CA Commercial Rent Increases: SB 1103, Escalation, Prop 13

California commercial rent increases are primarily governed by the lease agreement under the California Civil Code (effective since 1 January 1873, though enacted in 1872). However, SB 1103 (the Commercial Tenant Protection Act, effective January 1, 2025) introduced mandatory notice periods for rent increases and lease terminations affecting Qualified Commercial Tenants (QCTs). Additionally, Proposition 13 (California Constitution Article XIIIA) property tax framework creates indirect rent pressure through NNN expense pass-throughs. Disputes are adjudicated in the Superior Court of California.

No Rent Control for Commercial Properties

Official Law Citation: The rules and regulations outlined on this page are strictly configured under the California Civil Code § 1954.27Preview unavailable and SB 1103 (2024)Preview unavailable. Landlords must ensure their lease agreements directly adhere to these state codes.

California's Tenant Protection Act (AB 1482) - which caps residential rent increases at 5% + CPI - does not apply to commercial leases. Furthermore, Civil Code § 1954.27 (The Commercial Rent Control Act of 1987) explicitly prohibits any public entity from enacting or enforcing a system of rent control on commercial real property.

Landlords can raise commercial rents by any amount, at any frequency, as defined in the lease agreement, subject to the new notice requirements for QCTs.

SB 1103: New Notice Requirements for QCTs

Starting January 1, 2025, landlords must provide enhanced notice to Qualified Commercial Tenants for both rent increases and lease terminations.

Rent Increase Notices (Civil Code § 827)

For periodic tenancies (e.g., month-to-month), the notice required for a rent increase depends on the percentage:

Lease Termination Notices (Civil Code § 1946.1)

Landlords must provide enhanced notice before terminating a lease or refusing to renew for a QCT:

These requirements apply regardless of any conflicting clause in the lease for tenancies of unspecified duration.

Who Qualifies as a QCT?

• Microenterprises - 5 or fewer employees (including the owner)
• Restaurants - fewer than 10 employees
• Nonprofits - fewer than 20 employees

QCTs must self-certify their status in writing upon lease execution and annually.

Operating Cost Restrictions for QCTs (Civil Code § 1950.9)

Under Civil Code § 1950.9, landlords cannot charge a QCT for building operating costs unless they are allocated proportionately and the landlord provides written notice with supporting documentation at least annually (or as specified in the lease).

Common Escalation Structures

Fixed Annual Increases

A pre-set dollar amount or percentage per year. Common in multi-year leases.

CPI-Based Adjustments

Rent adjusts annually based on changes in the Consumer Price Index. Leases often include floor and ceiling provisions (e.g., minimum 2%, maximum 5%).

Fair Market Value (FMV) Resets

At option renewal periods, rent resets to current market rates. Disputes are typically resolved via appraisal or arbitration in accordance with lease terms.

NNN Expense Pass-Throughs

In NNN leases, the tenant's total cost increases when operating expenses rise, even if the base rent stays flat. Key categories:

• Property taxes - can spike upon reassessment (see Prop 13 below)
• Insurance premiums - rising across California
• CAM charges - maintenance/shared costs

Proposition 13 and Property Tax Pass-Throughs

Proposition 13 (1978), codified in Article XIIIA of the California Constitution, caps annual property tax increases at 2% per year based on assessed value. However, a change in ownership (sale) triggers reassessment to current market value, which can dramatically increase property taxes.

In NNN leases, this tax increase is passed through to the tenant. Practical implications:

Best practice: Tenants should negotiate Prop 13 protection clauses limiting their exposure to tax increases caused by a change in ownership.

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