New Laws Impacting Commercial Leases and Commercial Buildings to Take Effect on July 1, 2013

By Patric J. Kelly
Adleson, Hess & Kelly, a P.C.

As I presented in our October seminar, there are two significant pieces of legislation that take effect on July 1, 2013, for which you should be prepared.

1: Obligation to Disclose Energy Use of Certain Commercial Buildings for Certain Sales, Leases or Finances or Refinances Pursuant to California Public Resources Code section 25402.10.

This Code provision and its implementing regulations ("Regs") are likely not known to many people. The law was signed into law in October 2007. Another law signed in 2009 extended its operative effect and delayed compliance. The stated purpose of the disclosure requirements was to motivate building operators to take actions to improve their buildings' "energy profiles" and "to allow building owners and operators to compare their buildings' performance to that of similar buildings and to manage their buildings' energy costs". In other words, the law is building in a "green premium" to the value of buildings that use less energy. This law and the Regs apply to all "nonresidential buildings" as defined in the Regs, i.e., California Code of Regulations, Title 20, Division 2, Chapter 4, Article 9 as issued on November 26, 2012. The definition of a "Nonresidential Building" is: "a building of occupancy type A, B, E, I‐1, I‐2, M, R1, S, or Type U parking garages, as defined in the California Building Code, Title 24, Section 302 et seq. (2007)."

The law requires that owners of Nonresidential Buildings disclose the energy use history of the building to certain purchasers, tenants and financers of the building, including disclosing the ENERGY STAR® Energy Performance Score. The disclosure must be of the "United States Environmental Protection Agency's ENERGY STAR® Portfolio Manager benchmarking data and ratings for the most recent 12-month period to a prospective buyer, lessee of the entire building or lender that would finance the entire building." This information is more clearly defined in the Regs identified below.

In other words, building owners must now track and upload the building's energy efficiency and disclose that information upon certain sales, leases, finances or re-finances. The initial bill required disclosures starting on January 1, 2010. That bill was superseded, and the State Energy Resources Conservation and Development Commission was handed the right to determine when to begin the disclosures. Initially, the Commission mandated that disclosures were to start on January 1, 2013. That date has now been kicked over to July 1, 2013 for larger buildings and later for smaller buildings.
The most recent regulations set the dates for required disclosure as:

(a) On or after July 1, 2013, for a building with total gross floor area measuring more than 50,000 square feet.
(b) On or after January 1, 2014, for a building with a total gross floor area measuring more than 10,000 square feet and up to 50,000 square feet.
(c) On or after July 1, 2014, for a building with a total gross floor area measuring at least 5,000 square feet and up to 10,000 square feet.

At least a year's worth of energy use information must be disclosed. Accordingly, the State recommends that compliance not be delayed so that the required information can be disclosed timely. The Regs require that an account be opened or updated at least thirty days before a disclosure is required. (Regs, section 1684).

The disclosures must be made early on in the transaction (lease, finance, sale), basically, at the outset of the transaction and before binding documents are signed. The details for the timing of the disclosure are in the Regs and should be checked because they may change from time to time, but generally are as follows as per Section 1683 of the Regs:

(1) To a prospective buyer of the entire building, no later than 24 hours prior to execution of the sales contract; or
(2) To a prospective lessee of the entire building, no later than 24 hours prior to execution of the lease; or
(3) To a prospective lender financing the entire building, no later than submittal of the loan application.

The disclosures must be of the Disclosure Summary Sheet, Statement of Energy Performance, Data Checklist, and the Facility Summary for the building. All of these documents are defined in the Regs.

  • What you should consider as a lender in underwriting commercial loans subject to section 25402.10:
    • Determine whether your potential borrower is complying with the obligations of section 25402.10 and ask for the disclosures required by the Code and the Regulations.
    • Calculate the impact of compliance or non-compliance on the value of the property.
    • Review the disclosures your borrower is required to make under section 25402.10 in analyzing comparative values of similar properties. Calculate the energy efficiency of the property in comparison to similar properties. I would suggest that the more energy efficient, the more value should be allocated to the property. This may be a difficult analysis, but one which will likely become more standardized over time.
  • What you should consider as a as a commercial building owner to comply with section 25402.10 and its implementing regulations:
    • Register for an account with the "Portfolio Manager". Do this at least thirty days prior to any required disclosure. See this website for information: https://www.energystar.gov/istar/pmpam/.
    • Upload your data through your energy service providers in sufficient time to have the information available for those to whom you owe a duty of disclosure.
    • Disclose the data in a timely fashion (if required) to potential buyers, lenders, and lessees (all of which are specifically defined). Not all such transactions are covered.

A significant amount of information can be found here: http://www.energy.ca.gov. The actual regulations can be found here: http://www.energy.ca.gov/2010publications/CEC-400-2010-004/CEC-400-2010-004-15DAY-REV1.pdf. The order implementing the regulations can be found here: http://www.energy.ca.gov/ab1103/rulemaking/notices/2012-12-12_Corrected_Order_Adopting_Regulations_and_Directing_Additional_Rulemaking_Activities_TN-69057.pdf. A staff workshop PowerPoint dated September 12, 2011, describing just how to accomplish all of the disclosure requirements is found here: http://www.energy.ca.gov/ab1103/documents/2011-09-12_workshop/2011-09-12_AB_1103_disclosure_process.pdf. This is a great place to start although currency cannot be assured as this document was prepared before the final Regs were finalized.

2: Obligation to Disclose to Commercial Lessees Whether Property Has Been Inspected by a Certified Access Specialist and the Results of the Inspection, effective July 1, 2013.

California Civil Code Section 1938, passed in 2012 and effective September 19, 2012, states as follows:

"A commercial property owner or lessor shall state on every lease form or rental agreement executed on or after July 1, 2013, whether the property being leased or rented has undergone inspection by a Certified Access Specialist (CASp), and, if so, whether the property has or has not been determined to meet all applicable construction-related accessibility standards pursuant to Section 55.53."

This section is new. Obviously, the Legislature is attempting to make certain that commercial building owners comply with construction-related access requirements for disabled persons. Civil Code Section 55.53 has extensive requirements regarding inspection and reporting, and should be consulted and reviewed. The law requires local agencies to have at least one CASp certified inspector. Accordingly, to have one's building appropriately inspected, inquiry should be made of the local agency with authority over the building for the appropriate inspection. There is significant information to be found on the California Commission on Disability Access web page. It is found here: http://www.ccda.ca.gov/Default.htm.

  • What to do as a commercial building owner leasing out commercial property:
    • Consider having your property inspected by an authorized CASp and obtain the resultant report.
    • Make sure to amend your standard lease forms to make the appropriate disclosures required by the Code section.
    • Consider allocating in your lease who, as between the owner and lessee, has the obligation to meet the requirements of disabled person access.
    • Determine whether you wish to upgrade your property to solve any noted deficiencies.

For any questions on this or other real-estate or creditor bankruptcy related matters, contact me at:

Patric J. Kelly
577 Salmar Avenue
Second Floor
Campbell, California 95008