Small Business Tenant Protections Expand Under New California Commercial Lease Law

New California Law Expands Protections for Small Business Tenants

Starting January 1, 2025, California's SB 1103 will introduce significant changes to commercial tenancy law, particularly affecting small businesses and nonprofits. The law creates a new category of "qualified commercial tenants" and provides them with protections similar to those enjoyed by residential tenants.

To qualify for these protections, businesses must meet specific size requirements under the "5/10/20 rule": microenterprises with five or fewer employees, restaurants with fewer than 10 employees, or nonprofits with fewer than 20 employees. Additionally, tenants must proactively notify their landlord of their qualified status and provide annual self-attestation of their employee count.

The law introduces four major changes:

First, qualified commercial tenants must receive extended notice periods for rent increases. For increases of 10% or less, landlords must provide 30 days' notice, while increases exceeding 10% require 90 days' notice.

Second, landlords must provide lease translations for agreements negotiated in Spanish, Chinese, Tagalog, Vietnamese, or Korean. Unlike existing law, landlords cannot avoid this requirement by having tenants use their own interpreters. Qualified tenants may rescind leases if translations aren't provided.

Third, leases will automatically renew unless landlords provide timely notice of nonrenewal. This provision mirrors existing residential tenancy protections and requires landlords to explicitly notify tenants of these rights.

Fourth, the law restricts how landlords can charge for building operating costs. These charges must be proportionally allocated and related to costs incurred within the previous 18 months or expected within the next 12 months. Landlords must allow tenants to inspect cost documentation. Violations can result in significant penalties, including treble damages and attorneys' fees.

The law applies to all California commercial properties with qualified commercial tenants, including unexpected scenarios like small cafes or gift shops within larger office buildings. However, some questions remain unresolved, such as how the law applies to subleases and how landlords can challenge a tenant's self-attested qualified status.

This legislation continues a trend of extending residential-style protections to small commercial tenants, similar to COVID-era regulations. Commercial landlords should update their lease forms, notices, and procedures to comply with these new requirements before the law takes effect.