YOU THINK ALL RESIDENTIAL LANDLORD-TENANT DISPUTES ARE THE SAME AND BORING? NOT THIS ONE

Our focus in this piece is a trial court case for wrongful eviction entitled Follingstad v. Lama, filed in San Francisco about three weeks ago.  That lawsuit, at first seemingly like many others brought over the years by tenants who believe that they were ousted unjustly, is anything but typical.  It is fascinating because it features so many real estate topics right out of today’s news.

The case arose amid the enormous surge of property values and rising rents currently taking place in the Bay Area.  Besides the whole subject of lack of affordable housing and the growing economic/power disparity between landlords and tenants in strong California markets, the Follingstad lawsuit has a little of most everything.  Most notably, it brings into play the dynamics of all of these topics:

  1. a long-term tenant in a rent-controlled unit;
  2. an illegal unit in the building;
  3. the tenant’s pre-eviction listing of her unit with short-term rental giant Airbnb; and
  4. a rather suspect landlord who had recently purchased the building involved.

Follingstad had been paying $2,145 per month for an apartment in what was ostensibly to the outside world a duplex.  As a multiple-unit property, it would be covered by San Francisco’s rent ordinance and would therefore be subject to rent control.  That ordinance currently limits increases in monthly rent as to rent-controlled units to 1.9% during the present year.

Like the regulations in the City of Los Angeles, the San Francisco ordinance excludes single-family dwellings.  Remember that; it is key here.

Enter Lama as the new owner of the property.  Immediately, Lama as landlord issues to Follingstad a “notice of change of terms of tenancy” providing for a rent increase from $2,145 to $8,900 per month — more than 300%!

But wait!  It turns out that the other unit in the property was not lawful.  It was an illegally converted and unpermitted “in-law” unit.  Lama, a “sneaky” but crafty investor, took the illegal second unit — then unoccupied — off the market and declared the building (which also has a garage) to be a single-family house.  (To add to her approach, Lama actually removed the toilet and kitchen sink from the second unit, making it “uninhabitable” under state and local law.)

Lama then moved into the premises rather than renting out the now single-unit house.  This may have been the flaw in her otherwise clever scheme.  Why?  Because that made the eviction one predicated upon “owner move-in” instead of one for nonpayment of rent; and San Francisco, like Los Angeles, requires a “relocation payment” on an owner move-in whereas there is no payment required where the tenant has failed to pay the rent or is evicted for other “just cause.”  San Francisco’s relocation payment is $5,551 per tenant (plus $3,701 more for each tenant who meets the ordinance’s definition of “senior” or “disabled”).

The case is pending and, besides the issues described above, potentially raises some interesting questions.  For example, what would have been the outcome had Follingstad stayed in occupancy and forced Lama to pursue an unlawful detainer?  What if Lama had used as her ground to evict Follingstad the latter’s attempt to rent out the unit on a short-term basis through Airbnb (alleging that this was an unpermitted attempt to sublease)?  What would have been Follingstad’s rights if Lama had, instead of moving in, re-rented the building to a legitimate lessee as a single-family house?  Is there any possibility that a court would decide that the eviction was improper because it was unconscionable or, at least, inequitable?

In a hot rental market, there may be other cases arising which will address some of these open questions.  We at The Joe Cobert Report will let you know what happens in Follingstad as well as other cases which deal with some of these open questions.

Advertisements

THE “SHORT-TERM” RENTAL: A GROWING CHALLENGE FOR CALIFORNIA’S HOUSING COMMUNITIES

The term “short-term” rental is generally used to refer to the leasing of housing units (or portions thereof) for a period of fewer than 30 consecutive days. Sometimes such arrangements are known as “vacation rentals” because the leased location is utilized by travelers in lieu of traditional hospitality properties like hotels and inns. The use of these arrangements has spawned an industry providing information and bookings by internet communications with companies like Airbnb, VRBO and Homeaway.

State Laws

At the moment, there is no statewide California legislation focusing on short-term rentals, although some bills are pending in Sacramento addressing various topics pertaining to these types of temporary housing. There is also likely to be a measure on the November 2015 ballot statewide. One measure collecting signatures to get on the ballot contains provisions calling for the owners of short-term rentals where they are lawful to report periodically (probably quarterly) to city and county agencies in the local jurisdictions, with substantial fines for failure to do so.

