California’s Building Energy Disclosure Law: June 1, 2018 Disclosure Deadline For Non-Residential Buildings with 50,000 Square Feet of Floor Area

Under California’s building energy disclosure law, Assembly Bill 802, June 1, 2018 is the deadline to submit 2017 building energy use benchmarking data to the California Energy Commission for non-residential buildings with more than 50,000 square feet of gross floor area. The disclosures are now required annually on June 1, and in 2019 will apply to both non-residential and residential buildings. 

Wasn’t California’s energy disclosure law previously repealed? How is AB 802 different?  

Meter.JPG

You may recall the short lived Assembly Bill 1103, which in 2014 required owners to disclose a building's energy performance each time the building was financed, leased, or sold. The disclosure requirements under AB 1103 were transaction based and had to be provided to tenants, buyers or lenders at the time of the transaction. The AB 1103 program was difficult to implement, and many private parties simply waived or ignored the disclosure requirements altogether.  

This led to the repeal of AB 1103 in 2015 by Assembly Bill 802, which directed the Energy Commission to draft new regulations requiring building owners to instead make annual energy disclosures directly to the Energy Commission. In March 2018, the Energy Commission completed the new regulations.

Which buildings are covered?  

All buildings with at least 50,000 square feet of gross floor area are subject to the disclosure requirements, except for the following:

  • residential or mixed-use buildings with less than 17 residential utility accounts (but for 2018 only, all buildings with residential utility accounts are exempt);
  • condominium projects as described in section 4125 or 6542 of the California Civil Code;
  • buildings in which more than half of the gross floor area is used for scientific experiments requiring controlled environments, or for manufacturing or industrial purposes;
  • buildings without a certificate of occupancy for more than half of the reporting year or that are scheduled to be demolished within a year after the reporting date; and
  • buildings subject to local benchmarking and disclosure requirements approved by the Energy Commission (currently Berkeley, Los Angeles, and San Francisco).

The regulations define gross floor area as the area measured from the exterior surfaces of the walls of a building and including all interior areas. Additionally, if one common meter (electricity, natural gas, steam, or fuel) serves multiple buildings without sub-metering, then the buildings are considered one building and the floor area is aggregated.

How are energy disclosures made?  

A building owner must take the following steps to comply with the energy disclosure requirements: 

  1. open an ENERGY STAR Portfolio Manager account online, www.energystar.gov/buildings/facility-owners-and-managers/existing-buildings/use-portfolio-manager, for each building covered by the disclosure requirements;
  2. request energy use data from the utility for the building by March 1 of each year; and 
  3. by June 1 of each year, go to the Energy Commission’s benchmarking website, www.energy.ca.gov/benchmarking, select the appropriate Energy Star Portfolio Manager reporting link and complete the report to share the energy data and benchmarking information with the Energy Commission.

The California Business Properties Association (CBPA) notes that the rollout of the new regulations, adopted in March 2018, i.e., concurrently with the first deadline for requesting energy data, is still unfolding.  Presumably, delays are expected.  The CBPA has a resource page with additional information, www.cbpa.com/government/benchmarking-ab-802, and a fact sheet that’s helpful for determining whether the regulations apply to a building, www.cbpa.com/wp-content/uploads/2018/03/AB802-FactSheet.pdf.

What is disclosed? 

Capture.JPG

AB 802 requires utilities to maintain records of the energy use data for all buildings they serve. “Energy” includes electricity, natural gas, steam, or fuel oil.  When a building owner requests energy use data from the utility, the utility is required to provide aggregated energy use data to the owner or to the owner’s account in the ENERGY STAR Portfolio Manager.

Based on additional information provided by the building owner about the building and its use, the ENERGY STAR Portfolio Manager will provide certain benchmarking data about the building, including in some cases an ENERGY STAR rating, which is then reported to the Energy Commission by following the applicable reporting links on the Energy Commission’s website.

There are two exceptions, even for covered buildings, which prevent the disclosure of energy data. First, if a building has less than three accounts, then a utility must obtain the permission of all customers before providing energy data. An owner may obtain permission from customers directly through a lease or other document, provided the customers clearly grant permission for public disclosure of the aggregated energy use data; however, nothing requires that an owner do so.  If an owner has not obtained permission to disclose energy use data, the utility will send a request to each customer, and if all customers do not respond within 30 days, then the utility will notify the owner that no energy use data will be provided.  Second, an owner may obtain a determination from the Energy Commission that disclosure of the owner’s energy use data would result in the release of proprietary information that can be characterized as a trade secret.

In either case, a building owner would still be required to make annual disclosures using the Energy Commission’s website; however, the disclosure would include only general information about the building and would not include energy use data.  
 

