What You Need to Know:

On July 1, 2014, 2013 CALGreen, Part 11, Title 24, of the California Code of Regulations will go into effect. As a result, certain nonresidential additions and alterations will trigger compliance with more stringent energy-saving measures for plumbing, electrical, lighting and heating, ventilation and air conditioning systems. It is expected that the implementation of these updated Title 24 regulations will result in increased compliance costs in the completion of tenant improvements in commercial buildings. The implications for sellers, buyers, owners and tenants of commercial real estate include the need to update lease forms to take into account the practical impact of these regulations on each transaction and each material work of construction.

Background:

2013 CALGreen, Part 11, Title 24, of the California Code of Regulations constitutes yet another enactment to promote energy efficiency in California. In cases of building additions of 1,000 square feet or greater and/or building alterations with a permit valuation of $200,000 or above, the new code requires installation and/or replacement of certain fixtures and installation of certain devices and circuits connected to a time clock to automatically turn outlets off, all in an effort to reduce energy consumption. These fixtures and devices include, but are not limited to, water conserving plumbing fixtures, “smart” thermostat systems, occupancy sensors and automatic shut off controls.  It has been estimated that the cost of compliance to meet such requirements will range from $3.00/square foot to $6.00/square foot.

What You Need to Do:

1.  Review the basics of the New Regulations. If you are in the process of negotiating a letter of intent or new lease with tenant improvements requiring a permit to be obtained after July 1, 2014, you should consider the impact of Title 24 on your transaction. Each letter of intent and lease should specify the respective obligations of the parties with respect to the installation and ongoing maintenance of such Title 24 fixtures. It is also important to include language regarding cost sharing of such expenses in any expansion rights provisions, rights of first offer or the like so that when a tenant exercises such rights, there is a clear statement of who is responsible for what costs.

2.  Agree Upon a Clear Allocation of Costs and Responsibility.Commercial building owners, brokers and property managers should familiarize themselves with the requirements of 2013 CALGreen, Part 11, Title 24, of the California Code of Regulations. Depending upon the condition of and existing infrastructure within a commercial building, the  cost of compliance may be quite significant. As a result, purchase agreements and leases should set forth a clear and concise framework for allocating compliance costs. One key point to consider is whether modifications to the base, shell and core of a building may be required in order for Title 24‑compliant fixtures and equipment to be installed. Failure to address which party is responsible for the various modifications that may be required to achieve current Title 24 compliance may result in unnecessary and costly disputes.

Tips for Owners/Landlords. Commercial building owners should take Title 24 requirements into account in making representations and warranties regarding compliance with laws and energy efficiency measures.  However, a simple disclaimer of responsibility and a typical “AS IS” provision may not be enough to exculpate owners from compliance costs. Work letters should be revised to allocate responsibility for revisions to core building systems in order to comply with current regulations.

Tips for Tenants. Commercial tenants will need to ask more questions at the outset of a lease transaction to determine what work may be required to comply with the new Title 24 requirements. Tenants may wish to specifically state that any modifications of building systems necessary to meet the requirements of new regulations will be the obligation of the landlord, outside of any applicable allowance.