While most of the potential efforts to spell out regulations are designed to limit and/or tax the short-term rental industry — which at present is exempt from “occupancy” or “transient” taxes in most localities — there is some industry pushback in proposed legislation too. For example, AB1220 (Harper R-Huntington Beach), supported by a coalition of residential property owners, would expressly prohibit local governments from levying taxes based on short-term rental income.

 How the Topic Has Been Treated So Far By Local Jurisdictions

At present, the legislative and judicial evaluation of short-term rentals by California jurisdictions is in flux. Only a small number of cities and counties have as yet adopted laws on the subject. Quite a few local governments are still evaluating what to do. That is changing rapidly with more public awareness of the topic, as witnessed by the events this week in Santa Monica. There the unanimous City Council voted, without first taking public comment, to prohibit short-term rentals of entire residential units within its city borders. As far as short-term rental of spare rooms, less than the whole unit, Santa Monica’s approach is to allow same if the owner/host complies with licensing requirements and pays the City’s 14% occupancy tax, the same percentage as required of hotels, inns and the like in that jurisdiction.

Of the other municipalities which have thus far established legal policies concerning short-term rentals, measures adopted have ranged widely in scope. For instance, San Luis Obispo has a Municipal Code which totally bans “Vacation Rentals” within the city limits, but which is vague as to whether this extends to leasing of only a portion of the unit. Anaheim and Malibu recently passed measures legalizing short-term rentals provided that the hosts register and pay taxes like other businesses offering lodging. By contrast, San Diego’s applicable code does not prohibit short-term rentals categorically but rather prescribes that, in certain parts of the town, it is unlawful to lease out a condominium for fewer than seven days (effectively eliminating this type of occupancy for normal two-day weekends as well as extended holiday weekends).

What is the current status of regulation here in the City of Los Angeles? Our Planning Department is presently reconsidering the City’s zoning regulations in light of the proliferation of short-term renting, with written proposals expected to be surfacing in a few months. In the meantime, as specified in a memo on the subject circulated by the Planning Department last year, short-term rentals are zoning violations in many residential areas but may — at least for the time being — be permissible in certain locations which are zoned for high-density, multifamily occupancy. Hoteliers have been lobbying to eliminate any short-term occupancies, whether whole or partial units, or at least to “level the playing field” by proposing transient/occupancy taxes on short-term rentals at rates similar to those charged by hotels and other lodging providers for units having “like amenities.”

Not surprisingly, the City of San Francisco, where Airbnb is based, has had a flurry of activity on this topic too. This is at least in part because of the limited rental housing stock in that municipality as well as the extremely high rental rates for apartment and condo units there. San Francisco’s Administrative Code previously precluded “tourist” or “transient” occupancy, and short-term rentals were considered to fall into those categories. Moreover, the City’s Planning Code may have been a barrier too because it restricted operation of “hotels” in areas zoned for residential, and some groups argued that short-term rentals were covered by the hotel restriction. At this time, a fairly new ordinance in San Francisco provides some exceptions in narrowly limited circumstances. However, the regulations are the object of considerable lobbying, with apartment owners’ groups trying to expand the number of exceptions and tenants’ organizations trying to cut back on those few now available.

 Litigation Concerning Short-Term Rentals

Thus far, most litigation related to short-term rentals has focused on two topics. One is whether condo HOAs can regulate and limit the number of such rentals as well as whether they possess the authority to impose fees on condo owners who are engaging in short-term rental. An appellate court decision in Los Angeles County this March supported the right of HOAs to limit short-term rentals as well as to charge fees, although the amount of the imposed fees could not exceed what its Board of Directors reasonably estimates “in good faith” to be needed to “defray the cost” generated by a short-term rental.

Considerable judicial attention in recent times has focused on online hosting platforms. Some have been initiated by tenant advocacy groups. There was also a case decided at the trial level last month reflecting the competition and bickering among those hosting companies, with Homeaway unsuccessfully challenging the new guidelines in San Francisco as being unfairly favorable to Airbnb.

