New California Commercial Lease Regulations SB 1103 Set to Take Effect! A Must-Read for Small Business Owners on 2025 Changes in

California small businesses and nonprofit commercial tenants are about to receive significant legal protections. Starting January 1, 2025, SB 1103, also known as the "Commercial Tenant Protection Act," will drastically alter commercial lease rules, providing new protections for tenants, including extended notice periods for rent increases and lease terminations, as well as mandatory lease translations. Paul P. Cheng, Esq., a former prosecutor, current Arcadia City Councilmember, and well-known Southern California trial lawyer, provides insight on key aspects of this new law that could affect hundreds of thousands of business owners.

Background: Post-Pandemic Commercial Lease Reform

The COVID-19 pandemic hit California's small businesses hard, with many forced to close due to rent issues. The passage of SB 1103 marks the first time California has extended certain protections from residential leases to the commercial sector. This reform is seen as an important step toward "democratizing" commercial leases, and Paul P. Cheng, Esq. emphasizes, "Small businesses are the backbone of California, but they are often at a disadvantage in negotiations with large corporations and commercial landlords. This could be the most impactful lease reform for small business tenants in recent years."

Overview of SB 1103

SB 1103 introduces significant changes to commercial leasing, enhancing protections for small business tenants. Tenants who meet the "5/10/20 rule" and provide written notice confirming their status within 12 months of executing the lease can benefit from these new protections.

Under this law, landlords must translate leases into the tenant's primary language (such as Spanish, Chinese, Tagalog, Vietnamese, or Korean) to comply with these requirements. Additionally, leases with qualified commercial tenants will automatically renew unless the landlord provides a timely notice of non-renewal.

Qualified Commercial Tenants

To qualify for the protections provided by SB 1103, a commercial tenant must meet two conditions:

1. Microenterprise: This includes restaurants with fewer than 10 employees or nonprofit organizations with fewer than 20 employees. A microenterprise is defined as a sole proprietorship, partnership, LLC, or corporation with five or fewer employees, including the owner, who generally lack sufficient access to loans, equity, or other financial capital.

2. Written Notice: The tenant must have provided written notice to the landlord within the last 12 months, confirming that they qualify as a commercial tenant and self-attesting to the number of employees.

Four Key Changes in SB 1103

1. Notice of Rent Increase for Short-Term Leases For month-to-month or short-term leases, landlords must notify tenants in advance of any rent increase. If the increase is less than 10%, the notice must be given at least 30 days before the increase; if more than 10%, the notice must be given at least 90 days before. Additionally, the notice must inform tenants about the changes in the law.

2. Lease Translation Requirement SB 1103 mandates that landlords must provide a translated lease for qualified commercial tenants. Unlike existing laws, landlords cannot claim an exemption based on the tenant providing their own translation. If the landlord fails to comply, the tenant has the right to rescind the lease.

3. Automatic Lease Renewal For qualified commercial tenants, SB 1103 requires leases to automatically renew unless the landlord provides notice of non-renewal 30 to 60 days before the lease ends. Tenants can file complaints with local housing authorities or take legal action if the notice requirement is violated.

4. Limitation on Charges for Building Operating Costs Under SB 1103, landlords cannot charge qualified commercial tenants excessive fees for building operating costs unless the charges are proportionally allocated, documented, and reasonably expected within the next 12 months. Tenants can seek damages or an injunction if the landlord fails to comply.

Attorney Paul P. Cheng advises that both tenants and landlords need to prepare for these changes to ensure compliance with the new legal environment. For tenants, the first step is to assess whether they meet the "qualified commercial tenant" criteria, including employee numbers and business type. It is also critical for tenants to review important dates and terms in their existing leases, helping them understand their rights and obligations. Furthermore, establishing a reliable system for tracking employee numbers will assist tenants in providing accurate information during annual qualification declarations. For new leases signed after 2025, tenants should proactively request official language translations to ensure full understanding of the contract terms.

For landlords, it is essential to review current leases and identify tenants who may be affected by the new law. Implementing employee verification processes will help landlords confirm the validity of tenants' qualification declarations. Furthermore, maintaining transparent records of property expenses will be necessary, as the new law requires operating costs to be documented and verifiable. During lease renewal negotiations, landlords should consider proactively communicating potential changes to avoid disputes.

Attorney Paul P. Cheng emphasizes, "Because there are areas of the law that require further clarification, both tenants and landlords should seek professional legal advice before making any significant decisions to ensure full compliance and protect their interests."

Looking Ahead: New Trends in the Commercial Lease Market

As the implementation date approaches in 2025, California's commercial leasing market will undergo profound changes. Paul P. Cheng, Esq. predicts that the new regulations will significantly extend negotiation times for commercial leases, as both parties will need to carefully assess and negotiate terms. Additionally, the requirement for bilingual lease translations is expected to drive a sharp increase in demand for legal translation services, particularly in Spanish, Chinese, and other major languages.

Another noteworthy trend is the innovation of leasing models for small commercial spaces. With automatic renewals and increased transparency in operating costs, both landlords and tenants may explore more flexible leasing options to adapt to changing market conditions. These shifts will reshape California's commercial leasing landscape and may set a legislative precedent for other states. In the coming months, market participants must stay vigilant and adjust their strategies to navigate this historic transformation.

Consult a Lawyer

SB 1103 applies to all qualified commercial leases, including shopping malls, strip malls, and other areas housing small businesses. Commercial landlords should update their lease agreements, tenant notices, and operating procedures to comply with the new regulations. Landlords should consult a lawyer before taking action to fully understand the law’s specific application.