New Compliance Obligations for Landlords of Small Commercial Tenants Effective January 1, 2025

Senate Bill 1103 (“SB 1103”), effective January 1, 2025, imposes new requirements on landlords leasing commercial space to certain “qualifying commercial tenants” (“QCT” or “QCTs”). Below is a summary of what you need to know.

Who Qualifies as a "Qualified Commercial Tenant"?

QCTs include (1) microenterprises with five or fewer employees (full or part-time, including the owner) and generally lack access to financial capital; (2) restaurants with fewer than 10 employees; and/or (3) certain nonprofit organizations with fewer than 20 employees. This discussion pertains only to commercial properties (e.g., office, industrial, retail).

How Tenants Trigger SB 1103 Protections

To qualify for SB 1103 protections, a tenant must send a written notice (a “QCT Notice”) to the landlord stating it is a QCT, and the notice must self-attest to the number of employees the tenant has. SB 1103’s requirements apply only during the twelve-month period following the landlord’s receipt of the QCT Notice. Tenants can trigger successive new twelve-month periods by delivering a new QCT Notice to its landlord annually. Tenants who fail to deliver a QCT Notice will not benefit from the protections under SB 1103. For example, in a multi-tenant project, a landlord would only have to comply with the requirements of SB 1103 as to those tenants who actually delivered a QCT Notice.

Limitations on Operating Cost Fees for Qualified Tenants

SB 1103 establishes specific limitations on how landlords allocate building operating costs to QCTs. These requirements apply only to (1) leases executed or tenancies that commence or renew on or after January 1, 2025; (2) week to week, month to month, or other periodic tenancies of less than a month; or (3) leases executed or tenancies commencing before January 1, 2025, that do not address Common Area Maintenance (“CAM”) Expenses.

To charge QCTs a fee to recover any CAM Expenses, a landlord must meet the following requirements:

1. Building operating costs must be allocated proportionately per tenant, by square footage or another method substantiated through the landlord’s supporting documents provided to the tenant.
2. Building operating costs must be incurred within the previous 18 months, or be reasonably expected to be incurred within the next 12 months based on reasonable estimates.
3. Before lease execution, the landlord must provide the prospective QCT with a notice stating that the QCT may inspect supporting documentation regarding building operating costs upon written request. 
4. Within 30 days of a written request, the landlord must provide the QCT with supporting documentation of the building operating costs and how they were allocated.
5. Building operating costs may not include expenses that a tenant has paid directly to a third party.
6. Building operating costs may not include expenses where the landlord is reimbursed by a third party, tenant, or insurance.
7. During the course of a tenancy, a landlord cannot alter the method or formula used to allocate building operating costs in a way that increases a QCT’s share of those costs, unless the landlord provides the QCT with written notice of the change in the method or formula along with supporting documentation of the basis for the alteration.

“Building operating costs” generally mean costs that are incurred on behalf of a tenant for the operation, maintenance, or repair of the 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.

“Supporting documentation” generally means 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 of the following: (1) a tabulation showing how the costs are allocated among all the tenants; and (2) the landlord’s signed and dated attestation that the documentation and costs are true and correct.

New Notice Requirements for Rent Increases and Terminations

Landlords must also meet specific notice requirements when adjusting rent or terminating leases with QCTs.

A landlord must provide a QCT with at least 90 days’ written notice for rental increases of over 10%, and at least 30 days’ written notice for rental increases under 10%. A landlord must also include information regarding the SB 1103 requirements in its notice to the QCT. These requirements apply only to increases that are not already expressly provided for in the governing leases.

When a QCT leases property for an unspecified term, it results in the auto-renewal of the term implied by law (e.g., month-to-month), unless one of the parties gives written notice of termination to the other. If a QCT has occupied a property for more than one year on a month-to-month basis, the landlord must provide the QCT with 60 days’ notice of termination. The QCT still has the right to terminate the month-to-month tenancy on 30 days' prior notice (even if the QCT receives the 60-day written termination notice from the landlord).

Translation Requirements for Non-English Lease Negotiations

All new or renewed leases entered into between a landlord and a QCT on or after January 1, 2025, where the lease is negotiated (orally or in writing) in Spanish, Tagalog, Chinese, Vietnamese or Korean, must be translated into that language as well. The translated lease must (i) with limited exception, include every term and condition in the lease and (ii) be provided to the QCT at the time the lease is executed.

Potential Impact of SB 1103 on Landlords

SB 1103 potentially imposes a heavy burden on commercial landlords whose tenants provide a QCT Notice. These burdens may include increased costs and administrative resources. SB 1103 also creates potential avenues for misuse. For example, an institutional grade entity may be motivated to create multiple single location entities with few employees solely to benefit from the protections afforded to QCTs under SB 1103 (although a landlord would argue that the tenant is not a QCT because it has access to capital).

Preparing for Compliance: Key Steps for Landlords

We encourage landlords to contact us to discuss the significant procedural changes the new law imposes on their leasing practices and to understand what documentation is needed to confirm compliance. Liability for noncompliance could include, among other things, defenses to eviction, rescission, punitive and/or treble damages and the potential for a local district attorney to initiate an enforcement action.