What Are Some Remaining “Hot” Issues and Unanswered Questions

The explosion in the number of short-term rental operations in recent years has been enormous. It is estimated that Santa Monica alone presently has 1,700 sites. Creative efforts to circumvent the newly enacted rules are being devised. The issues left to be determined are numerous, some being rather complex and others less so. Think about just the small list of topics set out below.

  1. In locations where there is already a shortage of affordable rental properties, what can be done to maintain residential availability for lower and middle class tenants? How can the government keep short-term rentals from gobbling up houses, condos and apartments which would otherwise be available for long-term occupancy?
  2. How can the playing field be made more level to placate hotels and motels, which are losing market share to these short-term rentals, especially when the latter presently do not pay transient or occupancy taxes?
  3. How can local governments generate fees from short-term rentals which will not be the subject of substantial litigation?
  4. What impact does regulation of short-term rentals have on rights of privacy?
  5. What can developers and HOAs specify about short-term rentals when creating and/or operating multifamily residential projects?
  6. What will be the ultimate impact of short-term rentals on traffic, parking, crime and property values in the communities which allow those rentals?
  7. How can local governments effectively enforce their regulations given staff and budget constraints?

Updates

This is definitely a “hot-button” subject in California and some other locations around the country. More is assuredly to come. Stay tuned. The Firm will keep a close watch on developments regarding short-term rentals, and it will inform readers of The Joe Cobert Report of significant matters pertaining to this subject as they materialize.

RESIDENT APARTMENT MANAGERS AND THE NEW LEGISLATION REGARDING “SICK LEAVE”

Many readers of The Joe Cobert Report have already heard or read something about the recent California legislation relating to “sick leave”. That legislation, entitled the “Healthy Workplaces, Healthy Families Act of 2014” (the “Act”), applies to virtually all full-time and part-time employees who work on at least 30 separate days in an employment year and entitles them to one hour of paid “sick leave” for every 30 hours worked.

If you are not yet knowledgeable about all the details of that legislation particularly all the records to be kept and rules to be adhered to, we recommend that you contact one or more of the numerous top-level labor lawyers and/or human resources people in Southern California. They are devoting considerable time these days explaining how the Act impacts various businesses and how labor practices and policy manuals need to be revised in order to comply when July 1 rolls around. Why are we writing about the Act in this newsletter? Because we believe that a certain group of our readers are involved in the apartment sector and need to consider specifically the Act’s effect on employment of resident (that is, on site) managers. If you are involved in this property sector — as an investor, a property owner or an officer or principal of a property management company — you need to read on.    The Act Applies Here To begin with, there is no doubt that all or nearly all on-site managers are employees subject to the protections of the new Act. However, a number of the duties and procedures pertaining to on-site managers of multi-family properties and situations they encounter in performing their work differ from those in many other fields of employment. In particular, resident managers have job functions requiring them to divide their home life and personal time and, unlike others who choose to work at home for convenience, they must be at the premises at various times as part of their jobs. Some Key Issues and Questions To Be Addressed Consider these six items:

  1. When the employee is a resident manager who works largely from home and tells the employer that he or she needs some time to care for a sick parent or child living with the employee, how does one clearly distinguish which hours are “on the clock” and counted toward computation of sick leave and which hours are merely “personal” time? What documentation will be sufficient to address this concern?
  2. What if there are two cohabitants (spouses or otherwise) in an apartment unit who essentially share the on-site management tasks, how do you allocate the hours of employment so as to calculate the entitlement of each to sick leave?
  3. Sick leave payment under the Act is to be paid at the employee’s hourly rate when the leave is taken. For those resident managers who receive total or partial compensation by credit against rent due, will that impact the calculation of hours for which the employee accrues “sick leave”?
  4. Many resident managers are “on call” in the event of emergencies. If the owners continue to have an “on call” policy, will the hours counted for sick leave computation include any of the “on call” time? Will the clock start running at the moment the emergency call comes in or prior thereto when the manager is “available” in case of such a call?
  5. The Act provides that an employee choosing to utilize “sick leave” does not have to pre-arrange the time with the employer (although it is preferred if the employee can provide notice early on). Nor does the employee have to line up a replacement in the event that he or she is going to utilize accrued sick leave. What should owners and property management companies acting on behalf of owners do to be prepared in the event the resident manager takes sick leave with little or no notice? If there is no co-manager, what latitude does the employer possess to cover for the absent manager? Would the situation be different for smaller apartment buildings than for complexes of 16 units or more (as to which California law mandates a resident manager)?
  6. The Act requires the posting of certain notices about the sick leave rules at a “conspicuous place” on the property where the employee works. If there is no separate room on the premises which has been set aside as an office specifically for use by the resident manager of an apartment project, what locations qualify as “conspicuous places” for these purposes? What enforcement is there going to be on this and are there going to be penalties for supposed non-compliance?

