Beginning on January 1, 2025, “qualifying commercial tenants” will get the benefit of statutory protections with respect to their commercial leases. While the newly-enacted provisions do not apply to all commercial leases in the State of California, they do signal a potential trend towards regulation of the commercial landlord-tenant relationship that had previously been reserved for residential leases.
A “qualified commercial tenant” is defined as a business which is: 1) a microenterprise (defined in Business & Professions Code §18000(a), but generally a business with less than 5 employees and limited access to traditional forms of capital); 2) a restaurant with less than 10 employees; or 3) a nonprofit organization with less than 20 employees. Importantly for both landlords and tenants who may meet this definition, a tenant is required to provide express written notice to its landlord that it is a “qualified commercial tenant” under the law prior to the execution of the lease (as applicable) and on an annual basis thereafter to reap the benefits of the new statutory scheme. The tenant is also required to provide a self-attestation as to the number of employees it has. A landlord receiving such a notice from one of its tenants must be careful to comply with the new commercial tenancy protections.
What protections is a “qualified commercial tenant” entitled to under the law? First, commercial landlords who wish to impose building operating costs (e.g., via a NNN lease) are required by statute to: 1) allocate such costs to all of its tenants on a proportional basis, such as by square footage; 2) ensure that the costs have been incurred within the last 18 months or are reasonable estimates of costs which will be incurred in the next 12 months; 3) provide notice to a prospective tenant prior to execution of the lease that they may inspect supporting documentation of the building’s operating costs; 4) provide such tenants with supporting documentation of building operating costs previously incurred or reasonably expected to be incurred within 30 days of a written request for such information; 5) ensure the costs do not include expenses paid by a tenant to a third party; and 6) ensure the costs do not include expenses for which a third party, tenant, or insurance company provides reimbursement to the landlord.
“Qualified commercial tenants” are also entitled to at least 90 days’ written notice of any increases in rent which exceed 10% of the rent previously charged to the tenant, and at least 30 days’ written notice of any increases in rent which are less than a 10% increase in previously-charged rent. As with residential tenancy laws, landlords will also be required to provide tenants with at least 60 days’ notice of lease termination if the tenant has occupied the space for more than one year, and 30 days’ notice of lease termination if the tenant has occupied the space for less than one year. Finally, when a “qualified commercial tenant” negotiates a lease in another language, the tenant must be provided with a copy of the commercial lease translated into that language. If a translated document is not provided as required by statute, the tenant may rescind the lease. Failure to comply with the new statutes may provide valid affirmative defenses to an unlawful detainer action and subject the landlord to liability and attorney’s fees which may be incurred by a “qualified commercial tenant.”
If you believe your business may be a “qualified commercial tenant,” it is vital to confirm eligibility and provide written notice to your landlord of the same as soon as possible to lock in the new protections afforded by the law and to reaffirm eligibility on an annual basis. If you receive a notification from a tenant or subtenant that it believes it is a “qualified commercial tenant,” you should contact an attorney well-versed in commercial tenancy law to make sure you are complying with the obligations being imposed by the new provisions as soon as possible.