New Changes to California Commercial Leasing Requirements in 2025

Recent legislative changes impose new requirements for owners of California commercial properties, at least with respect to certain specified types of tenants. Effective Jan. 1, 2025, the Commercial Tenant Protection Act, enacted in the Civil Code as SB 1103, extends to "Qualified Commercial Tenants (QCTs)" protections of the sort previously applicable to tenants in residential circumstances. The new law defines QCTs as 1) microenterprises, defined to include sole proprietorships, partnerships, limited liability companies or corporations with five or fewer employees that generally lack sufficient access to capital, 2) restaurants with fewer than 10 employees and 3) nonprofits with fewer than 20 employees. Starting in 2025, commercial property owners and managers face additional legislative requirements and restrictions when dealing with QCTs. The Commercial Tenant Protection 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 against rent increases, eviction controls and other measures in the residential leasing context and may prove noteworthy if they portend other legislative attempts in the future to protect small tenant operators in commercial settings.

Four key provisions of SB 1103 will require commercial property owners to reexamine their leasing and operational processes with respect to QCTs:

First, the law imposes new notice requirements on owners seeking to raise rent for month-to-month tenancies or leases that are less than a month in length or where the lease term is not specified by the parties. For rent increases of 10 percent or less of the rent charged during the prior 12 months of such tenancies, owners must provide QCTs at least 30 days' notice before the increase takes effect. For increases of more than 10 percent, owners must provide at least 90 days' notice in advance.

• First, the law imposes new notice requirements on owners seeking to raise rent for month-to-month tenancies or leases that are less than a month in length or where the lease term is not specified by the parties. For rent increases of 10 percent or less of the rent charged during the prior 12 months of such tenancies, owners must provide QCTs at least 30 days' notice before the increase takes effect. For increases of more than 10 percent, owners must provide at least 90 days' notice in advance.
• Second, month-to-month tenancies will automatically renew – potentially for longer than a month – unless the owner provides notice of termination at least 60 days before the proposed termination where a QCT has occupied the property for at least a year or 30 days' prior notice if a QCT has been in place for less than a year.
• Third, lease agreements with QCTs negotiated primarily in Spanish, Chinese, Tagalog, Vietnamese or Korean must be translated into such language, and the translation must be delivered to the QCT.
• Fourth, and most notably, owners may collect building operating costs from QCTs only if they 1) allocate such fees proportionately to each tenant and 2) provide detailed and itemized supporting documentation thereof. Additionally, if an owner brings a claim against a QCT for failure to pay such fees, the QCT may assert as an affirmative defense the owner's violation of this provision and seek specified damages.

For more information about how this law impacts the ownership and management of commercial properties in California, contact the authors or your Holland & Knight West Coast Real Estate Practice Group attorney.