Special Suggestions For Apartment House Buyers

As part of their due diligence, investors seeking to buy apartment buildings with on-site management need to verify how much paid sick leave the on-site manager has earned but not used. Pro formas generated by syndicators now will have to take this accrued liability into consideration. Sellers of such complexes now must include this information on their books (as well as in every payroll stub given to the on-site manager with his or her salary check).

Additionally, think about this: Many apartment house buyers want to select their own on-site manager instead of the person the seller was using. Now, in doing this a buyer must inquire when the current manager last took sick leave. Why? Because the Act creates a rebuttable presumption that termination of an on-site manager within 30 days of that manager’s taking sick leave is retaliatory for the taking of such sick leave and therefore constitutes a wrongful termination.

  What Next On This Topic?

In preparation for the July 1 operative date of the Act, lawyers, HR personnel for various affected businesses and apartment associations around the state are scrambling to develop the forms and modify the language of standard employment agreements they have long been using or disseminating to their members or clients.

Joe Cobert has been working on this quite actively. If there are any amendments to the Act or regulations generated by the office of the California Labor Commissioner, Joe intends to obtain copies of same and to keep our readers updated.

We express our thanks to labor lawyer Richard Rosenberg of Ballard Rosenberg Golper & Savitt, LLP for his assistance with this article.

COMMERCIAL BILLBOARDS IN THE CITY OF LOS ANGELES: WILL L.A. BE ABLE TO PASS AN ORDINANCE WHICH IS BOTH CONSTITUTIONAL AND EFFECTIVE?

For years, the use of billboards throughout the City of Los Angeles proliferated at a substantial rate. In a town where so many people are driving vehicles and which is a huge media market, the use of billboards and other commercial signage has spawned a mega-million dollar industry. However, while these types of signage are great for certain advertising, they have their critics. Indeed people have increasingly complained in the last decade that these billboards have become ubiquitous eyesores, another kind of urban “blight.” Moreover, as in many other municipalities, billboards have been blamed for distracting motorists and leading to numerous traffic accidents.

To address the situation in Los Angeles and with a goal to significantly restrict billboard use for commercial advertising, the Los Angeles City Council (the “Council”) has enacted a number of ordinances, some passed more than 10 years ago. Predictably, the signage industry and landlords who rent out billboard space to offsite commercial enterprises have opposed those ordinances.

Three lawsuits were filed over the years in the federal court in Los Angeles challenging the constitutionality of one or more of these ordinances on free speech grounds based on the First Amendment to the United States Constitution. All three reached the appellate level and were heard by the federal appellate tribunal for the Los Angeles region, the Ninth Circuit Court of Appeals. In all three, the Ninth Circuit ruled that the ordinance involved passed constitutional muster. Based thereon, the city’s planners and staff worked on guidelines and felt that the legal challenges were ended. They were wrong!

One of the enactments, dating back to 2002, applied only to commercial advertising on new “offsite billboards”; that is, billboards advertising commercial messages were permitted after 2002 only if they were at the actual site of the business being advertised while being prohibited if at any other location. As an example, one which was pointed out in an editorial in the Los Angeles Times this past Sunday, the 2002 ordinance if construed literally would have permitted a billboard stating “Joe’s Bagels Sold Here” but not a sign at the same site saying “Joe’s Bagels – One Mile Ahead.”

