New protections for small business tenants in California in SB 1103

Effective January 1, 2025, SB 1103 makes four major changes to commercial lease law:

Commercial landlords must be aware of all associated changes and must build these new requirements into leases, tenant notices and operating procedures. In general, landlords should be aware that like the protections for small commercial tenants enacted during COVID-19, these new rental regulations indicate a legislative policy toward treating small businesses more like residential rentals, as opposed to rentals. traditional shopping with larger commercial tenants.

Definition of ‘qualified commercial lessee’

Businesses must meet two elements of the definition of qualified commercial tenant to qualify for these new protections.

First, a business must be a “microenterprise,” a restaurant with fewer than 10 employees or a nonprofit organization with fewer than 20 employees. A microenterprise is defined in Business and Professions Code section 18000 as a sole proprietorship, partnership, LLC, or corporation with five or fewer employees (including the owner), who may be full-time or part-time, and who generally does not have sufficient access to credit. , equity or other financial capital. A convenient way to remember this definition is the “5/10/20 rule,” based on the number of employees.

Second, the tenant must have provided the landlord, within the preceding 12 months, with written notice that the tenant is a qualified commercial tenant and a self-certification regarding the number of employees that the tenant employs before or after the execution of the lease and any year after. In other words, the provisions of the law are not self-enforcing – the tenant must give notice first. Rental rates, square footage of the premises, and income or wealth of the tenant are not taken into account when determining qualified status.

With those definitions in mind, here are the four main changes SB 1103 makes to commercial lease law.

Four New Tenant Protections

The existing Section 827 of the Civil Code provides that for short-term residential leases, that is month-to-month or a shorter period, the landlord must give advance notice of a rent increase. The amount of notice required depends on how much the rent will increase.

SB-1103 extends this notice requirement to qualified commercial tenant leases. If the increase is 10% or less of the previous year’s rent, notice must be given at least 30 days before the increase date, and if it is greater than 10%, then notice must be given at least 90 days in advance. The notice itself must inform the qualified commercial tenant of the requirements of this amended statute.

It is unclear how important this provision would be to most small businesses. Unlike short-term residential leases such as residence hotels, a commercial business is not likely to be a month-to-month lease unless it is a holdover from a longer fixed lease. However, due to an apparently unresolved inconsistency in the Senate and Assembly versions of this section, its protection may extend beyond month-to-month rentals. Landlords may assume that this provision applies to rent increases for all leases of commercial real property by a qualified commercial tenant.

Violation of this provision does not entitle the Eligible Commercial Tenant to civil penalties, but Eligible Commercial Tenants may be entitled to a refund of overpaid rent or an injunction to prevent further violations.

Existing law in Article 1632 of the Civil Code requires a business to submit a translation of a contract from English to the primary language in which the agreement was negotiated, specifically Spanish, Chinese, Tagalog, Vietnamese or Korean (translation requirement) but provides an exception if the other party uses its own interpreter (interpreter exception).

SB 1103 extends this requirement to a landlord who leases to a qualified commercial tenant for negotiated leases on or after January 1, 2025. It requires the landlord to meet translation requirements, but does not grant the landlord the translator exemption. In other words, the landlord must always comply with the translation requirements.

If the landlord fails to comply with this requirement, the qualified commercial tenant (but not the landlord) has the right to cancel the lease.

Section 1946.1 of the existing Civil Code provides that a residential lease is considered renewed unless the landlord gives 30 to 60 days notice of nonrenewal before termination, depending on whether the lease was for less than one year.

SB 1103 extends this protection to leases of qualified commercial tenants and requires a landlord to notify the provisions of this section in a notice to a qualified commercial tenant. Eligible commercial tenants who believe their landlord has violated the notice requirement of this section may file a complaint with the local housing authority or pursue legal action.

Section 1950.8 of the existing Civil Code prohibits a landlord from requiring an additional fee to continue or renew a lease unless the amount is shown in the lease, but this requirement does not apply if the increase is for construction operating costs incurred on behalf of the tenant and the basis for the calculation is set in rent.

SB 1103 adds a new law, Civil Code Section 1950.9, that applies to leases executed or renewed on or after January 1, 2025. The section prohibits a landlord from charging a qualified commercial tenant a fee to recover the costs of operating the building, unless the costs are apportioned pro rata, the costs have been incurred in the previous 18 months or are reasonably expected to have occurred in the next 12 months, and the landlord gives notice to the prospective tenant that the tenant can inspect the cost documentation.

This particular provision has some substantial enforcement teeth, including actual damages, attorneys’ fees and costs, and in the case of willful, oppressive, fraudulent or malicious infringement, treble damages and punitive damages. The tenant may also raise this section as a defense to eviction.

application

SB 113 applies to all commercial leases in California where the tenant is a qualified commercial tenant. Obvious applications are shopping malls, strip malls and other buildings where a variety of small businesses congregate. Some commercial landlords, for example the owner of a large commercial office building leased to large businesses, may feel that the charter is not relevant to them, but smaller tenants such as a coffee shop or lobby gift shop may. are covered.

Unanswered questions

Unanswered questions remain, such as the case of subleases, where the tenant may not be a qualified commercial tenant, but the subtenant may qualify under SB 1103. Similarly, it remains to be seen how and when a landlord may object to the tenant’s self-certification of qualified status, especially if that status changes during the tenancy.