Recent Amendments to the Disclosure Regime Governing California Lease Agreements (Part 2)
This article is the second in a two-part series dealing with the various disclosure obligations that have been recently included in the legal framework governing commercial lease agreements and real estate in California. In Part I, we discussed the disclosures to be made under the amended ADA accessibility regime; in Part II, we will focus on the energy use disclosures required under the Non-Residential Building Energy Use Disclosure Program.
The Non-Residential Building Energy Use Disclosure Program (AB 1103 and AB 531) mandates the disclosure of energy use data (for the prior 12 months), operating characteristics, and ENERGY STAR Energy Performance Score of commercial buildings of over 5,000 square feet, to be made to a prospective buyer or tenant no later than 24 hours prior to the execution of the purchase/lease agreement, and no later than the submission of the loan application in the case of a prospective lender. Since July 1, 2013, the program has been in force with respect to buildings of over 50,000 square feet, however the same is slated to come into effect on a staggered basis and will cover buildings over 10,000 square feet by January 1, 2014, and those over 5,000 square feet by July 1, 2014.
Indeed, this mechanism is not unknown to realtors and the administration – since January 1, 2009, gas and electric utilities have maintained energy consumption data for all commercial (non-residential) buildings, which have been uploaded to the United States Environmental Protection Agency’s ENERGY STAR Portfolio Manager portal on a consent basis. However, the program now mandates the usage of the free online portal, which requires utility account-holders to furnish data within 30 days of each request. Additionally, the user is also required to fill out a compliance report and download and make available certain “Energy Use Materials” (Disclosure Summary Sheet, Statement of Energy Performance, Data Checklist, Facility Summary) to prospective tenants and buyers.
The software tool compares buildings located in regions experiencing similar climate and operational conditions, and scores them relatively on a 1-100 scale – a rating of 75 qualifies for ENERGY STAR certification – allowing prospective tenants and buyers to estimate future operating costs, rather than mere utility bills, when comparing buildings. At the same time, maintenance of the ENERGY STAR profile and rating is an additional burden on the real estate developer, given the degree of influence it can have over potential customers.
This system is an improvement on the benchmarking system to aid tenants, buyers, and lenders to compare energy consumption data of similar commercial buildings that was created in 2007 pursuant to Section 25402.10 of the California Public Resources Code. Moreover, it must be borne in mind that these disclosure obligations apply specifically to sales, purchases, or financing agreements in respect of an entire building, and not portions of buildings, or to multi-family buildings.
Though no sanctions have been specified for the failure to comply with the above mandated disclosures, it is certainly in the interest of real estate developers to take these regulations seriously, when dealing with clients, who will almost certainly require evidence of compliance as a prerequisite to the closing of a real estate transaction, thus creating a self-regulating market, that significantly reduces the burden of enforcement on the state.