Fast forward to March of 2013. One billboard firm, Lamar Central Outdoor LLC (“Lamar”), decided to try a different approach to challenge that 2002 ordinance. Lamar filed suit against the City in the Los Angeles County Superior Court, a state forum rather than a federal one. That case was decided last month by Superior Court Judge Luis A. Lavin. Saying that he “respectfully disagrees” with the Ninth Circuit and that he is not bound by that federal tribunal’s rulings in his state court, Judge Lavin struck down the City ordinance saying that it violated the free speech protections of the California Constitution, which he found to be broader than the First Amendment to the United States Constitution. The key passage in Judge Lavin’s ruling reads as follows:

“To prohibit a sign or billboard because it displays a commercial passage advertising a product or business that is sold or conducted at a location other than where the sign or billboard is located, while permitting a structurally identical sign … that displays a noncommercial message … is to restrict speech based on its content.…”

What added to Judge Lavin’s decision to reject the 2002 ordinance is the factual inconsistency which has transpired since 2002 in the application of the law. Judge Lavin noted that, while stressing the traffic hazards and visual “blight” which billboards have created in the City, for some reason the City planners have in the 12 years since the 2002 ordinance was enacted nevertheless selectively authorized about 15,000 signs throughout Los Angeles!

Moreover, Judge Lavin took note of another inconsistent application of the City’s billboard legislation. After 2002, the City targeted two specific types of signage – digital and electronic billboards – as especially distracting and annoying. Hoping to reach a settlement in respect to those categories of signage and to avoid more litigation, the City had entered into a little publicized (some say “surreptitious”) pact with some of the major sign companies to let about 100 digital and electronic billboards be “grandfathered.” Prior to the decision in the Lamar case, that pact was found to be illegal and void, resulting (1) in an order that all those signs “go dark” and (2) with many in the City’s bureaucracy being quite embarrassed.

To say that Judge Lavin’s decision has shocked and dismayed local politicians and city planners here in Los Angeles would be an understatement. They had been confident that they could placate everyone and avoid future legal attacks with a compromise which would maintain the 2002 ordinance except that it would be modified to set out specifically defined “sign districts,” locations where billboards could continue to be added while keeping the ban on new billboards elsewhere. Judge Lavin’s policy has, for the moment, torpedoed that modification effort.

Where does that leave us? Naturally, we expect appellate review of Judge Lavin’s ruling. To that end, City Attorney Mike Feuer has already said that the City will pursue such an appeal promptly, concurrently requesting a stay allowing the ordinance to be enforced until the appellate decision is final. The next step almost certainly would be a petition to the California Supreme Court. Regardless of who wins and who loses the appeal, it is not a certainty that the justices of our highest state tribunal will agree to review such a “hot potato.”

In the meantime, will the Council try an “end run” by voting to amend the ordinance in some way to try to get it to satisfy the courts? Will the Council invite public commentary? And who is lining up on each side of the controversy? Environmentalists, residential property owners and law enforcement groups have been the most vocal proponents of tough restrictions. Opponents are not limited to the sign companies and commercial landlords but also a number of other groups and individuals who possess a huge economic stake here and who may be guided principally by their financial considerations. They include:

1. some nonprofits who are jumping in to support the signage with the hope that they can negotiate free or subsidized advertising in the process;
2. public unions and contractors, among others, who have been citing the potential increase in City revenue additional signage could bring; and
3. Los Angeles taxpayers and others who think that the City could use billboard approval as a means to get the sign companies to pay for landscaping, sidewalk repair, street paving and such as a quid pro quo (thereby enabling the City to apply funds usually spent for those services to other municipal needs).

We have not seen the end of this controversy by a long shot. Follow The Joe Cobert Report for updates.

WHAT TO DO WITH EMPTY BIG BOX STORES

Big boxes proliferated from the late 1980’s until the Great Recession two decades later.  Economies of scale encouraged not only strong companies like Wal-Mart to commit to huge commercial square footage but so too did many which have since fallen by the wayside.  In multi-tenant shopping centers, demise of a big box retailer, its “going dark,” often resulted in the death knell for satellite stores which had drawn customers from the traffic frequenting the big boxes.

