By:  Kimberly Huangfu, Esq. and Manny Fishman, Esq.

Although the current atmosphere is one of uncertainty as to how Title 24 will be implemented and how significant the compliance costs will be, California’s commitment to green building and energy efficiency remains clear. The recent roll out of California Building Standards Commission’s 2013 Title 24 Code Regulations (“Title 24 Regulations”) that took effect on July 1, 2014, reaffirms California’s pledge to achieve its zero net energy goals for commercial buildings by 2030. The Commission continues to aggressively push forward with the next round of 2016 code requirements as stakeholders and policymakers are currently engaged in the “pre-rulemaking” process for the next iteration of 2016
Title 24 Regulations.

As to the 2013 cycle, the most notable change is that Title 24 Regulations now apply to tenant improvements with a permit value of $200,000 or above, as well as building additions of 1,000 square feet or greater. The uncertainty of who will fund these tenant improvements, and more importantly whether building owners will bear the burden of upfront infrastructure costs to accommodate the Title 24-specific regulations, has been the most difficult concept for landlords and tenants to accept. As a result, there has been a great deal of apprehension in terms of how to properly allocate Title 24 compliance costs between landlords and tenants. This, in turn, has led to a decline in the number of building permit applications and, coincidentally, an increase in the number of leases where the parties reach an impasse and walk away from the deal.

What is the solution? Unfortunately, there is no bright line answer, but candid discussions among the parties detailing the tenant’s needs and how those objectives can be achieved in a cost-efficient manner is a starting point. There are a few options to alleviate some of the cost considerations, ranging from the implementation of certain pass-throughs of operating expenses and CAM charges to be spread among all building tenants over the life of the lease term, or the inclusion of certain Title 24 compliance costs as part of the negotiated tenant improvement allowance. One thing is clear—Title 24 Regulations will encourage landlords and tenants to negotiate language in their respective letters of intent, leases, and work letters to address compliance costs head-on.

In the past, the voluntary adoption of non-mandatory, incentive-based green building standards was thought of as a good marketing tool. This is no longer the case. The 2013 Title 24 Regulations are mandatory, when applicable, and while compliance will prove to be navigable (at least until the 2016 cycle takes effect), the new regulatory framework adds a layer of sizable cost considerations that will fuel the ongoing debate between landlords and tenants as to who should bear the ongoing compliance costs.