New Protections for Qualified Commercial Tenants under CA SB 1103

By:   J.J. Sherman, Law Offices of J.J. Sherman, P.C.
            Jessie Staley, St. John’s University School of Law

Effective January 1, 2025, California Senate Bill 1103 sets new rules for commercial leases with “qualified commercial tenants.”  While the new law affects only a fraction of California commercial leases, it imposes significant obligations on landlords who have commercial leases with “qualified commercial tenants.”¹

1. Who’s a “qualified commercial tenant”?

Under CA SB 1103, a “Qualified commercial tenant” means a tenant of commercial real property² that meets both of the following requirements:

• The tenant is a microenterprise³, a restaurant with fewer than 10 employees, or a nonprofit organization⁴ with fewer than 20 employees.
• (I) Subject to subclause (II), the tenant has provided the landlord, within the previous 12 months, a written notice that the tenant is a qualified commercial tenant and a self-attestation regarding the number of employees, at such time the protections under [CA SB 1103] come into place. (II) Unless the tenancy is from week to week, month to month, or other period less than a month, the tenant provided the notice and self-attestation described in subclause (I) before or upon execution of the lease, and annually thereafter, at such time the protections under [CA SB 1103] come into place.⁵

2. When does CA SB 1103 not apply?

CA SB 1103 does not apply to any commercial lease where the tenant does not meet the definition of “qualified commercial tenant.”

3.IF CA SB 1103 applies, then what additional requirements are imposed on the landlord?  

• Notice to Tenant Before the Effective Date of a Rent Increase

In all leases of commercial real property by a qualified commercial tenant, or of any interest therein, from week to week, month to month or other period less than a month, the landlord may increase the rent provided in the lease or rental agreement upon giving written notice to the tenant, either by delivering a copy to the tenant personally or by serving a copy by mail.  

If the proposed rent increase for that tenant is 10 percent or less of the rental amount charged to that tenant at any time during the 12 months before the effective date of the increase, either in and of itself or when combined with any other rent increases for the 12 months before the effective date of the increase, the notice shall be delivered at least 30 days before the effective date of the increase.⁶ 

If the proposed rent increase for that tenant is greater than 10 percent of the rental amount charged to that tenant at any time during the 12 months before the effective date of the increase, either in and of itself or when combined with any other rent increases for the 12 months before the effective date of the increase, the notice shall be delivered at least 90 days before the effective date of the increase.⁷

If the proposed rent increase for that tenant is caused by a change in a tenant’s income or family composition as determined by a recertification required by statute or regulation, the notice shall be delivered at least 30 days before the effective date of the increase.⁸ 

A rent increase will not be effective until the notice period required by CA SB 1103 has expired.

• Translation of the Commercial Lease

 Under the amended Section 1632, a person engaged in a trade or business who negotiates primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean, orally or in writing, in the course of entering into a lease, sublease, rental contract or agreement, or other term of tenancy contract or agreement covering a nonresidential-zoned commercial space entered into between a landlord and a qualified commercial tenant, on or after January 1, 2025, shall deliver to the other party to the contract or agreement, and any other person who will be signing the contract or agreement, and before the execution thereof, a translation of the contract or agreement in the language in which the contract or agreement was negotiated, that includes a translation of every term and condition in that contract or agreement.⁹ 

The landlord must also provide at the time and place where a lease, sublease or rental contract or agreement is executed, notice in any of the languages specified in CA SB 1103.¹⁰ Upon a failure of the Landlord to comply with these requirements, the Tenant may rescind the contract or agreement.¹¹

• Right to Terminate Commercial Leases without a Specific Term

Hiring of commercial real property by a qualified commercial tenant for a term not specified by the parties is deemed to be renewed at the end of the term implied by law unless one of the parties gives written notice to the other of the party’s intention to terminate the tenancy.¹²

An owner of commercial real property hired by a qualified commercial tenant giving notice shall give notice at least 60 days prior to the proposed date of termination, except the notice period is shortened to at least 30 days prior to the proposed date of termination if a tenant has occupied the property for less than one year.¹³  A tenant giving the notice shall give notice for a period at least as long as the term of the periodic tenancy prior to the proposed date of termination.¹⁴

• Right to Recover Building Operating Costs

  A landlord of a commercial real property shall not charge a qualified commercial tenant a fee to recover building operating costs¹⁵ unless all of the following apply:

• The building operating costs are allocated proportionately per tenant, by square footage or another method, as substantiated through supporting documentation provided by the landlord to the qualified commercial tenant.
• The building operating costs have been incurred within the previous 18 months or are reasonably expected to be incurred within the next 12 months based on reasonable estimates.
• Before the execution of the lease, the landlord provides the prospective qualified commercial tenant a paper or electronic notice stating that the tenant may inspect any supporting documentation of building operating costs upon written request.
• Within 30 days of a written request, the landlord provides the qualified commercial tenant supporting documentation of the previously incurred or reasonably expected building operating costs.
• The costs do not include expenses paid by a tenant directly to a third party.
• The costs do not include expenses for which a third party, tenant, or insurance reimbursed the landlord.¹⁶

A landlord of a commercial real property shall not charge a fee to recover any building operating costs from the qualified commercial tenant until the landlord provides the qualified commercial tenant supporting documentation.¹⁷

During the course of the commercial tenancy, the landlord will not alter the method or formula use to allocate building operating costs to the qualified commercial tenant in a way that increases the qualified commercial tenant’s share of those costs, unless the qualified commercial tenant is provided with written notice of the change in the method or formula with supporting documentation of the basis of the alteration.¹⁸

A landlord who violates this requirement will be liable to a qualified commercial tenant in a civil action for actual damages, reasonable attorneys’ fees, and costs, and if the court finds the landlord has acted willfully or with oppression, fraud, or malice, three times the number of actual damages and punitive damages.¹⁹

This portion of CA SB 1103 relating to Landlord’s right to recover building costs will only apply to: (1) leases executed or tenancies commenced or renewed on or after January 1, 2025,  (2) a tenancy that is from week to week, month to month, or other period less than a month, and  (3) leases executed or tenancies commenced before January 1, 2025 that do not contain a provision regarding building operating costs.²⁰

• What are some practical considerations for lawyers representing Landlords and Tenants under commercial leases?

