California’s New Commercial Tenant Rights Could Change the Game

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The location was everything Deandrea Jones could have asked for and then some. The problem became the “and then some.”

Jones is the creator and owner of Wah Gwaan Jamaican Kitchen and Bar in Los Angeles. It’s located in the heart of the Crenshaw district, at the bustling intersection of Crenshaw Boulevard and Vernon Avenue, right across the street from Leimert Plaza and the shiny new Leimert Park light rail station.

The light rail station almost didn’t happen. Even after years of transit planning that included it, plans for L.A.’s Crenshaw/LAX light rail line moved forward without the station to cut costs. Local activists fought back and won a two-year campaign to get the Leimert Park station built, part of their vision for revitalizing an area that has long been a cultural hub of the Black community in Southern California.

Jones’ restaurant fits right in with that vision. She signed a five-year lease on the space in June 2020, in the depths of the pandemic, paying three months’ worth of rent upfront for the security deposit. It took two years to build out the space before she could open her doors. Under the terms of her lease, the monthly payment goes up every year. It’s hard but at least it’s something she can anticipate and plan around as her business grows.

But Jones also has to pay a monthly fee for common area maintenance, which is supposed to help pay for the building’s shared plumbing, parking lot maintenance, landscaping and more. Last year, Jones says, that maintenance fee jumped from $1,080 to $1,800. When she asked her landlord why the fee needed to jump 67% overnight, even as chronic sewage issues and other neglected maintenance continued, the landlord responded by sending in collection agents.

With small business owners across California struggling with huge unexplained increases in common area maintenance fees, massive increases in rent and sudden eviction notices, Gov. Gavin Newsom last week signed legislation establishing a new slate of statewide rights for qualified commercial tenants.

‘A more equal playing field’

California’s new commercial tenant rights apply to small businesses with up to five employees, restaurants with up to ten employees, or nonprofits with up to 20 employees.

Businesses covered under the new law have the right to a lease written in the language that was used for negotiation with the landlord, security deposits limited to one month’s rent, and a right for documentation from landlords that explains how building maintenance fees are calculated, including any new increases in fees. The new law also sets requirements for fair notice of rent increases or termination of tenancy upon the end of an existing commercial lease.

“A big part of the advocacy strategy and the process of advocating for [the legislation] was educating decision makers on how not all lease negotiations are an equal playing field,” says Doug Smith, Senior Director of Policy and Legal Strategy for Inclusive Action for the City, which was part of the statewide coalition that helped design and push for the new law.

“Creating these baseline protections, in our view, is not tipping the scales in favor of one party over another, but it’s actually creating a more equal playing field for these types of negotiations.”

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That playing field has changed dramatically over the past few decades. California’s new commercial tenant rights are just the latest response to the current state of commercial real estate, especially when it comes to storefronts and other retail spaces along commercial corridors like Crenshaw Boulevard.

Local business owners in these places might leap at the chance to own the buildings where they’ve been renters. But by design, they’ve never stood a chance against a growing influx of deep-pocketed institutional investors.

“There’s a perception that small businesses and small nonprofits don’t need protections, or they’re not worthy of protections in the same way that residential tenants are,” Smith says. “It’s based on this notion that commercial leases are sophisticated business-to-business transactions, this idea that there’s already a level playing field between equal negotiating partners.”

That may be the case when a big box store negotiates its lease, but it’s far from the reality for most small businesses. “What this misses is the legacy of exclusion that’s baked into our systems,” Smith says.

Development and displacement

The neighborhoods along the Crenshaw corridor like Leimert Park and Hyde Park have remained majority-Black amid shifting demographics across the broader South L.A. area. But redlining by banks and racial discrimination in the real estate industry have kept commercial property ownership largely out of the hands of Black business owners and Black developers.

Commercial real estate was once deeply hyperlocal. Property owners needed to know what locals wanted to eat, drink, buy or experience to successfully fill each storefront and retail space. At the very least, they had to understand what Black communities wanted so that they could extract rents from commercial properties in Black neighborhoods.

Now, larger institutional investors — pension funds, real estate investment trusts, private equity firms — are increasingly pushing into commercial real estate. Their mere presence shifts hyperlocal markets into global commodities. Even if a commercial property owner is local, today they can behave as if they’ll have an opportunity to sell to an institutional investor operating on a national or global scale.

