What is The Commercial Tenant Protection Act SB 1103?

Ever felt powerless when negotiating your small business lease? The Commercial Tenant Protection Act SB 1103 is changing that. Starting January 2025, this groundbreaking California law gives small commercial tenants protections previously reserved for residential renters in the context of leases of commercial real property. From advance notice for rent hikes to translated lease agreements, SB 1103 levels the playing field for microenterprises, small restaurants, and nonprofits. Whether you’re running a bookstore, food truck, or community organization, these new rules could save your business from unexpected costs and sudden displacement. Here’s what you need to know.

Key Takeaways

• SB 1103 specifically protects “Qualified Commercial Tenants” (QCTs) including microenterprises with five or fewer employees, restaurants with fewer than 10 employees, and nonprofits with fewer than 20 employees. 
• The law mandates longer notice periods for rent increases (90 days for increases over 10%) and lease terminations (60 days for tenants who’ve occupied for at least one year), giving small businesses more time to adjust to changes.
• SB 1103 requires lease translations for agreements negotiated in Spanish, Chinese, Tagalog, Vietnamese, or Korean, and mandates detailed documentation and proportionate allocation of operating costs, increasing transparency in commercial leasing.

Understanding SB 1103 and its Scope

SB 1103, officially codified as Civil Code Section 1950, aims to level the playing field for small commercial tenants by providing them with essential protections against rent increases, unclear lease terms, excessive fees, and language barriers.

The Act represents a new legislative foray into commercial leasing matters previously left susceptible to contractual negotiation and bargaining power. These protections for small businesses, nonprofits, and food operators resemble similar protections afforded to residential tenants against rent increases and eviction. 

The Act specifically targets “Qualified Commercial Tenants” (QCTs), which are defined as:

• Microenterprises: Businesses with five or fewer employees, including the owner(s), who may be part-time or full-time, and generally have limited access to financing7.
• Restaurants: Establishments with fewer than 10 employees7. It is important to note that the Act does not define what constitutes a “restaurant,” leaving room for interpretation regarding businesses like coffee shops or ice cream shops1.
• Nonprofit Organizations: Entities with fewer than 20 employees that qualify under Section 501(c)(3) of the Internal Revenue Code5.

SB 1103 applies to a wide range of commercial properties, including office, industrial, and retail spaces. However, residential properties, mobile homes, and recreational vehicles are excluded from the Act’s purview.

To benefit from the protections under SB 1103, tenants must proactively inform their landlords of their QCT status in writing and provide a self-attestation of their employee count. The timing and frequency of this self-attestation notice depend on the duration of the tenancy.

For leases exceeding 30 days, the notification must be submitted before or upon lease execution and annually thereafter. For month-to-month or other periodic tenancies of less than one month, the notice must be provided within the previous 12 months.

Key Protections for Tenants under SB 1103

SB 1103 introduces several key protections for QCTs:

1. Rent Increase Notices

Landlords are now required to provide QCTs with advance written notice of any rent increases. The notice period depends on the magnitude of the increase:

• Rent increases of 10% or less: 30 days’ notice12.
• Rent increases exceeding 10%: 90 days’ notice12.

This provision ensures that small businesses have sufficient time to adjust to rent hikes and make informed financial decisions. It’s crucial for landlords to adhere to these notice periods, as failure to do so could render the rent increase unenforceable until the proper notice is served and the required time has elapsed.

The varying notice periods recognize that businesses with different financial situations may require different lengths of time to adapt to rent increases for that tenant..

For example, a microenterprise with limited access to capital might need more time to adjust to a significant rent increase than a larger, more established business.

2. Lease Termination Notices

For month-to-month tenancies, landlords must provide QCTs with written notice of lease termination:

• Tenants with at least one year of occupancy: 60 days’ notice11.
• Tenants with less than one year of occupancy: 30 days’ notice12.

This provision offers QCTs greater stability and predictability, allowing them to plan for relocation or business adjustments if necessary.

3. Lease Translations

SB 1103 mandates that commercial leases negotiated primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean must be translated into the tenant’s primary language. This provision promotes transparency and ensures that QCTs fully understand the terms of their lease agreements.

If a landlord fails to provide a translated copy of the lease, the QCT has the right to rescind the agreement. This underscores the importance of clear communication and language accessibility in commercial leasing.

While the translation requirement may pose logistical and financial challenges for landlords, particularly for smaller property owners, it can also foster better landlord-tenant relationships and reduce the likelihood of misunderstandings and disputes9.

4. Operating Cost Pass-Throughs

Landlords can only pass through building operating costs to QCTs if they meet specific conditions, including:

• Proportionate Allocation: Costs must be allocated to tenants proportionately, typically based on square footage or another method supported by documentation2.
• Detailed Documentation: Landlords must provide QCTs with detailed documentation explaining how operating costs are calculated and allocated2.
• Transparency and Justification: Tenants have the right to request supporting documentation for operating costs, and landlords are obligated to provide it within 30 days2.

This provision ensures that QCTs are not unfairly burdened with excessive or unjustified operating expenses.

It also promotes transparency and accountability in the allocation of building costs. The proportionate allocation requirement may raise questions about how to fairly distribute costs for shared amenities or services that are not used equally by all tenants.

