CLIENT ALERT: Mandatory Disclosure of Past Energy Use when Selling, Leasing or Financing Property in California
July 16, 2012

California has instituted a new and unusual requirement that obligates virtually all commercial landowners to disclose a property’s past energy use to potential buyers, tenants and lenders. Any person or company owning property in California, other than single-family residences and other small-scale properties, will be affected by these new regulations.

Under Section 25402.10 of the Public Resources Code, owners of non-residential property will be required to disclose energy use data for the prior 12-month period, the property’s operating characteristics, and the property’s “Energy Star Portfolio Manager” ratings whenever the landowner sells, leases, or finances (or re-finances) a property. These disclosures must occur “as soon as practicable,” and in any event before execution of a sales contract, a lease execution, or the submission of a loan application. This timing requirement may require owners to take proactive measures now, even if they are months away from a prospective sale, lease or refinance.

The energy use disclosure requirement kicks in on a staggered basis depending on the size of the building(s) on the property. Under regulations prepared by California’s Energy Commissions, adopted on July 11, 2012, the implementation dates are:

  • January 1, 2013, for buildings with a floor space of more than 50,000 square feet; 
  • July 1, 2013, for buildings of more than 10,000 square feet, and 
  • January 1, 2014, for buildings of at least 5,000 square feet.

Importantly, the regulations provide that the energy use disclosure requirement will apply only to the sale, lease or finance of an entire building. This means that landlords will not have to worry about issuing energy use history reports for individual demised spaces in a multi-tenant building, nor (presumably) will sellers of commercial condominium units need to disclose historic energy use for each unit that is part of a larger building. Given the many permutations of how property may be divided and developed, though, it’s foreseeable that there will be uncertainty (and, potentially, litigation) over the scope of required disclosure.

To accomplish the disclosure, the building owner establishes an account at the EPA’s Energy Star Portfolio Manager website, which requires a variety of information including the owner’s name and address, building address and year of construction, a list of all sources of energy, and a description of the space usage in the building. Note that the Portfolio Manager account must be set up “at least 30 days before disclosure is required” — given that disclosure is required prior to submitting a loan application, and “as soon as practicable” after signing a sales contract, it may behoove owners to set up Portfolio Manager accounts now, in advance, so that they do not run afoul of the disclosure deadlines or rush to comply at the last minute.

Once the Portfolio Manager account is established, the applicable utility(ies) input energy use data into the account, and then the owner authorizing the applicable utility(ies) to release energy use data to the necessary parties. The information is to be kept in a manner that preserves the confidentiality of utility customers, including aggregation of accounts if a building has more than one utility account (though of course this “protection” may be fairly moot many situations, such as when there is one anchor tenant that is separately metered, and several smaller shops drawing under the owner’s account). The authorization to the utilities can be in writing or by “secure electronic authorization”, and can be made by either the property owner or its operator (presumably, including property managers).

Following disclosure of the initial energy use data and ratings, the owner has no further obligation to update the data, nor to provide additional energy use data. However the regulations state that this mandatory disclosure of past energy use does not modify an owner’s duties with respect to other mandatory disclosures, nor an owner’s common law obligations. In other words, a seller could still be found guilty of fraud if it fails to disclose certain known facts about latent defects in a building’s energy envelope or HVAC system, even though the seller made the obligatory energy use disclosures.

The regulations do not state what penalties or remedies will apply if a owner fails to make a mandatory energy use disclosure. Neither the regulations nor the statute mention civil penalties or fines, so it is likely that a failure to abide by the regulations (and underlying statute) would be an ordinary statutory misdemeanor. In addition, it is conceivable that a prospective buyer, tenant or lender could back out of a transaction - without repercussion - if a owner failed to make a mandatory disclosure. (At the same time, the regulations do provide owners with a “safe harbor” if the necessary information is not available, so long as the owners make a “reasonable” approximation of the information and such approximation is not an attempt to get around the obligatory disclosures.) We will have to await court decisions on this issue before the cost of non-compliance becomes more certain.

As a final note, the statute chapter containing the energy use disclosure requirement described above also discusses water conservation measures. Given this broad scope and the state’s overall focus on resource conservation and “going green”, it’s conceivable that a future legislative session may expand the seller / lessor disclosure requirements to include a property’s water use history as well. As yet, though, that is not the case.

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