New California Landlord Disclosure Requirements Effective July 1

more+
less-

Two new landlord disclosure requirements become effective in California on July 1, 2013. One requires that all new commercial leases state whether the property has been inspected for disability access—and if so, the results. The other requires information about a building’s energy use to be disclosed to potential purchasers, lessees, and lenders in transactions involving an entire commercial building.

Accessibility Disclosure

Under Civil Code Section 1938, all commercial leases entered into in California on or after July 1, 2013 (regardless of size) will have to state whether the property being leased has had an inspection by a Certified Access Specialist. If so, the leases also must state whether the property meets all applicable construction-related accessibility standards. A landlord may choose not to have the inspection but must also disclose such a decision. As a result, a prospective tenant might reconsider its position. If an inspection flags any deficiencies, the landlord will need to either remedy the matter or respond to troublesome questions from prospective tenants.

A benefit to landlords is that under a separate law, landlords who have obtained such inspections may be entitled to a 90-day delay of a lawsuit brought by a tenant who claims accessibility deficiencies. Landlords also may be able to limit their liability to $1,000 for each “offense.”

Energy Use Disclosure

The California Energy Commission (CEC) has promulgated regulations requiring that, before the execution of any sale agreement, lease agreement, or loan application involving an entire nonresidential building, the building owner must disclose energy use information to all potential purchasers, lessees, and lenders. Specifically, the building owner must disclose the building's energy use and energy rating information through the online Energy Star Portfolio Manager system operated by the U.S. Environmental Protection Agency (EPA). Because of the various deadlines outlined below, owners should consider taking certain immediate action.

  • Who Must Report and When?

The compliance deadline depends on the "total floor area" of the nonresidential building, as follows:

  • A building with a total gross floor area of more than 50,000 square feet must comply starting July 1, 2013.
  • A building with a total gross floor area of more than 10,000 square feet and up to 50,000 square feet must comply starting January 1, 2014.
  • A building with a total gross floor area of 5,000 to 10,000 square feet must comply starting July 1, 2014. Smaller buildings are not subject to the requirements.
  • What Must Be Disclosed?

At least 30 days before any disclosure is required, the building owner must open an online account with the EPA's Energy Star program Portfolio Manager Website and provide detailed energy information about the property for the previous 12 months. In making the disclosures, the building owner must provide various documents generated on the website. These include a report detailing a building's energy performance and energy use rating (if available), a report of the property’s physical and operating characteristics, and a report of the space usage of a building and comparison between a building's energy usage and national averages.

If the building owner does not possess the necessary information, the building owner must request that the building’s utility or energy vendors upload the necessary information to the website. The information must be provided within 30 days after the owner's request.

  • Compliance and Enforcement Issues

A number of unresolved issues require careful analysis, including the following:

  • The regulations require disclosures to be made "as soon as practicable" and, in all events, before execution of any sale agreement, lease, or loan application. It is unclear if this merely means before the execution of a non-binding letter of intent, or some earlier date (such as the commencement of discussions between the parties). In any event, it is advisable for the owner of a building that falls within the reporting requirements to register its building with the EPA website now.
  • Once the disclosures are made to a counterparty, the building owner should require that the counterparty execute a document acknowledging receipt of the disclosures. Because the disclosures are strictly between the parties involved in a transaction, a non-disclosure agreement may be beneficial.
  • Some buildings have individual tenants that hold separate accounts directly with the utility companies and have separate metering. It is unclear whether the owner must include energy usage data for such tenants in its reporting in a whole building transaction.
  • Despite the seeming lack of "teeth" in the disclosure program regulations, the CEC has stated that California law provides various means of enforcing the new regulations against a building owner or utility company that fails to comply.

For more information on these or other California real estate matters, please contact Gary York at 424.204.4317 or yorkg@ballardspahr.com, or David A. Barksdale at 424.204.4322 or barksdaled@ballardspahr.com, or any member of the Real Estate Department.