Added Calif. Civil Code §1950.9

Amended Calif. Civil Code §827, §1632, §1946.1

Effective date: January 1, 2025

Bill text: SB 1103

Why this matters: The smaller the commercial tenant, the more likely a major financial obstacle becomes a serious threat the tenant is unlikely to easily resolve. Rent increases and deadlines imposed on tenants by landlords often have drastic effects on small operators as rental market conditions vary hugely during a business cycle. Landlords are far better capitalized and thus more financially flexible than small operations run by their tenant. Here, public policy levels the playing field financially so in the short term both passive landlords and active tenants can plan to survive long term.

Qualified commercial tenants given time to perform

Landlords with small commercial tenants have extra guardrails now in place to give small operators who occupy space under a leasehold more time to arrange or adjust to demands unilaterally imposed by their landlord and property managers or leasing agents.

The small commercial tenants who are entitled to more time to perform on notices from their landlord are classified in landlord-tenant codes as Qualified Commercial Tenants (QCTs).

To qualify as a QCT and receive more time for notices, the tenant needs to be a:

  • microenterprise — which is a business with five or fewer employees and limited access to financial resources [Calif. Business and Professions Code §18000];
  • restaurant with fewer than ten employees; or
  • nonprofit organization with fewer than 20 employees.

The tenant must establish their status as a QCT and right to receive protection as a QCT by serving the landlord with written notice about their QCT status. Without the tenant giving notice to the landlord initially and again annually, QCT changes in their occupancy agreement are not perfected and the QCT rules do not apply. [See RPI Form 589]

The tenant to initially perfect their status as a QCT and be protected with extended periods for notices from the landlord, must provide the landlord with their written QCT notice and attestation when entering into:

  • a rental agreement for a periodic tenancy (month-to-month or less); and
  • all other rental and lease agreements, within 12 months before the tenant provides written notice to the landlord.

For the tenant to continuously receive QCT advance notice protection, they must annually provide the landlord with the notice and attestation of employee numbers. [See RPI Form 589]

The landlord has no obligation to inform their tenant about the QCT rules. Thus, commercial tenants need an awareness of the rules which apply to them. Tenant brokers who are familiar with this legislation are in a position to advise their tenant-clients who are classified under the QCT category.

The landlord, after receipt of a QCT’s written notice about the tenant’s QCT status, is subject to:

  • a longer period of time for notice of an increase in rent, common area maintenance fees (CAMs) or other obligations;
  • a longer period of time for notice of termination of tenancy to be effective;
  • more documentation in a change of building operating costs paid by the tenant; and
  • translation requirements when negotiating a lease agreement.

The following reviews the details for the notices from the landlord.

Rent increases for a QCT’s periodic tenancy

After a landlord under a month-to-month or lesser periodic rental agreement receives an initial or annual QCT statement of QCT status, they must take precise steps when changing the rental amount or their notice of change is not enforceable.

The minimum advance written notice periods before the change is effective are:

  • 30 days’ advance written notice when the increase is 10% or less than the rental amount charged within the prior 12 months. [Calif. Civil Code §827(b)(2); See RPI Form 570]
  • 90 days’ advance written notice when the increase is greater than 10% of the rental amount charged within the prior 12 months. [CC §827(b)(3)(A); See RPI Form 574-1]

The landlord’s written notice of the change in rent amounts is delivered:

  • to the tenant personally; or
  • by serving a copy by mail. [CC §827(b)(1)]

A tenant is not entitled to recover any money penalties when the landlord violates these notice requirements. [CC §827(b)(6)]

However, the rental amount changes are not effective, and the tenant does not have to pay them until the landlord follows proper notice protocols. [CC §827(b)(5)]

Termination notices

Periodic tenancies held by a QCT are automatically renewed unless the landlord or the tenant terminates the tenancy in writing. [CC §1946.1(a)]

However, to terminate a QCT periodic tenancy, the landlord serves the QCT tenant with a:

  • 30 days’ notice when the tenant has occupied the property for less than one year. [CC §1946.1(c); See RPI Form 571]; or
  • 60 days’ notice when the tenant has occupied the property for one year or more. [CC §1946.1(b); See RPI Form 571-1]

Common area maintenance (CAM) charges

A commercial landlord may charge a QCT a CAM fee to recover building operating costs, only when:

  • the building operating costs are allocated proportionately per tenant, by square footage or another method explained with supporting documents the landlord provides to the QCT;
  • the building operating costs have been incurred within the previous 18 months, or are reasonably estimated to be incurred within the next 12 months;
  • the landlord provides the QCT with a notice before entering into the rental or lease agreement stating the tenant may inspect the supporting documents of building operating costs upon written request from the tenant;
  • within 30 days of the tenant’s written request, the landlord provides the QCT with supporting documents of the previously-incurred or reasonably-expected building operating costs;
  • the costs include no expenses paid by a tenant directly to a third party; and
  • the costs include no expenses for which a third party, tenant or insurance reimbursed the landlord. [CC §1950.9(a)]

The landlord may not charge the QCT building operating costs until the landlord provides the QCT with evidence showing why the landlord is charging for the costs. [CC §1950.9(b)]

During the tenancy, the landlord may alter the method for allocating building operating costs to increase the QCT’s share of the costs. However, the landlord must provide the QCT with written notice of the change in the method for allocation together with supporting documents. [CC §1950.9(c)]

Tenant recovery for landlord CAM charge violations

A landlord who violates the QCT codes relating to building operating costs faces liability to the tenant for:

  • actual money losses incurred by the tenant;
  • reasonable attorney fees and costs; and
  • treble and punitive money penalties against landlords who act willfully, oppressively, fraudulently or maliciously. [CC §1950.9(e)]

Translation requirements

When lease, sublease or rental agreement negotiations between a landlord and QCT are conducted mostly in Spanish, Chinese, Tagalog, Vietnamese or Korean (without an interpreter), the landlord provides the rental or lease agreement translated in that language before entering into the agreement. [CC §1632(b)(8)]

The involvement of an interpreter does not relieve the landlord of the translation requirement when dealing with QCTs. [CC §1632(h)(3)]

To the contrary, a landlord entering into a residential rental or lease agreement with a tenant may bypass the translation requirement when the tenant has an interpreter. [CC §1632(h)(2)]

When the translation requirement is not met, the QCT may rescind the lease or rental agreement. [CC §1632(k)(1)]

Related article:

Form-of-the-Week: Commercial Lease Agreements — Net variety — Forms 552-2 and 552-3