What You Need to Know

If you are the owner or operator of a nonresidential building that has a total floor space measuring 50,000 square feet or more, or if you fully occupy a nonresidential building that you own (even if its total floor space is as small as 1,000 square feet), then come January 1, 2011, regulations being finalized by the California Energy Commission (the “Commission”) will require you to disclose your building’s energy consumption records to any prospective buyer, prospective lessee of the entire building, or prospective lender who would finance or refinance the entire building.  And by July 1, 2012, the same disclosure requirements are slated to apply to owners and operators of nonresidential buildings as small as 1,000 square feet.

Key Provisions of the Law

California Public Resources Code Section 25402.10, which went into effect in 2007, creates a system for measuring the energy consumption of nonresidential buildings, with the ultimate goal being to increase energy efficiency 20% by 2015.  There are two main parts to the statute:  first, collection of data; and second, disclosure of that information.

Beginning in 2009, the statute required utility companies to maintain energy consumption records for all nonresidential buildings in a format compatible with the EPA’s Energy Star Portfolio Manager database.  The energy consumption of each nonresidential building can then be compared to similar facilities and assigned a score from 1 (the least energy efficient) to 100 (the most energy efficient).

Disclosure Requirements

The Commission plans to finalize its regulations for mandatory disclosure requirements in December 2010, to become effective on January 1, 2011.  (The most current set of draft regulations is available online and can be found at http://www.energy.ca.gov/ab1103/documents/index.html.)

As currently drafted, the regulations provide that the first group that will be required to disclose the EPA’s Energy Star Portfolio Manager benchmarking data and ratings for the most recent 12-month period are the owner or operator of any nonresidential building (a) of 1,000 square feet or more of total floor space that is solely occupied by the owner or (b) that measures more than 50,000 square feet of total floor space.

As of January 1, 2012, the disclosure requirements will be extended to the owner or operator of any nonresidential building that has a total floor space measuring 10,000 to 50,000 square feet.  Finally, as of July 1, 2012, the owner or operator of any nonresidential building that has a total floor space measuring 1,000 to 10,000 square feet will be required to make disclosures.

The draft regulations further call for disclosures to be made at an early stage of the negotiations between the owner/operator and a prospective buyer, lessee, or lender.  Specifically, the draft regulations provide that the disclosures are required to be given:

• at or before the time the owner presents a sales contract to a prospective buyer;
• at or before the time the owner presents a lease for the entire building to a prospective lessee; and
• at or before the time the owner presents a loan application to finance the entire building to a prospective lender.

Note that further advance planning will be necessary in order for an owner or operator to be prepared to make such a disclosure in a timely fashion.  The draft regulations require the owner to open an account at the U.S. EPA’s Energy Star Portfolio Manager website at least 30 days before such a disclosure is required.

Determining a Building’s Energy Score

A nonresidential building’s energy score will need to be accurately calculated, either by a knowledgeable building owner using the EPA’s Portfolio Manager website (www.energystar.gov) or by a third-party energy firm.  Energy ratings take into account information such as the building’s location, square footage, hours of operation, utility meter information, and other operating conditions.

Potential Confidentiality Issue and Drafting Tip

The disclosure requirements noted above will require a landlord to include data regarding its tenants’ energy consumption during the preceding 12 months.  But disclosing a tenant’s energy bill may raise confidentiality issues.  Landlords should consider inserting language in new leases that specifically allows them to make such disclosures.

What Could Happen If the Required Disclosures Aren’t Made?

The Commission has the right to review complaints about alleged violations of the energy efficiency disclosure requirements.  If the Commission finds that there has been a violation, the Commission may refer the matter to the Attorney General, who is then required to go to court to seek injunctive relief.  Any person has the right to complain to the Commission alleging a violation of the applicable law.  However, the more likely scenario, should an owner/operator fail to make the required disclosures, would seem to be a post-closing claim by the buyer/lessee/lender for damages or rescission.

Preparing to Comply

Owners and operators of nonresidential buildings who are contemplating selling, leasing, or financing/refinancing their buildings should plan ahead, so that they are prepared to make the necessary disclosures and do not have to scramble to do so at the last minute.
Depending on the size of the building and the complexity of its energy consumption profile, hiring a qualified energy firm to assist in accurately calculating the building’s energy score may be money well spent.

Finally, building owners and operators may wish to seek the assistance of legal counsel to make sure that they are taking all of the necessary steps to comply with the disclosure requirements of California Public Resources Code Section 25402.10 and the regulations adopted pursuant thereto.