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By Austin B. Quinn
December 4, 2024
Starting January 1, 2025, commercial landlords in California will need to accommodate additional tenant protections for certain small businesses and nonprofits. These changes stem from the recently passed SB 1103, which created new rules for rent increases, recovery of building operating costs, and lease termination procedures. In some instances, the new law also creates translation obligations for landlords. Keep an eye out for any ramifications to your business—either as a landlord or a tenant—due to these updates.
The new rules apply to “qualified commercial tenants” and nonprofits. Who counts as a “qualified commercial tenant”?
- First, the tenant must be one of the following: a microenterprise (meaning a sole proprietorship, partnership, limited liability company, or corporation with five or fewer employees, including the owner, that generally lacks sufficient access to loans, equity, or other financial capital), a restaurant with fewer than 10 employees, or a 501(c)(3) nonprofit organization with fewer than 20 employees.
- Second, the tenant must notify the landlord in writing within the previous 12 months that the tenant is a qualified commercial tenant and it must also attest to its number of employees.
What rules have changed?
Rent Increases: If a landlord proposes a rent increase for week to week, month to month, or other periodic leases less than a month, and that rent increase is greater than 10 percent of the rental amount charged to a tenant at any time during the 12 months before the effective date of the increase (either by itself or combined with any other rent increases for the 12 months before the effective date of the increase), the landlord must deliver written notice to the tenant at least 90 days before the effective date of the increase. If the rent increase is 10 percent or less of the amount charged to that tenant at any time during the previous 12 months before the effective date of the increase (either by itself or combined with any other rent increases for the 12 months before the effective date of the increase), the landlord must provide the tenant with at least 30 days of advance written notice.
Termination of Month-to-Month Leases: Qualified commercial tenants who occupy the property for over 12 months must receive at least 60 days prior written notice before termination or nonrenewal of the tenancy.
Common Area Maintenance Costs: For landlords seeking to pass through operating expenses such as common area maintenance costs, common utilities, insurance premiums (but not reimbursements) or property taxes, landlords must provide qualified tenants with “supporting documentation”, which includes 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 a tabulation showing how the costs are allocated among tenants and a signed and dated attestation by the landlord that the costs as documented are true and correct. The tabulation showing cost allocation must demonstrate proportionate allocation per tenant, by square footage, or another method as described by the supporting documentation. Only operating expenses incurred in the previous 18 months or reasonably expected to be incurred within the next 12 months may be charged.
If a landlord changes the method for allocating operating expenses that would increase a tenant’s share of costs, that tenant will be entitled to written notice. The new requirements regarding operating expense pass-throughs also provide tenants with an affirmative defense in eviction cases if their landlords violate these rules. District attorneys, city attorneys, and county counsel may also pursue injunctive relief for such violations. Notably, these requirements cannot be waived.
Translation Requirements: Lastly, if a landlord (or sublessor) communicates primarily with the qualified commercial tenant in Spanish, Tagalog, Chinese, Vietnamese, or Korean and enters a lease, contract, or agreement on or after January 1, 2025, the new law requires the landlord to deliver a translated version before signing. Although the terms of the contract in English will determine the rights and obligations of the parties, the translation may be admitted into evidence to show that no contract was entered because of a substantial difference in material terms. A failure to provide the translation gives the tenant a right to rescind the contract.
Which leases are subject to these rules?
Leases executed, begun, or renewed on or after January 1, 2025 require adherence to the new rules. Notably, these rules will also apply in the event of tenancies for short periods such as week-to-week, month-to-month, or for other periods under a month. Additionally, even leases executed before January 1, 2025 may be subject to these rules if they do not contain any provision on building operating costs.
If you have any questions regarding the new regulations, please feel free to contact Márcia Loeffelholz at mloeffelholz@hechtsolberg.com or Austin Quinn at aquinn@hechtsolberg.com.