Will the information be public?

Yes. Starting in 2019 for buildings with no residential accounts, and in 2020 for all buildings, the Energy Commission may disclose any of the following on a public website:

(A) Building address.
(B) County.
(C) Year built.
(D) Gross Floor Area.
(E) Latitude and longitude.
(F) Property or building name, if any.
(G) Property type.
(H) Property floor area (building and parking).
(I) Open "comments" field for the building owner or Owner’s Agent to provide additional information about the building.
(J) ENERGY STAR Portfolio Manager Property ID.
(K) Percentage of space occupied (Occupancy).
(L) Number of occupants.
(M) Number of buildings (if served by one common Energy meter without sub-metering).
(N) ENERGY STAR Score, for eligible buildings.
(O) Monthly and/or annual site Energy use by Energy type.
(P) Monthly and/or annual weather‐normalized site and/or source Energy use intensity.
(Q) Monthly and/or annual peak electricity demand.
(R) Total greenhouse gas emissions.

The information under items N-R will be disclosed only if energy data is available and not subject to a trade secret exception as noted above.

What’s the penalty for failing to comply? 

If a building owner fails to comply with the disclosure requirements, the Energy Commission will provide a 30-day notice to correct the violation. If the violation continues, the Energy Commission may enforce the requirements through Public Resources Code section 25321 by imposing a civil penalty of up to $2,000 for each violation, for each day the violation has existed and continues to exist.

photo credit: La Chachalaca Fotografía & Dominique Chappard

Jonathon Giebeler

Jonathon Giebeler is a graduate of the University of Southern California Law School, where he also earned a Master of Real Estate Development. His practice emphasizes commercial leasing representing landlords and tenants (including retail, office and industrial leases), real estate-secured finance, and the sale and purchase of real property.

Commercial Leasing In Mixed-Use Condo Projects

Mixed-use residential condominium projects create a number of issues for commercial landlords and tenants that should be addressed early in the leasing process.  

Mixed-use projects are becoming more common as urban infill increases. While all mixed-use projects create a number of issues for commercial landlords and tenants that are absent from comparable single-use projects, these issues are particularly pronounced in mixed-use residential condominium projects.  

The structure of a condominium project tends to decentralize the typical landlord-tenant relationship because the project will ultimately be controlled by an association acting through a board of unit owners. A tenant is unable to look directly to the landlord, who may simply be one owner of many, to perform customary "landlord" functions such as operating, maintaining, and insuring the building and common areas.

As a condominium unit owner, the landlord's interest will be subject to various governing documents. Any lease will need to be consistent with these documents and require the tenant's compliance with applicable restrictions. Lease provisions that parties are accustomed to negotiating at length, such as rights related to use and access, insurance requirements, operating expenses, maintenance obligations, and procedures following casualty events, to name a few, will largely be dictated by the project's governing documents.

To add to this already difficult framework, the nature of the users' interests are fundamentally different and often at odds. On one end of the spectrum are residential homeowners, directly involved in the association and highly invested in the operation of the project. On the other end are commercial tenants who must look to an absentee landlord to ensure their rights are enforced and protected. Commercial units also typically form only a small part of an overall project, putting commercial owners and their tenants at risk of being marginalized by the majority residential owners.

Review The Governing Documents Early

Given the potential for conflict, commercial landlords and tenants should review the project's governing documents as early as possible. These documents include the declaration of covenants, conditions and restrictions, condominium plan, association articles of incorporation, bylaws and budget, and applicable rules and regulations, such as architectural standards. The governing documents in larger projects may also include documents related to a master association, and separate reciprocal easements and cost sharing agreements.

The landlord may be unable to obtain amendments to the governing documents in an existing project, and a tenant or potential purchaser should see the review as part of its early feasibility analysis. A tenant may request revisions to the proposed governing documents if the project is still being developed, and a landlord/developer should generally accommodate reasonable requests and proactively include protections for the commercial uses because a commercial unit may have little value if its use is overly restricted or its share of expenses too burdensome.

Ensure These Critical Issues Are Addressed

Commercial landlords and tenants should ensure the following issues are adequately addressed (at a minimum) when reviewing the governing documents: 

Protection of Minority Interest –

Protections should be included to ensure the commercial owner's interests are not easily overridden or interfered with by the residential majority. This can be done, for example, by requiring a commercial owner's approval for matters material to the commercial unit, and by excluding the commercial unit from, or providing alternative standards for, certain rules and regulations, such as architectural review requirements.

Restrictions on Use –

Restrictions on use, whether blanket restrictions on nuisance activities or specific restrictions on access, hours of operation, noise levels, and the like, are commonly included in governing documents and should be reasonable. Ideally, they would include broad exceptions for contemplated commercial uses, particularly with respect to operating hours, outdoor music and noise, and common odors.