First and foremost, Landlords will need to ascertain whether their Tenants are “qualified commercial tenants” under the statute. One easy method is to add a representation and warranty to be made by the Tenant under the commercial lease, such as:

“CA SB 1103 Compliance.   Under CA SB 1103, a ‘qualified commercial tenant’ is defined as:   ‘a tenant of commercial real property that meets both of the following requirements:

•  The tenant is a microenterprise, a restaurant with fewer than 10 employees, or a nonprofit organization with fewer than 20 employees.
• (I) Subject to subclause (II), the tenant has provided the landlord, within the previous 12 months, a written notice that the tenant is a qualified commercial tenant and a self-attestation regarding the number of employees, at such time the protections under this subdivision come into place.
• (II) Unless the tenancy is from week to week, month to month, or other period less than a month, the tenant provided the notice and self-attestation described in subclause (I) before or upon execution of the lease, and annually thereafter, at such time the protections under this subdivision come into place.’

Tenant hereby represents and warrants that, as of the date of lease execution, it is not deemed a ‘qualified commercial tenant’ as defined in CA SB 1103.   Tenant shall provide Landlord notice if at any time during the lease term, Tenant is deemed a ‘qualified commercial tenant’ as defined in CA SB 1103.”

If the Tenant notifies the Landlord that it is, in fact, a qualified commercial tenant, then the Landlord’s lease administration team will need to follow the rules of CA SB 1103.    For example,  for all new leases with qualified commercial tenants executed on or after January 1, 2025, Landlords will need to review their form leases to confirm they sufficiently address how building operating costs will be charged to Tenants.  If a lease executed before January 1, 2025 already contains a provision regarding building operating costs, then the Landlord’s new requirements of CA Civil Code Section 1950.9 do not apply to that lease, but all new leases executed on or after January 1, 2025 are subject to the requirements of CA Civil Code Section 1950.9.

With respect to all Tenants negotiating leases, if a Tenant meets the definition of “qualified commercial tenant” under CA SB 1103, then it is in the Tenant’s best interest to notify the Landlord prior to lease execution in order to benefit from the new protections under CA SB 1103.  Legal counsel negotiating commercial leases for Tenants may ask their clients if they meet this definition and prepare the statutory notices and attestations for their clients prior to lease execution For more information on this or other commercial real estate law topics, visit the website for Law Offices of J.J. Sherman, P.C.

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¹ Special thanks to Alison E. Geddes of Weintraub Tobin and other members of the Commercial Leasing Subcommittee of the California Lawyers Association Real Property Law Section who provided invaluable input while preparing this article.

² Commercial real property means all real property in California except dwelling units, mobile homes and recreational vehicles. Cal. Civil Code § 1632(l)(1) (amended Sept. 30, 2024).

³ Microenterprise has the same meaning as that term is defined in subdivision (a) of Section 18000 of the Business and Professions Code. Cal. Civil Code § 1632(l)(2) (amended Sept. 30, 2024).

⁴ Nonprofit organization means any private, nonprofit organization that qualifies under Section 501(c)(3) of the United States Internal Revenue Code of 1986. Cal. Civil Code § 827(b)(7)(C) (amended Sept. 30, 2024).

⁵ Cal. Civil Code §§ 827(b)(7)(D); 1632(m)(4); 1946.1(k)(4) (amended Sept. 30, 2024); 1950.9(h)(5).

⁶ Cal. Civil Code § 827(b)(2) (amended Sept. 30, 2024).

⁷ Cal. Civil Code § 827(b)(3)(A) (amended Sept. 30, 2024).

⁸ Cal. Civil Code § 827(b)(3)(B) (amended Sept. 30, 2024).

⁹ Cal. Civil Code § 1632(b)(8) (amended Sept. 30, 2024).

¹⁰ Cal. Civil Code § 1632(d) (amended Sept. 30, 2024).

¹¹ Cal. Civil Code § 1632 (k)(1) (amended Sept. 30, 2024).

¹² Cal. Civil Code § 1946.1(a) (amended Sept. 30, 2024).

¹³ Notwithstanding subdivision (b), an owner of a residential dwelling or commercial real property hired by a qualified commercial tenant giving notice pursuant to this section shall give notice at least 30 days prior to the proposed date of termination if a tenant or resident has resided in the dwelling or occupied the property for less than one year. Cal. Civil Code § 1946.1(c) (amended Sept. 30, 2024).

¹⁴ Cal. Civil Code § 1946.1(b) (amended Sept. 30, 2024).

¹⁵ “Building operating costs” means costs that are incurred on behalf of a tenant for the operation, maintenance, or 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 charged to the landlord pursuant to property ownership. Cal. Civil Code § 1950.9 (h)(1).

¹⁶ Cal. Civil Code § 1950.9(a).

¹⁷ Cal. Civil Code § 1950.9(b).

¹⁸ Cal. Civil Code § 1950.9(c).

¹⁹ Cal. Civil Code § 1950.9(e).

²⁰ Cal. Civil Code § 1950.9(i).