At first, landlords tried to fill the void by looking for other, healthier big box users, trying to induce them to come aboard with new leases or subleases for the empty, big box space.  While some were successful in this regard, many others saw the space continue to languish and even deteriorate.  The result was the commencement of the phenomenon of the “carve-up,” dividing the big box into multiple spaces for separate users.

This Firm has dealt with a number of carve-up situations and learned that they are not easy arrangements to accomplish.  If you or someone you know has a shopping center with this kind of problem, we at the Firm can highlight the kinds of issues they may face.  Those include:

1.    how to determine approximate rental rates and lease terms for new occupants of part of the big box space;
2.    how to deal with rent reduction requests by existing tenants in satellite stores, particularly if they have complained that the big box store was what drew them in initially and that they relied on the existence of that big box retailer for their survival;
3.    should the landlord begin to carve up space even before finding occupants for all of the former big box (i.e., make changes to the space, in whole or in part, on speculation);
4.    who pays for the carve-up (the landlord, new occupants of the former big box space or some combination);
5.    what to do if replacement businesses in the big box location fail to drive a large number of customers to the satellite stores;
6.    what concessions to make to new tenants;
7.    will the new tenants have significantly greater (or, at least, different) parking requirements or hours of operation than had been the case when the big box retailer was conducting business in the shopping center; quite a distance from the traffic on the surrounding streets;
8.    if the big box was deep such that a sizable part of its space is quite a distance from the traffic on the surrounding streets;
9.    will there be challenges with respect to the activities of new prospective tenants based on exclusive rights claimed by lessees of satellite stores; and
10.    will the new tenants’ construction require substantial expenditures for the common areas in order to comply with current building codes and, if so, who will pay for those common area expenditures.

As this phenomenon runs its course, The Firm will keep its readers informed as to new issues arising from these changes in the retail real estate sector.

You may unsubscribe from future emails from the Firm by responding to this email with “Unsubscribe” in the body of the email: please DO NOT change the subject line of the email, send it as it is.

This email is a publication prepared by Joseph M. Cobert, A Professional Corporation (the “Firm”). The material provided is for informational and educational purposes only and should not be construed as legal advice. Any reader wishing legal advice from the Firm would have to make specific arrangements to retain the Firm with a written fee agreement. No reader may rely on this email as a representation by the Firm. Although the material is deemed to be accurate and reliable, there is no guarantee of its accuracy. The material contained in the newsletter is the property of the Firm and cannot be reproduced for any use without the Firm’s prior written consent. It  estate and other financial professionals only. It is not intended for consumer distribution.

Copyright © 2014 All Rights Reserved
Joseph M. Cobert, A Professional Corporation
16027 Ventura Boulevard, Suite 610
Encino, CA 91436
(818) 986-4200
http://www.cobertlaw.com
cobertlaw.wordpress.com

LOS ANGELES’ BUILDING EXPLOSION IS DRAMATICALLY CHANGING THE LOOK OF THE CITY

The architecture, transportation systems and neighborhoods in Los Angeles are in incredible transformation. Construction is taking place in almost every portion of the City, both in private and public venues (and some with both private and public uses).

One project in construction which epitomizes this transformation — something you have to see to believe — is located in the “Arts District” downtown. That is a part of Los Angeles which until recently has been off the beaten track or, more accurately, right off the tracks of the rail lines south of Union Station. On a “hardhat” tour not long ago, Joe was amazed at the size and scope of this mixed-use enterprise in what was for decades an industrial part of town next to the train terminal and the Los Angeles River.

Imagine a 400+ unit apartment building with a substantial retail element extending for three city blocks from First Street to Fourth Street along Santa Fe Avenue. There are two very long buildings laid out like passing trains which will have apartments on the upper floors plus retail and restaurant sites with rental rates in the range of $3.00 per square foot along both sides of the three buildings below the residential units. To give you an idea of just how long the project is, visualize this: had the structures been erected vertically, they would have formed the fifth tallest building in the world!

Of course, this project is initially going to appeal mostly to people working downtown and those in creative fields, for whom the explosive growth of the Arts District is a boon and a real game-changer. What may prove to be even more remarkable will be what the project signifies as to rejuvenation of the City’s urban core. Like the loft conversions not that long ago in the old Bank District, One Santa Fe is stimulating developers to pursue mixed-use possibilities throughout the Arts District, thereby setting the stage for a new wave of gentrification of a previously underutilized segment of Los Angeles.

