California Expands Residential Tenant Protections to Certain Small Commercial Tenants

On September 30, 2024, Governor Newsom approved California Senate Bill No. 1103, which extends certain rights previously reserved for residential tenants to “qualified commercial tenants,” which includes any tenant that is (i) a “microenterprise” (meaning a business with five or fewer employees that lacks sufficient access to loans, equity, or other financial capital); (ii) a restaurant with fewer than 10 employees; or (iii) a nonprofit organization with fewer than 20 employees. A qualified commercial tenant must provide written notice to the landlord that it is a qualified commercial tenant (along with a self-attestation regarding the number of the tenant’s employees) at or before execution of a lease, and every 12 months thereafter. The new law will go into effect January 1, 2025, and includes the following provisions:

Limitations on Building Operating Costs

A landlord of commercial real property may not charge a qualified commercial tenant a fee to recover building operating costs, unless all of the following conditions are satisfied:

• all building operating costs are allocated proportionately per tenant, by square footage, or another method substantiated through supporting documentation provided to the 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;
• prior to lease execution, the landlord provides the prospective 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, a landlord provides the tenant with supporting documentation of the previously incurred or reasonably expected building operating costs;
• the costs do not include expenses paid by the tenant directly to a third party; and
• the costs do not include expenses for which the landlord is reimbursed by a third party, tenant, or insurance.

Landlords are required to provide qualified commercial tenants with supporting documentation for building operating costs before they may charge a fee to recover such costs. In addition, landlords may not change the method or formula used to allocate building operating costs to a qualified commercial tenant in a way that increases the tenant’s share of such costs, unless the tenant is provided with written notice of the change and supporting documentation for the basis of the change.

A qualified commercial tenant may raise a landlord’s violation of this section as an affirmative defense in an action for unlawful detainer or recovery of possession based on failure to pay building operating costs. Further, a landlord that violates this section may be liable to a qualified commercial tenant for actual damages, attorneys’ fees, and, upon a showing that the landlord or its agent acted willfully or with oppression, fraud, or malice, potentially up to three times the amount of actual damages and punitive damages. These protections cannot be waived.

Required Notices of Rental Increases for Month-to-Month Tenancies

For any tenancy on a month-to-month basis (or any period shorter than month to month), a landlord must provide a qualified commercial tenant with notice at least 30 days before the effective date of any rental increase of 10% or less. If the rental increase is greater than 10% (counting all increases within the previous 12 months), the landlord must provide the notice at least 90 days prior to the effective date of the rental increase.

Required Notices for Terminating a Month-to-Month Tenancy Without Fault

A landlord must provide at least 30 days’ prior notice to terminate a month-to-month tenancy without fault if the qualified commercial tenant has occupied the premises for less than one year. If the qualified commercial tenant has occupied the premises for more than one year, the notice must be provided a minimum of 60 days prior to termination.

Translated Copy of Lease or Rental Agreement

For any lease or rental agreement with a qualified commercial tenant that was negotiated primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean, the landlord must provide the tenant with a translated copy of the lease or rental agreement prior to execution. If a translated copy of the lease or rental agreement is not provided, the qualified commercial tenant may rescind the lease or rental agreement. These rights may not be waived.

Any commercial landlords owning property in California that may be leased to qualified commercial tenants should take steps to ensure that their property managers and other staff are aware of (and comply with) these new laws going into effect on January 1, 2025, and should consult with their real estate attorney to ensure that any applicable lease forms conform with the new requirements.