Updated regulations adopted by the California Energy Commission (CEC) on December 12, 2012 will require owners and operators of non-residential buildings to disclose certain building energy performance data to a prospective buyer, lessee of the entire building, or lender that would finance the entire building before the sale, lease, financing, or refinancing of the building.

Background of AB 1103

In 2007, the California legislature passed AB 1103 (codified as California Public Resources Code Section 25402.10), which requires owners and operators of non-residential buildings to disclose certain energy benchmarking data for the most recent 12-month period to prospective buyers, lessees, and lenders of an entire building. AB 531 subsequently clarified that the disclosure program would be implemented pursuant to regulations established by the CEC. The initial date for complying with the law has been postponed repeatedly while the CEC finalized the regulations.

Nature and Scope of Disclosures

Section 1683 of the regulations provides that a non-residential building owner (which is defined to include an agent authorized to act on behalf of the building owner) must disclose the following documents generated by the US Environmental Protection Agency’s Energy Star Portfolio Manager website: (1) a Statement of Energy Performance;¹; (2) a Data Checklist;²; and (3) a Facility Summary³ for the relevant building. These required disclosure documents expire 30 days after they are generated. Additionally, the building owner must download a Disclosure Summary Sheet from the CEC’s compliance website and submit an electronic compliance report to the CEC.

Non-residential building owners and operators should become knowledgeable about the Energy Star Portfolio Manager website, as the regulations require that a non-residential building owner or operator open an account or update an existing account for the relevant building on the website at least 30 days before any required disclosure. Such account opening or update must include a request for all utility and energy providers serving the building to release energy use data for specified meters and/or accounts to the owner or operator’s account from at least the most recent 12 months. Utility and energy providers must upload such data within 30 days after receipt of such request.

To the extent that any information is missing in a disclosure, if the owner or operator has made a reasonable effort to ascertain the missing information, the owner or operator may then use an approximation of the information, provided that the information is (1) identified as an approximation; (2) reasonable; (3) based on the best information available to the owner or operator; and (4) not used for the purpose of circumventing or evading the purposes of the regulations.

Section 25402.10(e) also makes clear that these disclosure requirements do not alter the duty of an owner or operator to disclose the existence of a material fact affecting the property. Therefore, these disclosures are intended to supplement, rather than replace, any other disclosures that a non-residential building owner or operator must make regarding the property.

Timing of Disclosures

A non-residential building owner or operator must make all of the necessary disclosures to a prospective (1) buyer of the building “no later than 24 hours prior to execution of the sales contract”; (2) lessee of the entire building “no later than 24 hours prior to execution of the lease”; and (3) lender financing the entire building “no later than submittal of the loan application.” A “prospective buyer” is someone who has submitted a written offer to purchase a building, a “prospective lessee” is someone who has submitted an application to lease an entire building, and a “prospective lender” is someone who has received an owner’s application to finance an entire building. Practically speaking, a non-residential building owner or operator may need to make the disclosures at the outset of any discussions with prospective buyers, lessees, and lenders.

Timing of Regulations

The regulations set forth the schedule by which non-residential building owners or operators must begin making disclosures under Section 25402.10:

• Owners or operators of non-residential buildings with a total gross floor area measuring more than 50,000 square feet must begin making the required disclosures on and after July 1, 2013.
• Owners or operators of non-residential buildings with a total gross floor area measuring more than 10,000 square feet and up to 50,000 square feet must begin making the required disclosures on and after January 1, 2014.
• Owners or operators of non-residential buildings with a total gross floor area measuring at least 5,000 square feet and up to 10,000 square feet must begin making the required disclosures on and after July 1, 2014.

At this time, it is unclear whether or when non-residential buildings with a total gross floor area less than 5,000 square feet will be required to comply with the regulations. The fact that the CEC removed regulatory text that the disclosure program “applies to all nonresidential buildings in California” suggests that the regulations may not apply to such smaller buildings until further notice. The regulations do not appear to require owners and operators of multi-tenant buildings to make disclosures to lessees of individual spaces; similarly, such disclosures do not appear to be required of individual owners of non-residential condominium units upon the sale, leasing, or financing of such individual units.

Enforcement of Regulations

The regulations do not impose fines or other penalties for noncompliance. Therefore, it is an open question whether prospective buyers, lessees, or lenders can back out of a transaction if such disclosures are not made. It is conceivable, however, that noncompliance could potentially subject an owner or operator to an unfair business practices claim.

Practitioners should consider including a statement in a purchase and sale agreement, loan agreement, or lease, as the case may be, acknowledging that such disclosures have been made in accordance with Section 25402.10. When representing an owner or operator in a lease negotiation of an entire non-residential building, practitioners may also wish to include an affirmative covenant on the part of the prospective lessee to cooperate with the owner or operator in providing its energy use data throughout the term of the lease.

_{¹ A report that supplies data about a building’s energy performance.}

_{² A report that summarizes a property’s physical and operating characteristics.}

_{³ A report that summarizes the space and energy usage of a building and compares a building’s energy use to national medians.}