California Commercial Rent Increases: SB 1103, Escalation Clauses, and Prop 13

California commercial rent increases are primarily governed by the lease agreement. However, SB 1103 (effective January 1, 2025) introduced mandatory notice periods for lease termination or non-renewal affecting Qualified Commercial Tenants (QCTs). Additionally, Proposition 13's property tax framework creates indirect rent pressure through NNN expense pass-throughs.

No Rent Control for Commercial Properties

Official Law Citation: The rules and regulations outlined on this page are strictly configured under the official SB 1103 - Commercial Tenant Protection Act (2025)Preview unavailable. Landlords must always ensure their lease agreements directly adhere to this state code.

California's Tenant Protection Act (AB 1482) - which caps residential rent increases at 5% + CPI - does not apply to commercial leases. Landlords can raise commercial rents by any amount, at any frequency, as defined in the lease agreement.

No California city or county has enacted commercial rent control, though some jurisdictions have explored it.

SB 1103: New Notice Requirements for QCTs

Starting January 1, 2025, landlords must provide enhanced notice to Qualified Commercial Tenants before terminating a lease or refusing to renew:

These requirements apply to both fixed-term and month-to-month tenancies for QCTs. They apply regardless of any conflicting clause in the lease.

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

Landlords cannot change the method for allocating building operating costs if the change would increase the QCT's share - unless written notice and supporting documentation are provided.

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. An appraiser or arbitration panel may be used if the parties disagree.

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) 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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