Impacts of Commercial Tenant Protection Act

| Lindsay Petrone
QCT

The Commercial Tenant Protection Act, which was passed by the California legislature in 2024 and took effect as of January 1, 2025, expanded certain protections which already may benefit residential tenants to include certain classes of commercial tenants. Specifically, tenants who are (i) microenterprises (those businesses with 5 employees or less and have limited access to capital or loans), (ii) restaurants with less than 10 employees, and (iii) nonprofit entities with less than 20 employees, all collectively known as “Qualified Commercial Tenants” (“QCT”). In order to qualify as a QCT, a tenant must annually represent to its landlord that it is one and attest to its number of employees as within the threshold.

If a tenant is deemed a “Qualified Commercial Tenant,” then it can be afforded several statutory rights which other commercial tenants do not enjoy. First, a landlord cannot raise the rent of a QCT without first providing a statutorily required written notice to the QCT and waiting a certain period after delivery of that notice. If the rent is being raised less than 10% above the lowest rental amount in the last twelve months, then the notice period is 30 days. However, if the rent is being increased by 10% or more from the lowest rental amount in the last 12 months, then the QCT must be given at least 90 days before the rental increase can take effect. We advise commercial landlords timely serve their QCTs with rental increase notices in advance of any stated changes in the lease, otherwise the rental increase might not be enforceable until the notice and time period has expired.

Additionally, month to month leases with a QCT shall automatically renew for an additional month term, unless the landlord delivers a specific written notice to such tenant – 60 days in advance of the termination date if the tenant has been there at least one year, and at least 30 days if the tenant has been there less than one year. Alternatively, a QCT is only required to give that same landlord 30 days advance written notice of termination in either instance.

The California legislature also wanted to make the operating expense reimbursement process more transparent for QCT leases. As such, a new statute requires landlords to disclose the operating expense process to their QCTs and ensure that the method of cost allocation to them is fair. Further, certain costs cannot be recovered like those reimbursed to landlord by a third party and those which were not incurred in the prior 12 months or reasonably to be incurred in the ensuing 18 months.

Finally, the Legislature clarified that any QCT negotiating their lease in Chinese, Spanish, Tagalog, Vietnamese or Korean shall have their lease translated and signed in that negotiated language. If it is not translated, then that lease could be rescinded by the affected tenant. Please note that the above is a general overview and there are additional conditions and requirements for compliance with the above laws which cannot be stated here due to breadth. As such, we recommend these new laws be reviewed prior to sending any documentation to a QCT.

As a result of the Commercial Tenant Protection Act, commercial landlords should be aware of these rights afforded to QCTs and ensure they comply with any notice, disclosure and timeline obligations. There are penalties for failing to comply with these laws, including the prospect of punitive damages in certain cases if found to be a willful violation. Landlords would be best served by doing their due diligence in understanding if a tenant is a QCT and these restrictions apply. On the other side of the coin, tenants should be aware of these laws and ensure they timely notify landlords of their status to take advantage of these additional protections.

 

Authored by Reuben, Junius & Rose, LLP Partner, Lindsay Petrone.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Prop. 21 – Another Attempted Costa-Hawkins Takedown

| Michael Corbett
Costa-Hawkins

This November, California voters will be asked for the second time in as many years to overturn statewide restrictions on rent control in the Costa-Hawkins Rental Housing Act (“Costa Hawkins”). The following provides a summary of Proposition 21, named by its proponents as the Rent Affordability Act (“Prop. 21”), and its potential implications for residential landlords and tenants in California.

Prop. 10 and Costa-Hawkins

Its predecessor, Proposition 10, was rejected by nearly 60% of voters in 2018. It would have repealed Costa-Hawkins and allowed local governments to adopt rent control on any type of rental housing.  Costa-Hawkins, passed in 1995, allows local governments to enact and use rent control, except on (a) housing that was first occupied after February 1, 1995, and (b) certain classes of housing units, such as condominiums, townhouses, and single-family homes.  Landlords protected by Costa-Hawkins are currently allowed to increase rent to market rates when a tenant vacates a unit.

Prop. 21

If approved by voters, Prop. 21 would allow local governments to adopt rent control on housing units, except for (a) housing first occupied within the last fifteen (15) years and (b) units owned by natural persons who own no more than two (2) housing units with separate titles, such as single-family homes, condominiums, and certain duplexes, or subdivided interests, such as community apartment projects and stock cooperatives.  Prop. 21 would continue to allow local limits on annual rent increases to be more restrictive than the current statewide limit.  For vacancies where the previous tenant voluntarily vacated, abandoned or was lawfully evicted from a dwelling unit, Prop. 21 would impose, over the first three (3) years of a new tenancy, a combined rent increase cap of fifteen percent (15%) from the rental rate in effect for the immediately preceding tenancy.  This three-year rent increase cap would be in addition to any rent increases otherwise authorized by local law.

Tenant Protection Act of 2019

Prop. 21 follows the January 2020 roll-out of the Tenant Protection Act of 2019, which enacted a statewide rent control cap on annual rent increases of five percent (5%) plus the percentage change in the Consumer Price Index or ten percent (10%), whichever is lower.  The Tenant Protection Act of 2019, while considered to provide among the strongest state-implemented rent increase caps and renter protections in the country, does not affect vacancy decontrol, meaning landlords are currently able to set initial rents for new tenancies.  If passed, Prop. 21 would effectively foreclose the ability of landlords now protected by Costa-Hawkins to set initial rents at market rates if it would result in more than a fifteen percent (15%) increase from the prior tenant’s rental rate.

Support of Prop. 21

Proponents of Prop. 21 contend that the measure would provide more financial security for renters, reduce homelessness, and help alleviate a statewide housing affordability crisis.  The Prop. 21 campaign is sponsored by the Aids Healthcare Foundation, and notable supporters include Senator Bernie Sanders, House Representative Maxine Waters, the California Democratic Party, and the ACLU of southern California.

Opposition to Prop. 21

Opponents of Prop. 21 posit the proposed statutory changes would hurt renters by discouraging private sector builders from bringing more affordable housing units to market and diminish property values, resulting in less revenue for communities.  Californians for Responsible Housing is leading the campaign in opposition to this initiative, with other opponents including Governor Gavin Newsom, the Howard Jarvis Taxpayer Association, California NAACP State Conference, and Congress of California Seniors.

Votes Needed to Pass

For Prop. 21 to pass and become state law, greater than fifty percent (50%) of the votes cast for this proposition must vote “yes”.

 

Authored by Reuben, Junius & Rose, LLP Attorney Michael Corbett.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.