California's legislative landscape is changing, and with the new year comes a significant shift for commercial landlords. Governor Gavin Newsom recently signed SB 1103 (2024), known as the Commercial Tenant Protection Act, into law. The Act, effective January 1, 2025, introduces new protections for a class of small business tenants, requiring landlords to adapt their leasing and accounting practices to meet these updated standards.
Who Qualifies? Defining the "Qualified Commercial Tenant"
SB 1103 extends protections to small but vital segments of California's business community: "qualified commercial tenants." Qualified commercial tenants include microenterprises (businesses with five or fewer employees that face limited access to financing), restaurants with fewer than 10 employees, and nonprofits with fewer than 20 employees. To receive the protections under SB 1103, these qualified commercial tenants must formally notify the landlord of their qualified status and submit an employee count certification prior to lease execution and annually thereafter.
Key Provisions Effective January 2025
To adapt to the shifts that SB 1103 brings, landlords will need to incorporate the following critical changes into their leasing and accounting practices:
1. Restrictions on Operating Expenses Passed to Qualified Commercial Tenants
SB 1103 places strict limits on operating expenses that can be passed through to qualified commercial tenants (1) for leases signed or renewed on or after January 1, 2025, (2) for leases with less than a month of term irrespective of when they were signed, (3) for month-to-month leases irrespective of when they were signed, and (4) for leases signed before January 1, 2025 that do not contain a provision regarding the reimbursement of building operating costs. In such cases, landlords must provide detailed, itemized documentation to support any operational expenses they intend to pass through to qualified commercial tenants and must notify tenants that they have the right to "inspect any supporting documentation of building operating costs" upon 30 days' prior written notice. All supporting documentation must include an attestation by the landlord that is signed and dated and that certifies that the costs are true and correct.
To comply with these requirements as they apply to affected, existing leases (i.e., leases with less than a month of term irrespective of when they were signed, month-to-month leases irrespective of when they were signed, and leases signed before January 1, 2025 that do not contain a provision regarding the reimbursement of building operating costs), landlords should send qualified commercial tenants notices that meet the requirements of SB 1103 and that detail the operating expenses they intend to pass through in 2025 before or promptly after the new year, and this process should be completed every year thereafter
Charges can cover common area maintenance, shared utilities, and taxes but exclude costs paid by the tenant directly to a third party (e.g., separately metered utilities) and costs for which a third party reimburses landlord (e.g., insurance proceeds and amounts reimbursed by other tenants). Operating costs must be proportionally allocated based on floor area or another method supported by specific documentation. Additionally, landlords cannot alter the method of operating cost allocation without notifying the qualified commercial tenant and substantiating the change.
SB 1103 also gives qualified commercial tenants recourse if landlords overcharge or misrepresent operating costs. Qualified commercial tenants may seek actual damages for operating costs charged in violation of SB 1103 – and in cases where landlords acted intentionally or fraudulently, courts can award an amount equal to three times the actual damages, plus punitive damages. Qualified commercial tenants may also recover their attorneys' fees even if the lease does not have a prevailing party attorneys' fee provision.
2. Requirement to Translate Leases When Negotiating in Specific Languages
SB 1103 also acknowledges California's multilingual business environment. If a landlord negotiates a lease with a qualified commercial tenant or any residential tenant (but in the case of residential tenants, excluding month-to-month tenants) primarily in Spanish, Tagalog, Chinese, Vietnamese, or Korean, a written translation of the lease must be provided to the tenant before signing, even if the tenant uses a translator. Leases must include notices that the tenant is entitled a translation of the lease in Spanish, Tagalog, Chinese, Vietnamese or Korean at the time of lease execution. This translation requirement cannot be waived, and if landlords fail to meet it, tenants may have grounds to rescind the lease. If there is any conflict between the English lease and lease in the other language, the English lease shall apply, but the other lease may be introduced as evidence to determine the parties' intent relative to the lease terms. These translation requirements only apply to leases signed after January 1, 2025.
3. Notices for Rent Increases in Short-Term Leases
For leases shorter than a month or on a month-to-month basis, SB 1103 mandates that landlords provide advance written notice before rent increases or other changes to a lease. Depending on the amount of the rent increase, prior notice requirements may stretch up to 90 days. For example, if the proposed rent increase is 10 percent or less of the rental amount charged to that tenant at any time during the 12 months before the effective date of the increase, 30 days' prior notice is required. If the rent increase exceeds 10 percent, then 90 days' prior notice is required, subject to certain exceptions. All such notices must include references to Civil Code Sec. 827 (which is amended by SB 1103). These waiting periods prevent surprise increases and ensure that qualified commercial tenants have time to plan for rent adjustments. Other non-rent modifications to these leases also require timely notice. These notice requirements apply to all commercial leases, even those signed prior to January 1, 2025.
4. Termination Notice and Automatic Lease Renewal
Under SB 1103, if a landlord accepts rent payments from a qualified commercial tenant holding over in a premises after the initial lease term expires, the lease is automatically renewed for up to a year unless a party provides written notice of termination. The length of the automatic renewal cannot exceed the original term, and qualified commercial tenants must receive termination notices with specific timelines: 30 days for tenants with under a year of occupancy, and 60 days for those who have been in the premises longer. Any such notice must include prescribed statutory language in Civil Code Section 1946.1(h).
Preparing for SB 1103 Compliance
SB 1103 introduces a layer of protection for qualified commercial tenants while adding operational demands for landlords. Notably, these protections activate only once tenants formally declare their qualified commercial tenant status and verify their employee count. Landlords should be proactive in updating their lease terms, notice protocols, and accounting practices to align with the new requirements.
Harvest LLP can help landlords adapt to this evolving legal landscape. If you have questions about SB 1103 or need guidance on other real estate matters, please contact us.