Executive Summary

Starting July 1, 2013, new energy use disclosure requirements will require owners of nonresidential California buildings^[1] to disclose the building’s most recent twelve (12) months of energy usage prior to any sale, lease or financing of the entire building. As the energy disclosure applies only to leases of an entire building, landlords should not be required to issue energy use reports to each tenant in a multi-tenant building.

The new law initially applies only to nonresidential buildings with a total gross floor area of more than 50,000 square feet. On January 1, 2014, the law expands to include nonresidential buildings with a total gross floor area between 10,000 square feet and 50,000 square feet. On July 1, 2014, the law further expands to apply to nonresidential buildings with a total gross floor area between 5,000 square feet and 10,000 square feet. The law requiring the benchmarking and disclosure of energy use, along with the California Energy Commission (CEC) regulations implementing the same, require owners of nonresidential office buildings to commence activities related to the preparation of the disclosure report at least 30 days before a sale, lease or financing of the entire building. 

Owners of California nonresidential buildings exceeding 5,000 square feet should take into account the new disclosure requirements and update their transaction documents to ensure compliance.

 Background

 Assembly Bill 1103 (AB 1103) was signed into law on October 12, 2007. AB 1103 requires electric and gas utilities to maintain records of the energy consumption data on all nonresidential buildings, which data is to be maintained in a format that can be uploaded to the U.S. Environmental Protection Agency’s (EPA) Energy Star Portfolio Manager. AB 1103 further obligates an owner or operator of a nonresidential building to disclose the EPA’s Energy Star Portfolio Manager benchmarking data and ratings for the most recent 12-month period as part of the sale, lease or financing of an entire building. AB 1103 was intended to “motivate building operators to compare their buildings’ performance to that of similar buildings and to manage their buildings’ energy costs.” AB 1103 added §25402.10 to the California Public Resources Code and included a compliance deadline of January 1, 2010.

The enforcement of AB 1103 was delayed due to difficulties in its implementation. On October 11, 2009, Assembly Bill 531 (AB 531) was put into effect amending Public Resources Code §25402.10 by removing the January 1, 2010 deadline and instead requiring disclosure of the energy usage data on a schedule of implementation established by the CEC. AB 531 made no other changes to Public Resources Code §25402.10. 

Regulations implementing AB 1103 and AB 531 were adopted by the CEC on December 12, 2012, which are codified in the California Code of Regulations, Title 20, Division 2, Chapter 4, Article 9, Sections 1680 – 1685 (Regulations). The Regulations require compliance on a staggered basis based upon building size. Regulations §1682 provides that owners of nonresidential buildings with a total gross floor area of more than 50,000 square feet will comply with the energy disclosures commencing July 1, 2013. The disclosure requirements become applicable to all owners of nonresidential with a total gross floor area of more than 10,000 square feet commencing January 1, 2014. The foregoing square footage figure is further reduced to cover all owners of nonresidential buildings measuring at least 5,000 square feet on July 1, 2014. 

Analysis of the Law

Subject to the staggered implementation noted above, compliance with Public Resources Code §25402.10 requires owners of nonresidential buildings over 5,000 square feet to take certain actions at least 30 days before the sale, lease or financing of an entire building.^[2] First, the building owner must open an account or update an existing account on the US Environmental Protection Agency’s Energy Star Portfolio Manager^[3] website and create a profile for the building.^[4] Second, within the Portfolio Manager account, the building owner must request that the electrical and/or gas utilities serving the building release the last 12 months of energy use data for the building to the Portfolio Manager.^[5] Once the utilities receive the building owner’s request through the Portfolio Manager website, the utilities have 30 days to upload energy usage data for the entire building.^[6]

Once the utilities have uploaded the requested data, the building owner must log onto the Portfolio Manager website, complete a compliance report, and download the following: (i) a disclosure summary sheet; (ii) a statement of energy performance; (iii) a data checklist; and (iv) a facility summary.^[7] The foregoing documents expire 30 days after they are generated.^[8]

These above-described documents (collectively, the Disclosure Documents) are to be completed and given to: (i) any prospective buyer of the entire building, no later than 24 hours prior to the execution of the sales contract; (ii) a prospective lessee of the entire building, no later than 24 hours prior to execution of the lease; and/or (iii) a prospective lender financing the entire building, no later than the submittal of the loan application.^[9]  A “prospective buyer” is someone who has submitted a written offer to purchase the entire 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 the entire building.^[10]

If information is missing in any of the Disclosure Documents, the owner may use an approximation of the information. However, an approximation may only be used if the owner has made a reasonable effort to ascertain the missing information and the approximation is (i) identified as an approximation, (ii) reasonable, (iii) based on the best information available to the owner, and (iv) not used for the purpose of circumventing or evading the Regulations.^[11]

Public Resources Code §25402.10(e) also clearly states that the disclosure requirements do not affect an owner’s duty to disclose the existence of material facts affecting its property. The disclosures are intended to supplement, rather than replace, any other disclosures that a nonresidential building owner must make regarding its property. 

It should be noted that neither Public Resources Code §25402.10 nor the Regulations contain a penalty for non-compliance. However, a failure to disclose a building’s energy usage could be found to be a material fact in the transaction. Additionally, the failure to begin the disclosure process in advance could lead to delays in the overall transaction. Accordingly, an owner of a nonresidential building should factor into its schedule sufficient lead time to comply with the energy use disclosure laws. 

In summary, owners of nonresidential California buildings over 5,000 square feet should become familiar with the energy use data disclosures required under Public Resources Code §25402.10 and begin the disclosure process at least 30 days before a sale, lease or financing of their building. Owners should also update their transaction documents to reflect compliance with this new disclosure law.

_{[1] The disclosure obligations do not appear to require owners of multi-tenant, nonresidential buildings to make disclosures to lessees of individual spaces. Similarly, such disclosures do not appear to be required of individual owners of nonresidential condominium units upon the sale, leasing or financing of such individual condominium units.}

_{[2] The CEC removed regulatory text stating that the disclosure requirement “applies to all nonresidential buildings in California.” The removal suggests that the regulations do not currently apply to nonresidential buildings under 5,000 square feet.}

_{[3] The regulations adopted by the CEC defined “Portfolio Manager” as the EPA’s ENERGY STAR® program online tool for managing building energy use data.}

_{[4] Regulations §1684(a).}

_[5] Id.

_{[6] Regulations §1684(b).}

_{[7] Regulations §1684(c). The capitalized terms are defined in Regulations §1681.}

_{[8] Regulations §1684(c)(4)}

_{[9] Regulations §1683(a).}

_{[10] Regulations §1681.}

_{[11] Regulations §1684(e).}