CRE Update: Pending Legislation Could Cause Significant Disruption to Commercial Real Estate Sector
Published: August 20, 2024
It is rare for the commercial real estate industry to be the target of legislative reform. Even for a progressive state like California, real estate-focused initiatives tend to focus on promoting housing policies, residential tenant rights, and environmental protections. This year, however, there are three pending bills which could significantly disrupt the commercial real estate sector, potentially causing substantial increase in operating costs that will either undermine already-thin margins for landlords and owners or place more stress on tenants through passed through expenses. The three bills, each of which has passed its house of origin (either the Assembly or Senate), are summarized below. We encourage all of our clients to contact their state legislators to provide feedback regarding the dangers of these initiatives, which we will continue to monitor through the remainder of the legislative session.
Senate Bill 1103 – Leasing Protections for “Small Business” Tenants
If passed, Senate Bill 1103 will extend residential tenant protections to commercial leases, a wall of demarcation that is generally not crossed in California law. The bill has four components:
- Landlords must provide at least 90 days’ advance written notice to the tenant before raising rents by more than 10%.
- For tenants who speak Spanish, Chinese, Tagalog, Vietnamese or Korean, lease documents must be translated into those languages, and a translation must be provided prior to the tenant entering into a lease, even if the lease is negotiated through a translator. If a translation is not provided, the tenant can unilaterally rescind the lease.
- 60 days’ notice will now be required to terminate a month-to-month commercial tenancy if the tenant has occupied the premises for more than a year (previously, only 30 days’ notice required to terminate these leases, which were by nature for a month period).
- Absent express language in a lease providing for the passing through operating expenses to the tenant, operating expenses cannot be charged unless the charges (a) are proportionately allocated and (b) were incurred in the past eighteen months or will be incurred in the following twelve months. A violation of this last term can be used both as a defense in an eviction lawsuit, and as a counterattack—a landlord who fails to comply can be liable to the tenant for damages, treble damages, punitive damages and attorneys’ fees and costs.
SB 1103 applies only to Qualified Commercial Tenants: businesses with five or fewer employees, restaurants with ten or fewer employees and non-profit organizations with fewer than twenty employees.
Each of these changes significantly changes existing law, and provides new weapons for tenants to avoid market terms in their leases. Though aimed at perhaps reasonable goals, these terms could easily be abused by an opportunistic tenant seeking to avoid their leasehold obligations and/or the payment of market rents.
Notably, as a result of advocacy efforts by BOMA California and the California Business Properties Association, this bill has already been significantly tempered from its initial form. These groups continue to actively advocate against SB 1103. For the moment, however, Senate Bill 1103 has been passed by the Senate and can be called for a vote at any time by the Assembly. There is a possibility that the language of SB 1103 will be modified again prior to its final vote, but it is highly anticipated that it will ultimately be passed in some form and will take effect in January 2025.
Assembly Bill 2364 – Establishing Janitorial Standards
AB 2364 would require the Division of Labor Standards Enforcement to establish an advisory committee for the purpose of creating standards to protect the health and safety of janitorial workers. The advisory board would be charged with developing regulations which dictate the cleaning standards to which janitors are held, the types of facilities janitors may clean, the tools and equipment janitors must use, the level of training janitors must be provided, the maximum square footage of areas janitors may clean and the combination of tasks which janitors can be assigned during work shifts. If AB 2364 passes, it is projected that it will significantly increase the cost of janitorial services for commercial properties, as an industry which has largely proceeded unregulated must now conform to these new standards.
As of today, AB 2364 has passed the Senate Appropriations Committee, which has recommended that that Senate vote to pass the bill before the end of the legislative session on August 31.
Assembly Bill 2374 – Modification of the Displaced Janitor Opportunity Act
On August 15, 2024, AB 2374 was held under submission by the Senate Appropriations Committee such that it will not proceed further in this legislative session.
Had AB 2374 proceeded out of the Senate Appropriations Committee, the bill would have revised the Displaced Janitor Opportunity Act to apply to contractors and subcontractors employing just one or more janitors (removing the current twenty-five employee minimum), would have increased the required employee retention period from 60 to 90 days, and would have required that the successor contractor maintain the same number of hours and pay the same wages and benefits as were provided by the prior contractor. It would have also required employees retained for the ninety-day period to be offered continued employment if their performance during that period was satisfactory. In addition, the AB 2374 would have required any company employing a janitorial contractor or subcontractor to notify the union representing the contractor or subcontractor’s employees within five days of making the decision to terminate the janitorial service contract.
If AB 2374 had made it out the Senate Appropriations Committee and passed the Senate Floor this year, the impact to commercial property owners would have been felt immediately: if a new janitorial or building maintenance services contractor could perform services with fewer employees, AB 2374 would have required the property owner to retain and continue to pay extra personnel, thereby increasing costs. In addition, new contractors would have been required to provide notifications to a union representing another entity’s employees.