Operational Obligations –

The governing documents should clearly indicate the extent of the association's obligations to insure and maintain the project and comply with applicable laws, such as accessibility requirements, so that the parties can clearly allocate any remaining obligations in the lease.

Appurtenant Rights –

In addition to clearly describing the commercial unit, the governing documents should grant the commercial owner and its tenant the right to use others areas necessary for the tenant's operation, such as parking, outdoor patios, trash enclosures, roof access, and shared signage.

Operating Expenses –

The operating expenses that landlords and tenants customarily negotiate in a lease will instead largely be incurred by the association and passed through to unit owners in the form of assessments. These assessments should be reasonably allocated. Commercial owners should not be required to contribute to facilities used exclusively by residential owners, and vice versa. To the extent facilities are shared, the allocation of costs should generally be based on rates of consumption or use, rather than a unit's pro rata share of the overall project.

This article originally appeared in the Western Real Estate Business magazine

Jonathon Giebeler

Jonathon Giebeler is a graduate of the University of Southern California Law School, where he also earned a Master of Real Estate Development. His practice emphasizes commercial leasing representing landlords and tenants (including retail, office and industrial leases), real estate-secured finance, and the sale and purchase of real property.

A landlord accepting reduced rent from a tenant may be waiving its right to recover the full amount due under the lease.

A recent California case illustrates how important it is to clearly document changes to lease terms and not simply rely on an oral "gentlemen's agreement".  In Gambord v. Galli Produce Company (Cal. Ct. App., May 26, 2015, H039760) 2015 WL 3381728, a commercial landlord verbally agreed to let its longtime tenant make reduced rental payments because the tenant's business had declined. Over two years, from August 2008 through July 2010, the rent reductions exceeded $200,000. 

The landlord understood the agreement to simply be a deferment of rent due under the lease until the tenant's business recovered and later testified, "there was no agreement or even a discussion about a specific time of repayment. [¶] It was one of those gentleman handshake kind of deals . . . and the unspoken word was that when things get better we'll pay this money back." The tenant, however, understood the agreement to be a true reduction in rent, meaning that the landlord would forgive the difference between the reduced rental payments and the full amount due under the lease.  

As discussed below, because the landlord accepted the reduced rent and never clarified that rent was only being deferred, not forgiven, both the trial court and the court of appeal held that the landlord waived the right to recover the over $200,000 in unpaid rent original scheduled under the lease -- even though the parties only had an oral agreement and the lease required all modifications to be in writing.  

The problem with an oral "gentleman's agreement". 

To follow from the facts above, in late 2008, a tenant leasing a warehouse space asked its landlord to reduce its rent because business had declined significantly.  The tenant had leased the space for over 15 years and was on very good terms with the landlord.  The landlord  agreed to a $2,000 per month reduction in rent for August - December 2008, which reduced rent to $13,225 per month. Then, for the next  several months, the tenant requested additional reductions, and each time the landlord agreed: In December 2008, rent was reduced to  $11,500, in March 2009 to $10,000, in June 2009 to $8,500, and finally in August 2009 rent was reduced further to $7,500 and stayed at that level until July 2010. 

Each time rent was reduced, the agreement was oral. The tenant would generally call the landlord and ask for a reduction, and the landlord would respond "if that's what you need, you've got it," and then accept the lower payments without objection.

The parties never directly discussed whether the difference between the rent due under the lease and the reduced rent being paid was being forgiven or simply deferred. Although the landlord's property manager did say at the outset that "any unpaid rent would be an issue that would be dealt with later," and the tenant recalled saying that when business improved it would pay more rent, but it never said that when business improved it would pay back the full amount of rent originally scheduled under the lease.

In July 2010, the landlord asked the tenant to start increasing rent $500 a month until rent was back to the scheduled amount, and then followed up with an email:

"At the end of December, your rent will still be 30% below the Lease, which difference we will continue to defer. At the end of the year, if you find this rate difficult for you to maintain, please call me personally so we can discuss. You know I will work with you in every way I can — we've had a great relationship with you for a lot of years."

The tenant responded, agreeing to increase rent, but questioning the landlord's reference to deferred rent:

"I am glad to be able to progressively increase our rent towards a more suitable number for both of us. I must say though, I am taken aback by the use of the word `defer' in your email. Does this mean that you feel that the reduced amount [of rent] is accumulating?"

