Landlords Take Note: New Energy Regulations Take Effect July 1

As of July 1, 2014, new energy regulations will impact landlords and tenants in the state of California.

The state has enacted 2013 CALGreen, Part 11, Title 24 of the California Code of Regulations in order to address concerns over energy efficiency within nonresidential buildings. The code affects plumbing, heating, cooling, electrical, lighting, and ventilation systems in buildings which undergo construction for renovations or additions from July 1 onward. The estimated cost of compliance has been estimated at three to six dollars per square foot.

The new regulations will impact owners, buyers, sellers, and tenants of commercial real estate buildings. The increased costs of compliance will impact all transactions regarding these properties, from leasing to sales. Leasing forms may need to be updated to reflect changes in the industry.

At this point, owners of commercial real estate buildings should do two things:

Review the new regulations. Become aware of how the new regulations affect specific properties, and remember to consider the impact of additional costs on budget. This should be factored into new lease agreements as July 1 approaches. Landlords who are in the process of negotiating a letter of intent or new lease, which includes tenant improvements requiring a permit to be obtained on or after July 1, should take into account the additional costs of Title 24. Consulting with a real estate attorney is essential to clarifying the rights and responsibilities of all involved parties.

Allocate costs and responsibility. Since the cost of compliance can be significant, all lease and purchase agreements should be carefully drafted to clearly specify the responsibilities of all involved parties. All possible construction scenarios should be addressed, in order to prevent later disputes over financial responsibility for renovations.

Commercial building owners should keep in mind that an “as-is” provision in leases may not suffice to protect them from compliance costs. Consultation with a skilled real estate attorney is the best way for landlords to understand and comply with Title 24 to avoid unnecessary and unexpected expenses down the road.

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