterprises are defined by the California Business and Professions Code to mean “a sole proprietorship, partnership, limited liability company, or corporation that meets both of the following requirements: (1) Has five or fewer employees, including the owner, who may be part-time or full-time [and] (2) Generally lacks sufficient access to loans, equity, or other financial capital.”  In order for the new restrictions to apply, the QCT must deliver notice to the landlord of its QCT status (including a self-attestation regarding the number of employees) on or prior to lease execution and annually thereafter. If the tenancy is month-to-month or for a shorter period, then the new restrictions will apply so long as the QCT notifies the landlord of its status within 12 months before the landlord issues one of the notices covered by the statute. Except for the new operating expense restrictions listed below, the law appears to apply only to new leases entered into after January 1^st and to tenancies that are month-to-month or a shorter term.

Generally, commercial landlords leasing to QCTs must:

• Provide 90 days advance notice for all rent increases that exceed 10% of the rent previously due or that would exceed 10% when aggregated with any other rent increases in the prior 12-month period. Rent increases of 10% or less require 30 days advance notice. The notice must also inform the QCT of this new statutory requirement.
• Provide 60 days advance notice prior to terminating any month-to-month tenancy if the QCT has occupied the premises for more than 12 months (the QCT, however, still has the right to terminate a month-to-month lease on 30 days notice).
• Provide language prescribed by the statute advising the QCT of its rights to reclaim abandoned property together with any termination notice.
• Abide by new rules on pass throughs of operating expenses and taxes (other than Business Improvement District assessments) for QCTs under (A) leases entered into on or after January 1^st and tenancies commencing or renewed on or after January 1^st,  (B) any month-to-month tenancy or tenancies for shorter terms, and (C) existing leases entered into prior to January 1^st (regardless of the length of term) that do not contain provisions regarding pass throughs of operating expenses. There are several new requirements including that: (1) the costs must be allocated proportionately by square footage, or another method as substantiated through supporting documentation provided by the landlord to the QCT; (2) the costs must have been incurred within the previous 18 month period, or if the lease allows the landlord to bill such costs in advance then the costs must be expected to be incurred within the next 12 month period and be based on reasonable estimates; (3) the costs may not include expenses paid by other tenants of the property directly to a third party; (4) the costs may not include expenses for which landlord receives reimbursement from insurance, a third party or any other tenant; (5) the landlord may not charge such costs until supporting documentation is provided to the QCT; and (6) the method used to determine the QCT’s proportionate share of such costs may not be changed so as to increase the QCT’s share unless the QCT is provided with prior written notice of the change with supporting documentation. For new leases, the landlord must provide the QCT with notice prior to lease execution stating that the QCT may inspect supporting documentation of operating expenses upon written request. The landlord must provide supporting documentation within 30 days of written request.

Failure to comply with the requirements above can result in QCTs having an affirmative defense in eviction actions, as well as liability to QCTs for actual damages, potential reimbursement of the QCT’s attorney fees and costs (if approved by the court), and, in cases where the landlord is shown to have acted willfully, with oppression, fraud or malice, treble damages and punitive damages. District and city attorneys are also empowered to seek injunctions against landlords who violate these requirements.

In addition, commencing January 1, 2025, if the landlord negotiated with the tenant primarily in Spanish, Tagalog, Chinese, Vietnamese or Korean, then the landlord must provide a translation of the lease to the tenant in that language and provide information to the tenant of this new statutory requirement. If landlords fail to meet this requirement, then a QCT will have an ongoing right of recission.

The consensus of many California commercial landlords and property associations is that this law will hurt small tenants more than it helps them as commercial landlords will prefer to avoid the new risks and heightened burdens of leasing to these small tenants. A letter opposing this bill and signed by dozens of organizations, including the California Business Properties Association, the California Chamber of Commerce and the International Council of Shopping Centers predicts, “The ripple effects of SB 1103 will lead to increased costs for tenants, reduced commercial space availability, and ultimately harm the very businesses and nonprofits it purports to support.”  Time will tell if this new law will turn out to be all tricks and no treats for smaller tenants.