Notice to Owners of Commercial Property in California

New legislation affects commercial landlords

The California Legislature has passed a new law, effective January 1, 2025, that impacts landlords of small tenants, known as Qualified Commercial Tenants.

SB 1103: New California Laws Impacts Certain Commercial Leases with “Qualified Commercial Tenants”

Senate Bill No. 1103 (“SB 1103”), which goes into effect on January 1, 2025, establishes some new protections for “qualified commercial tenants,” a newly defined class of commercial property tenants. For commercial landlords, understanding whether SB 1103 will impact their properties begins with analyzing whether they are entering into a lease with a “qualified commercial tenant.”

What is a Qualified Commercial Tenant?

A “qualified commercial tenant” generally means a tenant of commercial real property that:

(a) is a “microenterprise,” a restaurant with fewer than 10 employees or a private, nonprofit organization with fewer than 20 employees, and

(b) has provided the landlord a written notice that the tenant is a qualified commercial tenant and a “self-attestation” regarding its number of employees.

A “microenterprise” is defined under the Business and Professions Code as a sole proprietorship, partnership, limited liability company, or corporation with five or fewer part-time or full-time employees (including the owner) that generally lacks sufficient access to loans, equity, or other financial capital. Nonprofits must be qualified organizations under IRS code section 501(c)(3). The timing and frequency of the “self-attestation” notice that the tenant needs to provide (ranging from at lease execution to within the previous 12 months or annually during the term) depends on the duration of the tenancy.

Notice Requirement for Certain Lease Terminations

Existing law provides that if a lease is for an unspecified term or the tenant remains in possession after the expiration of the lease term and the landlord accepts rent from the tenant, the lease term is generally deemed extended on a “month-to-month” basis. The new law requires landlords desiring to terminate such a lease with a qualified commercial tenant to give notice at least 60 days before the proposed termination date if the qualified commercial tenant occupied the property for more than one year. Landlords can still give 30 days’ notice if the qualified commercial tenant occupied the property for less than one year.

Notice Requirement for Rent Increases

SB 1103 imposes new notice requirements for increasing rent when the lease term is week-to-week, month-to-month, or any period less than a month. Commercial landlords leasing to Qualified Commercial Tenants must give at least 30 days’ notice before the effective date of the increase if the rent is increased by 10% or less and 90 days’ notice if the rent increase is greater than 10%.

Restrictions on Operating Cost Pass-Throughs

SB 1103 establishes strict rules for landlords charging building operating costs (defined as costs for the operation, maintenance, or repair of commercial real property) to qualified commercial tenants. These costs are passed through to tenants of commercial properties in triple-net leases.

Now, to recover these costs from a qualified commercial tenant, the landlord must comply with Civil Code Section 1950.9(a)(1)-(6), which imposes limitations on when the expense must have been incurred and how such expense is proportionately allocated between the tenants of the commercial property. In particular, the new law provides that landlords can only recover building operating costs incurred within the past 18 months or are reasonably expected to be incurred within the next 12 months, based on reasonable estimates. Most landlord-oriented leases do not contain the foregoing restriction. Additionally, before executing the lease, the landlord must have provided the prospective qualified commercial tenant with a paper or electronic notice stating that the tenant may inspect any supporting documentation of building operating costs upon written request. If the tenant requests such supporting documentation, the landlord must provide it within 30 days of the tenant’s request.

There are significant penalties for violations of this provision. A violating landlord will be liable for actual damages and reasonable attorneys’ fees and costs. However, if the qualified commercial tenant can show that the landlord or its agent acted willfully or with oppression, fraud, or malice, the landlord will be liable for three times the actual damages and punitive damages.

This section applies to leases executed, or tenancies commenced or renewed on or after January 1, 2025, and leases executed or tenancies commenced before January 1, 2025, but only if those pre-January 1, 2025 leases do not contain “a provision” regarding building operating costs. The statute is unclear about how much detail regarding

building operating costs must be included in “a provision” of a lease to avoid retroactive application of the statute. Another issue with the retroactive application of this section is that if a signed lease does not contain a provision regarding building operating costs, then, to recover building operating expenses, the statute requires (among other things) that the landlord provide the notice regarding the tenant’s right to inspect supporting documentation before signing the lease. Since the statute would retroactively apply to a lease already signed, it will be impossible for a landlord to comply with this obligation. The statute provides no mechanism for a landlord to “cure” this issue.