“We hear so many of those stories of how it used to be,” Smith says. “But we also hear stories around the impacts and the consequences of speculation in commercial real estate, where you do have folks coming in and acquiring properties, buying low to sell high, without that historical context and relationship to communities.”

Institutional investors have habitually followed L.A.’s metro expansion over the past several decades, creating speculation and displacement pressures around new transit stations, sometimes before they’re open. Even Leimert Park station, which local activists so fought hard to get built, ultimately helped fuel the kind of speculative development that incentivizes nearby commercial landlords to maximize the potential sale price of their properties by jacking up rents or common area maintenance fees.

It’s not just in Black neighborhoods. There’s a similar disconnect between local businesses and commercial real estate ownership in L.A.’s Little Tokyo, where some 400 small businesses now face displacement pressures centering around a newly-rebuilt metro station. This year, the National Trust for Historic Preservation named Little Tokyo one of its 11 most endangered places.

Nor is it just Los Angeles. Absent some larger policy or regulatory shifts that might change how institutional investors operate or what they’re allowed to do, small businesses, legal aid groups and community organizations are working with local and statewide legislators to create new tools to fight back in a growing number of places.

A coalition crystallizes

The statewide coalition behind California’s new commercial tenant rights came together last fall, ranging from community development organizations to small business networks, legal aid groups working with small businesses, and a community land trust. Several of the coalition members are stewards of commercial properties themselves.

More and more small business clients and members have been approaching these organizations with so many of the same issues, from unexplained increases in common area maintenance fees to exorbitant rent increases upon the end of a lease to landlords refusing to offer any lease renewal at all.

If it wasn’t transit-fueled speculation in Southern California, it was tech boom-fueled speculation in the Bay Area.

“We realized that there were these certain trends that we kept hearing about in all of these different spaces and all of these different ways of interacting with entrepreneurs, which was validating and helped us crystallize a platform for the legislation,” Smith says.

Some of California’s new commercial tenant rights are based on existing residential tenant rights, especially the fair notice requirements. Under existing residential tenant regulations in California, if a landlord wants to raise the rent on a residential tenant up to 10% more than the previous rent, the landlord needs to give at least 30 days notice before the rent increase takes effect; if the rent increase is more than 10%, the landlord needs to give at least 90 days notice. These same fair notice requirements now apply to qualified commercial tenants in California.

Smith believes these new commercial tenant rights will create a level of stability along commercial corridors that will benefit small businesses and communities as well as landlords. In his view, speculative development causes disruptions that create knock-on effects. When speculation forces one or two businesses along a previously thriving corridor to vacate their spaces, that forces their regulars to eat, drink or shop elsewhere. As neighboring businesses begin to lose those customers, they start struggling to keep up with ever-increasing rents. It’s a downward spiral from there.

Pushing for these new commercial tenant rights is part of a multi-pronged strategy to counteract the real estate speculation displacing small businesses.

This past summer, Los Angeles joined a handful of cities that have launched legacy business programs to help long-standing businesses – in L.A., they must have been operating for at least 20 years – overcome displacement pressures associated with new waves of speculative development.

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Meanwhile, Inclusive Action for the City is developing a portfolio of eastside L.A. commercial properties through the Community-Owned Real Estate project. The intention is for the tenants of CORE’s storefront properties to eventually become collective owners of the portfolio as a whole, instead of leaving them at the mercy of the market or even a friendly nonprofit.

CORE’s other developer is Little Tokyo Service Center, which has its own portfolio of properties including commercial spaces in Little Tokyo, and it’s also part of the coalition behind California’s new commercial tenant rights. The two mission-driven developers’ perspective also helped inform the legislation.

“Being able to just have that gut check with our team, to be able to confirm that what we’re asking for [from commercial property owners] in the policy is both workable and productive was really helpful for being able to move it through,” Smith says.

Along the Crenshaw Boulevard corridor, some of the activists who pushed for the Leimert Park metro station are now part of Liberty Community Land Trust, which is acquiring both commercial and residential properties in the area in order to shield them from speculation and make sure they continue to serve the community.

The success of community-ownership models depends on having a critical mass of customers attracted to the small businesses in their storefronts – and to other nearby storefronts as well. That’s where Smith believes community ownership and commercial tenant rights can create some mutually-reinforcing synergy.

“These new commercial tenant rights are a necessary incremental step to stabilize and preserve these commercial corridors so that we can get to a place of community ownership and sustainability,” Smith says.

“If everyone is pushed out before we can assemble the capital to acquire and hold the properties, then we’ve lost.”