Note: I am not an attorney, but the subject of this blog is legal in nature. Readers are advised to read this blog from the perspective of what our team sees as potential impacts to our industry based upon this new legislation versus as legal advice. Please consult your attorney for any legal advice relative to this matter.
The California legislature has been at it again and a few bad apples have likely caused the ownership of multi-tenant retail centers in California to be less tasty. Starting January 1, 2025, Senate Bill 1103, also known as the Commercial Tenant Protection Act takes effect.
My goal in this blog isn’t to tell you exactly what this law says, but instead my thoughts on how the implementation could affect the retail shopping center industry. There are links at the end of this blog to a few well written articles that provide greater details into the specifics of the law. These articles are written by the law firms of Mashian Law Group; Greenberg Glusker; and Cox Castle. Also included is a link to the actual legislation.
Very briefly, the Commercial Tenant Protection Act covers three areas.
- Requirements regarding passing through triple net charges.
- Notice requirements regarding rent termination and rental increases.
- Possible translation requirements for new leases AND lease extensions.
The legislation creates a new tenant category called a Qualified Commercial Tenant (QCT) which for our purposes is a non-restaurant tenant with 5 or fewer employees (act does not seem to define whether it is 5 bodies or 5 full time equivalent employees) OR a restaurant with fewer than 10 employees (restaurant is not defined). In order for a QCT to officially be considered a QCT the business is required to declare themselves one by providing proper notice to the property owner. So in effect just because you lease a space to a party supply store with only 3 employees that in itself does not make the tenant a QCT. They must put the property owner on notice that they are a QCT.
The following are my thoughts regarding the potential implications of this Commercial Tenant Protection Act.
1. A New Micro Legal Industry May Be Created: Similar to the American Disabilities Act (ADA) where there are a bunch of (in my opinion) unscrupulous attorneys and plaintiffs causing a lot of grief for property owners, I think there is likely to be a new industry created whereby a segment of attorneys create a business out of notifying certain independent non-restaurant and restaurants alike what their rights are and for a “small” fee they can process the paperwork to protect their rights. This part of the business will likely not create many profits, but once attorneys have a list of QCT’s they can then encourage these tenants to take legal action against their landlord particularly as it relates to triple net charges.
As I understand it, if a landlord requests triple net charges from a QCT then they have to follow a set of procedures for providing the expense information to the QCT. If they do not follow the proper steps, a property owner can end up paying for both the tenants reasonable attorney fees and actual damages. But if the QCT can prove that the owner or its agent did not follow the procedures and acted willfully or with oppression, fraud or malice then the damages can be three times the actual amount.
2. More Modified Gross Leases: If I was working with a tenant that declared themselves a QCT OR could declare themselves a QCT, and I was only signing an initial 3 to 5 year lease with the tenant, I would very much consider doing a modified gross lease (includes triple net expenses) so that I did not have to worry about the liability.
3. Need for More Professional Property Management: If you own a strip center with 10 tenants and most of them can be QCT’s, it is likely going to be harder to manage such a center independently. I envision owners of smaller centers needing to make sure that their property manager has the ability to easily produce records that comply with the new legislation’s requirements or the property management company could end up costing the owner a lot of aggravation and money. We see owner triple net information all the time as a part of our investment sales platform and I can assure you that a huge number of owners are ill equipped for the requirements of this legislation.
4. Less of a Willingness for Owners to Lease to QCT’s: I did not see any language in the legislation that prevents a landlord from discriminating against QCT’s, but I suspect that it is either implied or it is coming. I can see situations where certain tenant rep brokers think they are helping the tenant by putting in the letter of intent that the tenant is a QCT. I can then easily see an owner deciding not to lease to this tenant. The landlord will state it is for credit/financial reasons, but in reality, it may be that the landlord does not want the risk of dealing with such a tenant. This could hurt the exact type of tenant the legislation was intended to help.
5. Less of an Understanding of the Lease Document due to Language Barriers: The legislation requires that if a landlord and QCT negotiates certain documents (a lease is included) in either Spanish, Chinese, Tagalog, Vietnamese, or Korean, the document under the law that is being negotiated needs to be translated. This begs many questions. If a broker speaks to a tenant in one of these languages as a method of building rapport but the tenant does speak English is the document required to be translated into the language of the parties? I don’t think this is the case. Also, the legislation is silent regarding non-binding letters of intent. Unless told otherwise, we are taking the position that we can negotiate a letter of intent in English, but we can explain items in the tenant’s native language. But once we get to the lease, we can only explain the lease in English and it will be up to the tenant to obtain legal counsel if they want it explained to them in their native language. In our observation, most tenants that can be QCT’s won’t hire an attorney. They will just sign the lease. Once again, this legislation is likely to hurt the QCT.
6. More Problems with Evictions: The legislation has a component that requires a landlord to give more specific notice to QCT’s for rent increases and lease expirations. These requirements combined with the language regarding triple net charges is likely going to give the attorneys that represent QCT’s the ability to figure out ways that the owner/property manager messed up when trying to evict a tenant. As a result, evictions are likely going to take more time.
7. Commercial Property in CA Becomes Less Desirable: This legislation applies to all product types including office, industrial and retail. Clearly this legislation is potentially one more item that could make investing in properties that have smaller tenants less desirable. If this is the case, less capital will pursue such assets and therefore cap rates would need to increase to encourage such properties to transact.
I could be wrong AND I hope I am! Hopefully I’m mistaken on all or most of these items. Maybe those who quality as QCT’s will recognize that registering as a QCT may make it harder to lease space, create animosity with their landlord, and not really provide them with meaningful protections. Only time will tell.
For a better explanation of the actual facts of this legislation, please reference one or all of the following articles:
Mashian Law Group – New Protections for Small Commercial Tenants
Cox Castle Client Alert SB1103
Greenberg Glusker SB 1103 Article
SB1103 Text from CA Legislative Information
If you have an opinion on this matter, please reach out to me at brad@progressiverep.com or 909-230-4500.