Senate Bill 1103 went into effect on January 1, 2025. This new law establishes protections for “qualified commercial tenants” (QCT). A “qualified commercial tenant” is defined as a tenant of a commercial property that is any of the following: (i) a “microenterprise”, (ii) a restaurant with fewer than 10 employees, or (iii) a nonprofit organization with fewer than 20 employees. The California Business and Professions Code Section 18000 defines a “microenterprise” as a sole proprietorship, partnership, limited liability company, or corporation that (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.
It is important to note that a qualified commercial tenant doesn’t automatically get these protections. The tenant must notify the landlord in writing prior to executing the lease, and each year thereafter, that the tenant is a “qualified commercial tenant” in order to be subject to the protections of this law. This notice to the landlord must also include a self-attestation statement as to the number of employees the tenant has in their company.
Rent Increase Notice: (Civil Code 827)
If a landlord is notified in writing that a tenant is a QCT, then the landlord must give the QCT notice before the effective date of a rent increase stated in the lease, or the date of any rent increase for a shorter lease term (ie month-to-month, week-to-week, or term of less than 1 month), either by personal delivery or service by mail pursuant to CCP 1013. If the rent increase is 10% or less of the amount charged for the last 12 months, the notice shall be given 30 days before the effective date of the increase. If the rent increase is greater than 10% of the amount charged for the last 12 months, the notice shall be given 90 days before the effective date of the increase. The notice must include information related to the provisions of Civil Code 827. Any rent increase will not be effective until the notice period has expired, so it will be imperative that landlords calendar the dates for annual rent increases to give the tenant the proper notice required.
Building Operating Expenses: (Civil Code 1950.9)
SB 1103 also modifies the ability of a landlord to recover building operating costs from a QCT. Building operating costs are costs 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. Where (1) the lease is executed (or tenancy commenced or renewed) on or after January 1, 2025; (2) the tenancy is from week-to-week, month-to-month, or other period less than a month; or (3) the lease is executed (or tenancy commenced) before January 1, 2025 but does not contain a provision regarding building operating costs, a landlord shall not charge a fee to recover “building operating costs” unless certain requirements are satisfied (ie providing supporting documentation to the QCT related to building operating costs). “Supporting documentation” as used in Section 1950.9 means 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 (1) a tabulation showing how the costs are allocated among tenants (i.e., proportionately by square footage or another method substantiated through supporting documentation) and (2) a signed and dated attestation by the landlord that the documentation and costs are true and correct.
The QCT’s share of building operating costs must be allocated proportionately based on square footage of their leased premises in comparison to the square footage of the building or center. Landlords cannot alter the method or formula used to allocate building operating costs to the QCT in a way that increases the QCT’s share of such costs, unless the QCT is provided with written notice of the change in the method or formula and supporting documentation.
This new law also sets an 18 month cap on the time period in which a landlord can recover building operating costs. Landlords cannot charge a QCT for any building operating costs that were not incurred during the previous 18 months, or reasonably expected to be incurred within the next 12 months based on reasonable estimates. Prior to lease execution with a QCT, the landlord must provide the QCT with written notice advising that they can inspect landlord’s supporting documentation concerning building operating costs within 30 days of such request. It is recommended that the landlord include this notice as part of any new lease agreement with a QCT entered into January 1, 2025 or after.
A landlord cannot recover any building operating costs that are paid by tenant directly to a third party, or for which a tenant, third party, or insurance carrier has already reimbursed the landlord. The provisions of Section 1950.9 cannot be waived by the tenant, and a violation by the landlord of these provisions can be an affirmative defense raised by the tenant, as well as a claim for damages.
Translation of a Commercial Lease:
SB 1103 requires that a person who negotiates a lease of a commercial space primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean, orally or in writing, on or after January 1, 2025, must provide a translation of the contract in the language used primarily for negotiations.
Termination of Commercial Leases for Unspecified Term:
Any commercial lease entered into with a QCT for a term not specified by the parties (ie month to month with no fixed term) is deemed to be renewed at the end of the term unless one of the parties gives written notice to the other of the intent to terminate the tenancy. A landlord must give the tenant at least 60 days prior written notice of the landlord’s intent to terminate the lease. A tenant giving notice pursuant to this section shall give notice for a period at least as long as the term of the periodic tenancy prior to the proposed date of termination.
If the Tenant notifies the Landlord that it is a QCT, then the Landlord will need to follow the rules and notice requirements of SB 1103 and ensure the lease contains the required language. If a Tenant meets the definition of a QCT then the Tenant should notify the Landlord prior to lease execution in order to benefit from the new protections under SB 1103.
You can read the full text of SB 1103 click here.
This article is for informational purposes only and is not legal advice. For questions concerning this article please contact our office.