Additionally, there is potential for disputes over the calculation of operating costs, particularly in situations where landlords have not maintained adequate documentation.

5. Limitations on Evictions and Foreclosures

SB 1103 also includes provisions that limit a landlord’s ability to evict a tenant or take action against a tenant in the event of a foreclosure7. These limitations are designed to protect tenants from retaliatory actions by landlords and ensure that they have a fair opportunity to address any issues or disputes that may arise.

Impact of SB 1103 on Small Businesses

SB 1103 has been widely hailed as a victory for small businesses in California2. By providing QCTs with greater protections and a stronger negotiating position, the Act aims to:

• Reduce Displacement: SB 1103 helps to prevent small businesses from being priced out of their locations due to exorbitant rent increases or unfair lease terms4.
• Promote Fairness and Transparency: The Act fosters a more balanced and equitable commercial leasing environment by ensuring clear communication, language accessibility, and fair allocation of operating costs2.
• Empower Small Businesses: SB 1103 gives QCTs greater leverage in lease negotiations and protects them from potential exploitation by landlords15.
• Foster Economic Stability: By providing greater stability and predictability, the Act allows small businesses to focus on growth and contribute to the local economy4.

Impact of SB 1103 on Landlords

While SB 1103 offers significant benefits to small businesses, it also introduces new responsibilities and potential challenges for commercial property owners. Landlords must now:

• Adapt Leasing Practices: Landlords need to update their lease agreements and operational procedures to comply with the new requirements for rent increases, lease terminations, and operating cost pass-throughs.
• Enhance Documentation and Transparency: Maintaining detailed records of operating costs and providing timely documentation to QCTs is crucial to avoid potential legal disputes.
• Manage Legal and Financial Risks: Non-compliance with SB 1103 can expose landlords to financial penalties, including actual damages, attorney’s fees, and even punitive damages in cases of willful violations.

Some landlords have expressed concerns that SB 1103 could make them hesitant to rent to small businesses due to the added administrative burden and potential risks.

This could lead to a decrease in the availability of commercial space for small businesses and potentially favor larger franchises

Additionally, the Act could give rise to a new micro-legal industry similar to that which emerged after the enactment of the Americans with Disabilities Act (ADA), with attorneys specializing in representing tenants in disputes with landlords.

However, proponents of the Act argue that most of the new requirements are already standard practice in residential leases and that the benefits of fostering a thriving small business community outweigh the challenges15.

Furthermore, SB 1103 raises questions about how it will affect the commercial real estate market generally.

For example, it could lead to changes in property values or rental rates, particularly for properties that cater to small businesses. It could also influence the types of businesses that landlords are willing to lease to, potentially favoring larger, more established companies over smaller startups or microenterprises.

Preparing for the Future under SB 1103

Both tenants and landlords need to understand the implications of SB 1103 and take proactive steps to ensure compliance and navigate the changing commercial leasing landscape.

For Tenants:

• Determine QCT Status: Carefully assess whether your business meets the criteria for a “Qualified Commercial Tenant.”
• Notify Your Landlord: If you qualify as a QCT, formally notify your landlord in writing and provide the necessary self-attestation.
• Understand Your Rights: Familiarize yourself with the key provisions of SB 1103, including rent increase notices, lease termination notices, lease translations, and operating cost pass-throughs.
• Seek Legal Advice: If you have any questions or concerns about your lease agreement or the application of SB 1103, consult with an experienced real estate attorney.

For Landlords:

• Update Lease Agreements: Review and revise your lease templates to ensure compliance with SB 1103.
• Implement New Procedures: Establish clear procedures for handling rent increases, lease terminations, and operating cost pass-throughs for QCTs.
• Maintain Detailed Records: Keep thorough and organized records of all building operating costs to facilitate transparency and compliance.
• Seek Legal Counsel: Consult with a real estate attorney to understand your obligations under SB 1103 and mitigate potential legal risks.

Case Studies

To illustrate how SB 1103 applies in real-world situations, let’s consider a few hypothetical examples:

Case Study 1: Rent Increase Notice

A microenterprise with three employees operates a small bookstore in a commercial property. The landlord wishes to increase the rent by 12%. Under SB 1103, the landlord must provide the bookstore with at least 90 days’ written notice of the rent increase. If the landlord fails to provide adequate notice, the bookstore can challenge the rent increase and potentially delay its implementation.

Case Study 2: Lease Translation

A restaurant with eight employees negotiates a lease agreement with a landlord primarily in Spanish. The landlord provides the restaurant with a lease agreement in English but fails to provide a translated copy in Spanish. Under SB 1103, the restaurant has the right to rescind the lease agreement due to the lack of a translated copy of the leases of commercial real property.

Case Study 3: Operating Cost Pass-Throughs

A nonprofit organization with 15 employees leases office space in a commercial building. The landlord seeks to pass through operating costs for a recent roof repair. Under SB 1103, the landlord must provide the nonprofit with detailed documentation explaining how the costs for the roof repair are calculated and allocated to tenants. The nonprofit has the right to request supporting documentation, such as invoices and contracts, to verify the accuracy and legitimacy of the operating costs.

FAQs

Conclusion

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