News and Tips

Despite opposition from over 25 business groups, new law SB 1103 will  take effect on January 1, 2025. This law introduces new requirements for California commercial property leases. Though limited in its scope, there are some key benefits for small businesses, nonprofits, and microenterprises defined as "Qualified Commercial Tenants" (QCTs). QCTs are specifically small businesses with five or fewer employees, restaurants with fewer than ten employees, and nonprofit organizations with under twenty employees. To qualify, these tenants must "self-certify" their QCT status to their landlords and provide annual proof of such status. The law mandates different notice periods for rent increases: 30 days for increases of 10% or less and 90 days for larger increases, with these requirements applying across new and existing leases. But panic not, landlords: These limitations only apply where the lease document does not provide otherwise (primarily month-to-month leases), so your rent increase table is "safe" (for now), as is your holdover provision, provided it is drafted properly. 

SB 1103 also tightens rules on passing operating costs to QCTs, requiring property owners to document cost breakdowns if requested by those tenants. This includes a breakdown of costs, itemized receipts or invoices, and a signed attestation to confirm the accuracy of the reported costs. These requirements are hardly onerous and are generally fair; in fact many if not most commercial leases already afford tenants a right to audit the landlord's books and records. 

SB1103  also limits the fees landlords can charge QCTs for building operating costs (i.e., management and administration fees). They must now be: 

• Proportionally allocated based on rational metrics (proportionate share based on building square footage would qualify); and 
• Documented with detailed cost information, which must be provided upon the QCT’s request.

Any changes in cost allocation methods must be disclosed in writing  to QCTs, who can use non-compliance as a defense in eviction cases.

Again, these requirements reflect most landlords' current practices regarding pass-through of management and administrative fees, but they do mandate additional transparency if requested by the QCT.  

Another key provision mandates that leases negotiated in certain languages (Spanish, Tagalog, Chinese, Vietnamese, or Korean) must include full translations, giving tenants a right of rescission if translations aren’t provided. This requirement could prove problematic if accurate and affordable legal translation services are not readily available within the time frame of a typical lease negotiation. The law does not address what happens if translations are provided but contain inaccuracies.

Finally, SB 1103 includes a requirement that month-to-month tenants having over a year of tenancy be given a 60-day (vs. 30-day) notice to terminate. Violations can lead to penalties, including rescission rights, actual damages, and legal fees, with enforcement supported by local government attorneys. 

Although this new law is very narrow in its application only to self-identified QCTs, it does represent the California legislature's focus on regulating commercial leases — with further regulations potentially on the horizon.

It is no secret that legal drafting requires a fair amount of precision in order to prevent misinterpretation and keep loopholes closed. “Shall” has been used pervasively in contracts and other legal forms for generations to express the compulsory nature of a party’s obligations. But use of the word can have problematic implications in a litigation setting, and as a result, attorneys should consider weaning away from the ubiquitous word “shall” in legal documents. While “shall” is generally used to indicate a mandatory obligation, the word itself is ambiguous enough to obscure the original intent of the document’s author. “Shall” can be interpreted as “may” or “must” or even “should”, all of which have drastically different meanings and connotations. The U.S. Supreme Court ruled as early as 1995 that “shall” can be interpreted to mean “may”. Instead of using “shall” repeatedly throughout contracts and leases, attorneys are being encouraged to use words that unequivocally indicate obligation—such as “must” or “will”.