The New California Energy Disclosure Requirements and Their Impact on Selling a Shopping Center or Leasing a Commercial Building
Because of recently enacted regulations implemented by the California Energy Commission (CEC), before any shopping center owner can sign a purchase agreement to transfer its project, it must disclose to the prospective purchaser certain energy information about the center. Similarly, before any shopping center owner can lease any single-tenant building in excess of 10,000 square feet to an individual tenant, it must make similar disclosures to the prospective tenant. These regulations became effective January 1, 2014, and were intended to provide purchasers, tenants and other recipients of the disclosures with historical energy usage information about the subject real estate assets, in order to help them make more informed business decisions from an environmental and energy standpoint.
The new regulations essentially require the current owner of the property to provide the prospective owner or tenant with 12 months of historical energy usage information relating to the property, so that the prospective owner/tenant can, among other things, understand the property’s overall energy cost, as well as cost trends. To the extent an owner cannot access this information directly through its connections with the subject utility providers (e.g., if the owner leased space to a tenant and the tenant’s utilities are separately metered, the owner/landlord may not have access to the subject information), it is important for leases to contain provisions requiring such tenant to provide such information or to allow the landlord access to such information.
In order to obtain the information to comply with the subject disclosures, the shopping center owner should open (or update) an existing account on the Environmental Protection Agency’s (EPA’s) Energy Star Program Portfolio Manager Website. Such account must be opened (or updated) at least 30 days prior to when disclosure is required. Accounts can be created by accessing www.energystar.gov. Thereafter, shopping center owners will need to access the CEC’s compliance website and complete and submit the compliance report by logging on to the owner’s Portfolio Manager account. Shopping center owners can then download the necessary documents to comply with the disclosure requirements found in California Public Resources Code Section 25402.10(d) (the “CPR Code Section”).
The CPR Code Section currently requires shopping center owners to disclose the EPA’s Energy Star Portfolio Manager benchmarking data and ratings for the most recent 12-month period to a prospective buyer no later than 24 hours prior to the execution of a purchase and sale agreement. Therefore, practically speaking, shopping center owners should be ready to make the necessary disclosures prior to entering into a purchase and sale agreement for the asset to be sold.
As mentioned earlier, the requirements of the CEC and CPR Code Section also apply to the leasing of free-standing buildings in excess of 10,000 square feet of total gross floor area leased entirely to one tenant (which floor area threshold will be reduced to 5,000 square feet on July 1, 2014). As such (and also as mentioned above with respect to other leases relating to separately metered premises), it would behoove landlords leasing such buildings to add provisions to their leases whereby the tenant consents to the release of utility data to the landlord, as the landlord will have to provide that information on the EPA’s Energy Star Program Portfolio Manager Website, and will also be required to keep such information current (similar to the requirements of shopping center owners outlined above). To the extent these leases are already in effect, such provisions could be imposed through lease modifications.
It should be noted that neither the CPR Code Section nor the regulations of the CEC currently outline any specific penalties for the failure to comply with the foregoing disclosure requirements. However, the CEC has set forth certain actions it may take in the event of non-compliance with the statute and regulations. According to the CEC, such actions may include initiating administrative proceedings before the full Energy Commission for an order compelling compliance or initiating a civil judicial proceeding to obtain injunctive relief. In addition, under California law, the failure of a seller or landlord to comply with the disclosure requirements in a purchase agreement or lease may, arguably, invalidate the respective agreement or lease, or such failure could, potentially, be considered a nondisclosure of material facts leading to a fraud claim. As of the date of this writing, these issues have not yet been adjudicated, so it remains to be seen what the actual remedies for non-compliance may be.
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The new energy disclosure requirements are a bit wieldy and not issues to be dealt with at the last moment. These requirements should be understood and dealt with well in advance of any transfer and/or large building lease (of the type covered by the regulations). Should you need any assistance in these matters, please feel free to contact the Retail Group of Cox, Castle & Nicholson LLP (Gary Glick in Los Angeles; Bob Sykes or Dave Wensley in Orange County; or Scott Brooks in San Francisco).