Translation Requirements

If a landlord primarily communicates or negotiates with a tenant in Spanish, Chinese, Tagalog, Vietnamese, or Korean, it is required to give a translation of every term and condition in the written contract or agreement in the language in which the contract or agreement was negotiated. This requirement applies to leases, subleases, rental contracts or agreements, or other term of tenancy contracts or agreements covering a nonresidential-zoned commercial space entered into between a landlord and a qualified commercial tenant on or after January 1, 2025. The statute gives these tenants the right to rescind the lease if the landlord did not comply with these provisions.

Ultimately, SB 1103 imposes substantial administrative and financial burdens on impacted commercial landlords. Westside Realty Advisors are available to discuss the new laws' application and specific requirements with commercial landlords concerned that their properties or leases may be subject to SB 1103 and to help update their leasing practices to ensure compliance.

Restrictions on Cost Allocation Adjustments:

The bill prohibits landlords from altering the method or formula used to allocate building operating costs to increase the tenant’s share of those costs during the tenancy. This restriction significantly impacts a property owner's ability to manage unforeseen expenses. Here are some critical costs property owners would not be able to recoup due to this prohibition:

Emergency Repairs: The costs of emergency repairs due to unforeseen incidents like electrical failures, structural damage, HVAC breakdowns, and damages caused by extreme weather.

· Insurance Premium Increases: Insurance premiums increase due to changes in risk assessment or after a claim (e.g., a natural disaster or accident).

· Property Tax Increases: Unexpected increases in property taxes due to reassessment or changes in tax laws.

· Major Capital Improvements: The property needs necessary major capital improvements or upgrades, such as roof replacement, significant plumbing upgrades, or elevator repairs.

· Compliance with New Regulations: Costs incurred to comply with new safety, environmental, or accessibility regulations (such as ADA compliance upgrades, asbestos removal, and decarbonization efforts).

· Inflation Adjustments: General inflation-related increases in operating costs (e.g., utilities, maintenance services) that outpace the expected or documented amounts.

· Unforeseen Security Enhancements: Enhancements to security measures in response to increased crime rates or specific threats.

Legal Risks and Uncertainty:

· Rescission Rights: Allowing tenants to rescind leases anytime for non-compliance with translation requirements introduces significant legal uncertainties. Tenants could exploit minor translation errors to terminate leases, causing financial losses and disrupted tenancies. The provision lacks a time limit for rescission, leading to prolonged uncertainty for landlords.

· Affirmative Defense in Eviction: The bill allows tenants to use a landlord’s non-compliance with documentation requirements as an affirmative defense in eviction or possession actions. This introduces substantial legal risks, including potential financial penalties and attorney’s fees, which could lead to increased legal disputes and costs.

Increased Administrative Burden and Compliance Costs:

· Detailed Documentation Requirements: The bill requires landlords to provide detailed, itemized, and dated documentation of building operating costs within 30 days of a tenant's written request. This requirement is administratively burdensome and costly, especially for small property owners who may lack the resources to maintain extensive records.

· Translation Requirements: The translation requirements for commercial leases negotiated in non-English languages impose substantial costs, as accurate translations of technical legal documents can start at around $10,000. Translation errors could lead to legal disputes, further complicating compliance.

These top issues illustrate the significant financial, administrative, and legal burdens that SB 1103 would impose on landlords, particularly small property owners. This would potentially harm the commercial real estate market and the small businesses the bill aims to protect.

If you are a landlord with Qualified Commercial Tenants and want to know how to comply with SB 1103, call us. We will be glad to assist you.

Gary Aminoff
Principal

Westside Realty Advisors
KW Commercial
439 N. Cañon Drive, Penthouse
Beverly Hills, CA 90210
gary@wra-cre.com
(310) 387-6900