Navigating California Commercial Real Estate Law
Commercial real estate developers, sellers, and buyers in California face legal and financial challenges since the state’s new commercial real estate statutes took effect in 2019. Some of these new laws changed the way commercial landlords approached evictions and commercial property abandonment. Other sections of the law impacted property transfers and contracts. At Polymath Legal, we work with commercial developers, buyers, and sellers of real property throughout California. Call us today at (833) 931-6418 to discuss how changes in California commercial real estate law affect your business.
Commercial property owners, investors, sellers, and tenants should be aware of four key changes to California commercial real estate law, as it can affect the way they invest or structure lease terms or contracts.
Limitations on Private Transfer Fees
Private transfer fees require a real property buyer to pay a fee upon transferring ownership of the property. These fees are imposed by the seller and are assessed each time the property changes hands, and typically run a set course of 20-99 years. A new law, California Civil Code § 1098.6, prohibits the creation of new private transfer fees unless the fees provide a direct benefit to the property.
Under the Code of Federal Regulations, the term “direct benefit” means the transfer fee funds maintenance and improvement of the property. Investors planning to seek financing from the Federal Housing Administration (FHA) or the Federal Housing Finance Agency (FHFA) may have trouble obtaining financing for real property encumbered by a private transfer fee, as these two agencies are prohibited from providing mortgages for such properties.
Private transfer fees already in place prior to January 1, 2019, will not be obstructed. No new private transfer fees may be created, except for fees that provide a direct benefit. While Federal Code stipulates these fees be used for improvement on the property, in fact, the term is rather broad and may include developments that impact the environmental, conservation, educational, or recreational activities of adjacent or contiguous properties. If the transfer fee attached to the property does not comply with the new law, then the fee is void.
Abandonment of Commercial Property
Effective January 1, 2019, this amendment to California Civil Code § 1951.3 reduces the period of time before landlords may serve a tenant with a “Notice of Belief of Abandonment.” Prior to the change, the minimum period before serving notice was 14 consecutive days after the rent was due and unpaid. Now, landlords can issue the notice three days after the unpaid rent’s due date. The revision stipulates that these are calendar days, not consecutive days, and thus Saturdays, Sundays, and holidays are executed. Existing contracts which have terms that set forth a longer grace period for unpair rent are exempt from the change.
Landlords are permitted to use an overnight courier to serve the notice to the tenant. Previously, the notice was to have been mailed or personally delivered to the tenant.
The commercial landlord must have a reasonable belief that the property within is abandoned in order to serve the notice of abandonment. They may terminate the lease 15 days after the notice was given.
Landlords and tenants may negotiate different lease terms regarding the grace period after the rent due date or a timeframe in which the commercial landlord will deem the lessee’s property to be abandoned. However, landlords and tenants both should be aware of the changes to the law, as these can affect the way that leases may be written.
Disposal of Tenant’s Personal Property
This amendment to California Civil Code § 1993.04 and § 1993.07 alters the terms regarding property disposal left behind when a commercial tenant vacates. Effective January 1, 2019, if the estimated value of property left behind totals more than $2,500 (or one month’s rent), the landlord may retain the property for their own use or auction it off. The prior threshold allowed landlords to take possession of goods totaling $1 per square foot of the grounds or $750, whichever was the lesser.
The change was prompted because the prior threshold was deemed to be an undue hardship for property owners.
Landlords may structure a lease with more stringent terms for property disposal and require tenants to waive the statute’s threshold amounts. Tenants should be aware of the changes in the property abandonment statutes and note the terms in their lease.
General Release Language
The change in the wording of general release terms of property transfer contracts may reduce the ability of buyers to “carve out” exceptions to the blanket release for the seller. Before the changes, buyers could stipulate a release for all known and unknown conditions of the property, which may have left the seller responsible for issues they weren’t aware of, in perpetuity. Now, the releasing party must stipulate that they release unknown claims.
The change to Cal. Civil Code § 1542 now specifically addresses this general release language. As a result, buyers and sellers of commercial real estate in the state of California may wish to provide additional lines in the contract for the purchasing party to acknowledge that they acknowledge the existence of yet-unknown claims and assume any risk or benefit thereof. Signing this release may reduce ongoing litigation between buyer and seller should an unknown claim to the real property arise.
Consult With an Experienced Commercial Real Estate Attorney
California commercial real estate buyers, sellers, developers, and tenants should all make themselves aware of the changes to the commercial property statutes that took effect in 2019. Some, such as the terms of disposal of a tenant’s personal property and determining whether a commercial property is abandoned, will affect the structure of commercial leases. Others, including the limitations of private transfer fees and the change to the verbiage of the general release code, will affect the terms of a purchase.
The real estate attorneys at Polymath Legal PC are here to assist our clients in navigating the changes in California commercial real estate law and protecting their interests under the new laws. Call us today at (833) 931-6418 to discuss your business needs.