In fact, due to the excitement generated by One Santa Fe and the clamor for retail and restaurant space in the vicinity, other significant developments are in the planning stage or scheduled to break ground soon. For example, on the west side of Santa Fe Avenue at Third Street, right across the road from One Santa Fe, another sizeable mixed-use project has obtained its entitlements and is expected to commence construction very shortly.

Get over there and take a look. While you are there, drive around to see some of the other changes and try the Factory Kitchen or one of the other excellent, cutting edge restaurants which have recently opened nearby and which are, incredibly, becoming destination sites themselves.

ENERGY “BENCHMARKING” REQUIREMENTS FOR CERTAIN COMMERCIAL BUILDINGS WILL BE EXTENDED IN SCOPE ON JULY 1

If you own a commercial building in California which has more than 5,000 square feet of rentable floor area, read this.

In an earlier issue of The Joe Cobert Report (July 2013), we alerted our readers to California’s joining with a number of other states in mandating monitoring and disclosure of energy consumption data.  AB 1103 added provisions to the Public Resources Code phasing in requirements for owners of California commercial buildings of a certain minimum size to the effect that they must (a) “benchmark” energy usage in those structures and then (b) disclose such data for the most recent 12-month period in advance of three types of transactions.  Those three types of transactions and the disclosure timing for same is as follows:

  1. The data needs to be communicated to a prospective buyer no later than 24 hours prior to execution of the sale contract;
  2. The data needs to be communicated to a prospective lessee of the entire building not later than 24 hours prior to the execution of the lease; and
  3. The data needs to be communicated to a lender who is prospectively going to finance the entire building not later than the time the owner submits the loan application to the lender for that possible financing.

In the first phase, which went into effect on January 1 of this year, the above-stated requirements were made applicable to commercial buildings of more than 10,000 square feet.  On July 1, the second phase will become operative and make the same rules applicable as well to buildings having 5,001 to 10,000 square feet of rentable floor space.

This benchmarking concept was the idea of the California Energy Commission (“CEC”) as a means of assisting the state in meeting its energy and climate change goals through increasing awareness of energy use.  If you have yet to become familiar with the specifics of AB 1103, we detail the key aspects below:

Owners will have to retain companies to (a) calculate the energy usage in their buildings and then (b) compare that usage to statistics accumulated by Energy Star for similar buildings nationally.  The statistics will be utilized to rate the energy performance of a given building on a scale of 1 to 100, 100 being the best.

  1. The process will be facilitated by using the Energy Star Portfolio Manager, a web-based system which allows building managers to track and access the energy consumption.  This can be accomplished, once the owner so authorizes, by having the electric and/or gas utility servicing the building upload all of the energy consumption information to a confidential account set up with the Energy Star Portfolio Manager.
  2. That information is employed to generate a checklist that is required under AB 1103, whereupon the data in the checklist is electronically transmitted to the CEC into an account the owner will have had to open.

AB 1103 does not prescribe any specific governmental penalties for noncompliance or delinquency in compliance.  Regulations are being created to address this.

Note also that some municipalities have added extra requirements.  For example, San Francisco has passed an ordinance requiring owners of commercial buildings in that city to make annual reports about energy usage in those buildings.

Failure to observe these energy rules adequately and in a timely manner could have substantial civil liability consequences, as the other parties involved in a transaction could pursue litigation for breach of contract or rescission if they successfully demonstrate that the owner’s omission or delay in disclosure materially misrepresented a material fact.  With that in mind, the Firm has alerted its clients owning buildings subject to the reach of AB 1103 to document carefully their disclosures and have the other party or parties in sale, lease or financing transactions affected by the legislation acknowledge in writing the receipt of those disclosures.  In some cases, this may entail revision of forms of leases or purchase contracts which clients have been utilizing as their “standard” documents.

The July 1 deadline is coming up soon, so action should be taken in the very near future by anyone who may be in the midst of or considering a transaction affected by the law.  If you have questions on this subject or require drafting of paperwork relative thereto, do not hesitate to contact Joe Cobert and the Firm for advice.