Commercial Property Owners, Brokers and Property Managers Beware: California’s Commercial Tenant Protection Act Goes Into Effect January 1st!
Published: December 19, 2024
California law has long treated commercial and residential tenancies differently. Consumer protection-focused regulations enacted to protect residential tenants were legally considered inapplicable to business tenants which were considered to have a higher level of sophistication. This is all about to change in California. As we prepare to usher in 2025, commercial property owners, brokers and property managers must familiarize themselves with new California legislation which significantly changes laws pertaining to small businesses leasing commercial property.
Effective January 1, 2025, California’s Commercial Tenant Protection Act (Senate Bill 1103) (the “Act”) will provide small business commercial tenants with some of the same legal protections currently afforded to residential tenants. In particular, the Act imposes protections pertaining to (1) limitations on operating costs or common area maintenance charges, (2) translation of leases and amendments into languages other than English, (3) increasing the duration of notice required prior to rent increases, and (4) increasing the duration of notice required prior to the termination of tenancies.
Application Only to Qualified Commercial Tenants Providing Notice of Qualification
As an initial matter, the Act does not completely synchronize commercial and residential tenancies. Rather, the Act applies only to “Qualified Commercial Tenants” (“QCT”), which are defined as:
- microenterprises comprised of a sole proprietorship, partnership, limited liability company or corporation that has five or fewer employees, including the owner, who may be full or part-time and generally lack sufficient access to loans, equity or other financial capital;
- restaurants with fewer than ten (10) employees; and
- nonprofit organizations with fewer than twenty (20) employees.
The Act does not specify whether the employees of restaurants or nonprofit organizations need to be full time or part-time. California law does not provide a definition of a restaurant, leaving questions as to whether businesses such as a coffee shops or ice cream shops, for example, are restaurants.
QCTs must provide notice to property owners through a self-attestation notice that they are a QCT in order to receive the protections of the Act. It is important to note that if a property owner suspects that a tenant is a QCT but the tenant has not provided a self-attestation of its status, the Act will not apply until and unless a self-attestation is provided.
Restrictions on Recovery of Operating Costs
Under the Act, Landlords cannot charge a QCT for recovery of “building operating costs” unless all of the following apply: (1) the operating costs are allocated proportionately per tenant as substantiated through supporting documentation provided to the tenant; (2) the operating costs were incurred in the previous 18 months or are reasonably expected to be incurred within the next 12 months; (3) before signing the lease, the landlord provides the prospective tenant written notice stating that the tenant may inspect any supporting documentation of operating costs upon written request; (4) within thirty days of such a request, the landlord must provide supporting documentation of previously incurred or reasonably expected operating costs; (5) the costs do not include expenses paid by a tenant directly to a third party; and (6) the costs do not include expenses for which a third-party, tenant or insurance reimbursed the landlord. “[B]uilding operating costs” are defined within the statute as, “costs that are incurred on behalf of a tenant for the operation, maintenance, 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 charge to the landlord pursuant to property ownership.”
Landlords cannot collect operating costs from any QCT until it has provided supporting documentation of the costs. Supporting documentation is defined by the statute as, “a dated and itemized quote, contract, receipt, or invoice from a licensed contractor or provider of services,” together with at least a tabulation showing how the costs are allocated among tenants and a signed and dated attestation by the landlord that the documentation and costs are true and correct.
The restriction on operating costs applies to (1) leases executed or renewed on or after January 1, 2025, (2) leases commenced before January 1, 2025 that do not contain a provision regarding building operating costs, and (3) month-to-month or shorter tenancies. During the course of a tenancy, landlords leasing property to QCTs cannot change the method or formula used to allocate operating costs unless the tenant is provided with written notice and supporting documentation.
There are significant consequences for violations of the operating costs component of the Act. Not only can a violation be considered an affirmative defense to an unlawful detainer action, but landlords can be liable to a QCT for actual damages, attorneys’ fees and costs. If the landlord or their agent acted willfully, treble damages (generally, triple the amount of damages) and punitive damages can be awarded. District attorneys and city or county counsel can seek injunctive relief against landlords for violation of the Act.
Waivers of this component of the Act are expressly void as a matter of public policy.
Translation of Leases and Lease Amendments
If a lease or other lease agreement (including subleases, amendments, etc.) is negotiated primarily in Spanish, Chinese, Tagalog, Vietnamese or Korean, orally or in writing, commercial property owners are now required to provide QCTs and any person who will be signing the lease documents a translated copy of lease documents before the document is signed. The English version of the document must contain a statement in a conspicuous place in the applicable non-English language that the property owner is required to provide a translation. The translation must contain every term and condition in the document other than names and titles of individuals, addresses, brand or trade names, numerals (or dollar amounts expressed in numerals) or words or expressions which have no generally accepted non-English translation. The translation requirement applies even if the tenant utilized a translator in negotiating the agreement.
If a translation is not provided to a QCT who provided a self-attestation of qualification, the tenant can rescind the agreement at any time. Under California law, if a contract is rescinded, the rescinding party may bring an action to recover the consideration paid to the landlord pursuant to the agreement along with other possible damages.
Notice Requirements for Rent Increases
Under current law, landlords need to provide tenants with thirty days’ written notice in advance of imposing a rent increase on a month-to-month tenant. Under the Act, at least thirty days’ advance written notice is required for rent increases that are ten percent (10%) or less of the prior rental amount and at least ninety days’ advance written notice is required for rent increases which are greater than ten percent (10%) of the prior rental amount. Notice is not required regarding rent increases that are specifically identified within leases.
Additional Notice Time for Notices of Termination of Month-to-Month Tenancies
Under current law, landlords need only provide tenants with thirty days’ written notice that a month-to-month lease will be terminated. Under the Act, landlords must now provide tenants with written notice at least sixty days prior to the proposed termination of the lease where the tenancy has lasted more than a year. If the duration of the QCT’s tenancy has been less than a year, only thirty days’ advance written notice is to be provided.
Conclusion
Our firm has been tracking the Act since its inception. In fact, as a board member of BOMA California, the author was involved in lobbying efforts in conjunction with the California Business Properties Association pertaining to the Act which helped drastically reduce impact of the bill compared to its original version. While the Act’s application may not be as devastating as originally contemplated, commercial property owners, brokers and property managers are encouraged to fully understand how the Act applies and may affect their businesses. Our firm remains available to address any questions or new strategies pertaining to this new and unique set of laws.