The landlord responded:

 "I'm surprised and a little saddened by your reaction to my mention of the word `defer.' [¶] I'm really sorry if you misinterpreted my willingness to temporarily defer a part of your monthly rent, a significant portion of it at that, until such time as business conditions improve for you. . . . [¶] . . . But this continued forbearance is only done with the understanding that the unpaid rent each month will continue to be deferred, not forgiven  . . .   "At no time, have I inferred or implied that the deferred rent would be forgiven. As a Trustee, I have no authority to give away assets of the trust for no reason. Additionally, any such basic change in the Lease, as a change of rent would entail, can only be accomplished by written agreement signed by both parties. This has not taken place."

That was the beginning of the dispute that soon led to court. In December 2010, the landlord sent a formal demand letter requesting payment of deferred rent and property tax payments in the total amount of $203,939. The tenant of course refused to pay that amount, and in January 2011, the landlord filed a complaint against the tenant and the guarantors under the lease to recover.

At trial, the judge "found both gentlemen entirely credible" and stated they were "both decent, honorable, credible. They were working under different assumptions. . . .  There never was a meeting of the minds . . .  as to whether the rent would be forgiven or simply deferred."

And that is largely the problem with an oral "gentleman's agreement" -- there is rarely a meeting of the minds. Rarely does an oral agreement cover all of the material terms and even if it did (in which case, why not put it in writing?) when a dispute arises, each side naturally remembers its own version of things.

A landlord who accepts reduced rent payments without objection waives its right to recover the full amount. 

Because the parties had not agreed on whether unpaid rent was being deferred or forgiven, the trial court held that the landlord had waived the right to recover the full amount of the rent required under the lease. On appeal, the judgement was affirmed.

The trial court stated the applicable law as follows:  "Where the parties agree to an oral modification, if the landlord accepts the tenant's payment without objection or clarification, i.e., without expressing the landlord's intention that there are strings attached to the arrangement, such as later repayment of the deficiencies, the landlord is precluded from later seeking such deficiencies."

The court of appeal explained further that although "there was no express oral agreement that the reduced rent payments would be accepted as payment in full under the written lease, the lessor's recovery of the unpaid rent may be precluded under section 2076." Civil Code Section 2076 provides that:

"The person to whom a tender is made must, at the time, specify any objection he may have to the money . . . or he must be deemed to have waived it; and if the objection be to the amount of money . . . he must specify the amount . . . which he requires, or be precluded from objecting afterwards."

Here, the landlord agreed to accept reduced rent and by failing to specify (ideally in writing!) that the full amount remained payable, the landlord waived its right to recover the full amount.  

What about the provision in the lease stating that all modifications must be in writing?

You may recall that the landlord thought that, notwithstanding its agreement to accept reduced rent, the original lease terms would continue because the parties had never entered into a written amendment or modification and told the tenant "any such basic change in the Lease, as a change of rent would entail, can only be accomplished by written agreement signed by both parties. This has not taken place." The actual lease agreement provided the same and stated: "This Lease may be modified in writing only, signed by the parties in interest at the time of the modification."

However, as both the trial court and court of appeal explained, even where an agreement expressly bars oral modifications, California Civil Code section 1698 will enforce an oral modification to the extent "executed" or fully performed. See Civil Code § 1661 ("An executed contract is one, the object of which is fully performed."); and Julian v. Gold (1931) 214 Cal. 74, 76  ("an executed oral agreement will serve as a modification or release of a written agreement").

Here, the landlord was free to revoke its oral agreement to accept reduced rent at anytime, but so long as the agreement was in place, each payment of rent by the tenant at the lower rate was the tenant's full performance or "execution" of the agreement and was enforceable.  

Simply put, there was no way to turn back time, and that is another problem with oral agreements -- parties often have a false sense of security and think that because they have a written agreement, they can temporarily and informally agree to something outside of the agreement orally but continue to rely on the written agreement's enforceability.  That was certainly the landlord's intent here. The landlord accepted reduced rent on a temporary basis but believed it would continue to be entitled to the full amount under the lease. However, even if a lease or other agreement prohibits oral modifications, an oral modification will be enforced to the extent performed.

Take time to clarify the terms of your agreements and put them in writing. 

The take away here is not just to "get it in writing" but more importantly, take time to clarify the terms of your agreement. In this case, even if the parties' agreement had been in writing, the result would have been the same because the only thing they agreed on was that rent would be reduced. The problem was that the parties never clarified and agreed on all of the other issues related to reducing rent.  For example, was the rent being deferred or forgiven, and for how long? If deferred, when would the deferred rent be repaid, would interest accrue, and how would payments that were made be applied?  

Jonathon Giebeler

Jonathon Giebeler is a graduate of the University of Southern California Law School, where he also earned a Master of Real Estate Development. His practice emphasizes commercial leasing representing landlords and tenants (including retail, office and industrial leases), real estate-secured finance, and the sale and purchase of real property.