California Enacts Two New Disclosure Laws Affecting Commercial Property Owners

Raines Feldman LLP, by Eric B. Blum
February 20, 2013

California recently enacted two new laws which impose additional disclosure requirements on property owners in connection with the sale, lease and/or financing of commercial properties. Both laws require compliance commencing on July 1, 2013.

1. Disability Access Disclosures

Section 1938 has been added to the California Civil Code as part of SB 1186, and requires certain disclosures relating to disability access legal requirements. Specifically, Section 1938 provides as follows: “A commercial property owner or lessor shall state on every lease form or rental agreement executed on or after July 1, 2013, whether the property being leased or rented has undergone inspection by a Certified Access Specialist (CASp), and, if so, whether the property has or has not been determined to meet all applicable construction-related accessibility standards pursuant to Section 55.53.”

Section 1938 does not provide for any specific penalties if the lease does not include the required language. However, failure to include such language could result in claims or cross- complaints by a tenant against its landlord in the event a tenant is sued for failing to comply with disability access laws, or such failure may permit the tenant to terminate the lease. Accordingly, in addition to including the required language, all leases should also clearly designate which party is responsible for compliance with disability access laws.

2. Building Energy Use Disclosures.

The California Energy Commission (“CEC”) adopted regulations implementing the Nonresidential Building Energy Use Disclosure Program (the “Program”). Passed by the California legislature as AB 1103 in 2007, the Program requires nonresidential property owners to fulfill the following requirements prior to the sale, lease and/or financing of an entire building: (1) not less than 30 days prior to the date the applicable disclosure is required (see below for timing requirements), owners must open an account on the U.S. Environmental Protection Agency’s Energy Star Portfolio Manager website and upload or cause its utility company to upload benchmarking data and ratings from the prior twelve months to the account; and (2) owners must disclose energy use reports to prospective buyers, lessees and lenders prior to entering into a transaction.

The required disclosure documents described above must be delivered as follows: (i) to a prospective buyer no later than 24 hours prior to execution of the purchase agreement; (ii) to a prospective tenant (leasing the entire building) no later than 24 hours prior to execution of the lease; and (iii) to a prospective lender (providing financing for the entire building) no later than submittal of the loan application.

The Program will take effect in three phases as follows: (a) on and after July 1, 2013, for a building with a total gross floor area in excess of 50,000 square feet; (b) on and after January 1, 2014, for a building with a total gross floor area in excess of 10,000 square feet and up to and including 50,000 square feet; and (c) on and after July 1, 2014, for a building with a total gross floor area equal to 5,000 square feet and up to and including 10,000 square feet.

The regulations do not provide specific penalties for failure to comply with the Program’s disclosure requirements; however, noncompliance may subject an owner to civil penalties for violations under the code of up to $2,000 per day. Further, it is feasible that noncompliance could allow buyers or lessees to back out of a transaction due to owner’s failure to make the legally required disclosures. Accordingly, owners should initiate compliance in advance of the above deadlines. A step-by-step summary of the disclosure process prepared by the CEC can be found at the following website:

http://www.energy.ca.gov/ab1103/documents/2011-09-12_workshop/2011-09-12...

For more information about the subject matter of this article, please contact Eric B. Blum at eblum@raineslaw.com or the Raines Feldman attorney with whom you regularly work.

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