Written By: Eric D. Dean and Abe G. Salen
INTRODUCTION & BACKGROUND
In a continuing effort to make energy efficiency a priority in the State of California, its governing body has recently enacted statutes designed to provide better energy data to prospective purchasers, tenants, or lenders, of a non-residential building prior to the sale, lease, or financing of the entire building, using the US Environmental Protection Agency’s (EPA) ENERGY STAR Portfolio Manager online program.
Unfortunately, as discussed below, compliance, enforcement, and penalties were noticeably absent from the new law.
Assembly Bill 1103 (“AB 1103”), codified into law on October 12, 2007, was supposed to take effect on January 1, 2013. After delays, it has become effective as of January 1, 2014. AB 1103 added Section 25402.10 to the California Public Resources Code (“Section 25402.10”).
In effect, AB 1103 requires the tracking of the energy use of all non-residential buildings and the disclosure of such energy use as part of the sale, lease, or financing of an entire nonresidential building. Due to delays and difficulties with the implementation of AB 1103, Assembly Bill 531 (“AB 531”) amended Section 25402.10 by requiring disclosure of energy usage data on a schedule of compliance to be established by the State Energy Resources Conservation and Development Commission.
On December 17, 2012, the California Energy Commission (“CEC”) adopted regulations implementing AB 1103 and AB 531. The regulations require compliance on a staggered schedule based upon a building’s size. Compliance is currently required as of January 1, 2014 for all buildings with a total gross floor area of more than 10,000 square feet. This will decrease to 5,000 square feet as of July 1, 2014.
COMPLIANCE REQUIREMENTS
Compliance with Assembly Bills 1103 and 531 and the implementing regulations requires owners of certain nonresidential buildings to take certain actions at least 30 days before the sale, lease, or financing of the entire building.
Whether a building is subject to the disclosure requirements is determined by the building’s occupancy type, which is based on the occupancy permit as issued by the local building department. The following occupancy types as defined in the California Building Code (Title 24, Part 1) are subject to the disclosure requirements:
- A (Assembly), B (Business), E (Education) I‐1 and I‐2 (Institutional), M (Mercantile), R‐1 (Transient – Residential), S (Storage), and U (Parking Garage)
- All other occupancy types are exempted from the program requirements, including but not limited to, F (Factory and Industrial), I‐3 and I‐4 (Institutional), and R‐2, 2.1, 3, 3.1, 4 (Residential)
If a building is subject to the disclosure requirements, the owner must, at least 30 days before the sale, lease, or financing of the entire building:
- Register for a Portfolio Manager account and create a profile within Portfolio Manager for the building;
- Identify all sources of energy use data (electricity, natural gas, propane, etc.) for the building;
- Contact the applicable utility or utilities to confirm their procedures for providing the energy use data;
- Request all applicable utilities to upload the latest 12 months of energy use data into the building owner’s Portfolio Manager account (utilities may also provide a spreadsheet containing energy use data to be manually uploaded by the building owner);
- Generate a Data Verification Checklist report in Portfolio Manager;
- Disclose the Data Verification Checklist to a prospective buyer, lessee, or lender at least 24 hours prior to execution of a sale contract or lease, or submittal of a loan application;
- Submit the Data Verification Checklist to the California Energy Commission at AB1103report@energy.ca.gov within 30 days of producing the report.
Owners should also consider updating purchase agreements, lease forms, and financing documents to include an express acknowledgment by the buyer, tenant, or lender, as applicable, of receipt of the Data Verification Checklist.
ENFORCEMENT / PENALTIES FOR FAILURE TO COMPLY
The CEC is responsible for the governmental oversight and enforcement of this mandated requirement. Although there is no specific penalty provision for non-compliance, it is informally understood that the CEC may take administrative and/or judicial action to enforce the disclosure requirements. Due to the infancy of the regulations, it is unclear at this time whether and to what extent the CEC will undertake such action.
In addition to the state’s enforcement and potential administrative action against a non-complying owner, the failure to disclose a building’s energy usage could be viewed as a material fact in a transaction giving rise to a private lawsuit by the potential buyer, tenant, or lender. Moreover, a failure to commence the disclosure process well in advance of the transaction could result in closing delays. Both the former (failure to disclose) and the latter (delay) could result in potential liability to the owner.
Therefore, owners of nonresidential buildings should focus on a compliance plan in correlation with the disclosure requirements, add this to their schedule for significant transactions affecting the building, and otherwise update their transaction documents to ensure compliance.
CONCLUSION
AB 1103 remains in its infantile stage. It remains unclear whether and to what extent the CEC will enforce compliance, and what penalties may be assessed. What is known is that the potential for both public and private liability require owners of non-residential buildings to remain transparent with energy usage and should, by all accounts, be prepared to provide this information well in advance of the close of any future transaction.