It would be convenient if this were only a prospective conversation about the leases you are about to sign. It isn’t. Tens of thousands of existing leases (many with long renewal terms) are for premises that are subject to greenhouse gas disclosure and reduction laws already on the books and now being phased into effect. That reality makes this subject urgent: leases drafted decades ago, long before anyone contemplated building energy performance standards (BEPS) or whole building emissions reporting or net zero energy mandates, must now be revisited.

Public sentiment about government climate measures ebbs and flows. Laws do not. From Maryland to California, New York City to Denver, and Seattle to Washington, D.C., jurisdictions have enacted BEPS, clean heat rules, and related regimes that are forcing building owners to reduce emissions or face penalties. These rules typically target building owners, but the right (or wrong) lease language will determine whether those costs and obligations ultimately fall on landlords, tenants, or both. And these issues arise not only in commercial leases, many multifamily leases implicate the same concerns.

The cost of compliance with these new climate laws will often dwarf the value of a lease if not the building itself (e.g., converting natural gas powered HVAC to all electric).

Buildings are the sweet spot for GHG emissions reductions: they account for nearly 40% of U.S. emissions. That is why property owners and tenants must treat lease language about energy, data, and compliance as material business terms.

Below is a tactical roadmap, focused on Maryland but relevant elsewhere, to begin to help owners, tenants, brokers, and in house counsel identify the provisions in a lease that matter, and the sort of language to consider.

1.  Start by reviewing every lease you have, now

A review should not be a checkbox exercise. Begin with these questions for buildings in regulated jurisdictions:

  • Does the lease have a general “compliance with law” clause? Who bears the obligation to comply with statutes and regulations that affect the leased premises and the building?
  • Does the lease address energy data sharing, submetering, or benchmarking?
  • Are operating expenses and capital expenditures defined in a way that captures costs of retro commissioning, BEPS compliance, or penalties?
  • Do tenant improvement and renovation provisions require compliance with building energy standards?
  • Is there express allocation of responsibility for BEPS fines, alternative compliance fees, or excess emissions charges?

A seemingly boilerplate clause about “complying with laws” historically aimed at ADA or fire sprinklers can be determinative here, but it is only the starting point.

2.  Make energy and GHG emissions data sharing standard

It may be a myth that if you cannot measure it,

 you cannot manage it. But Maryland law already requires utilities to provide whole building and aggregate energy data to owners for benchmarking purposes (Maryland Senate Bill 2022, 528). In practice, however, utilities’ data alone is insufficient for a building owner to calculate attributable tenant GHG emissions. Owners will need tenant level inputs: employee counts, operating hours, plug load inventories, and information about tenant equipment and processes.

As a threshold edit, virtually all leases, existing and new, should likely be amended to require tenants to share energy related data and occupant information needed for GHG reporting and benchmarking.

That clause can carve out proprietary tenant information, protect trade secrets, and  limit public disclosure where legally permitted, but the core obligation to share data should be explicit.

3. Define the standards that matter

Where jurisdictions impose actual limits on building energy use or emissions (not merely reporting), the lease must define the applicable standard. Useful defined terms include:

  • Building Energy Performance Standard (BEPS). Identify the statute, code section, or regulatory rule, and any thresholds or compliance dates that apply to the building.
  • Energy Consumption Limit. A numerical limit (kWh, kBtu, or emissions metric) that the tenant is expected not to exceed.
  • Plug Load Standard. If tenant equipment/displays are regulated, define the metric and measurement approach.
  • Retro-commissioning. Define scope (e.g., HVAC, lighting, controls), the standard of work (ASHRAE, LEED enhanced credit, or equivalent), and the process/timing.
  • Energy Data. As above, define what data and level of granularity is required.

If a tenant will be subject to an energy consumption cap (because the building is), that cap must be expressed in the lease, tied to a recognized metric and testing/measurement protocol, and accompanied by an agreed upon method for calculating exceptions and credits.

4.  Submetering and measurement

Accurate measurement is the foundation of enforcing allocation. Submetering the leased premises, with meters capable of recording demand and kWh, should be standard where practicable. In many older buildings true submetering will be difficult or regulated by public utility commissions; electronic submetering software that simulates tenant load may be a substitute but must be expressly permitted and described.

The lease should specify:

  • who installs and pays for submeters,
  • standards for meter accuracy,
  • how data is shared and retained,
  • responsibility for meter maintenance, and
  • consequences for meter failure or bad data.

5.  Operating expenses, capital expenditures, and amortization

Expectations about what is a reimbursable operating expense versus a capital expenditure will intersect with BEPS compliance. Consider:

  • Including a tenant’s prorata share of the costs to undertake whole building retro commissioning and BEPS compliance in operating expenses;
  • Allowing certain capital improvements made to meet BEPS to be amortized and charged to tenants over a reasonable period (e.g., the useful life or the remainder of the lease term);
  • Requiring tenant cooperation in retro commissioning, including providing occupant data and access, and making the tenant responsible for costs that are directly attributable to its premises or operations.

These allocations are all new and while they have not existed in the past, today are negotiable commercial terms, but silence in the lease often defaults to landlord risk exposure.

6.  Tenant improvements and renovations: design to perform

Leases should require that initial tenant improvements and subsequent renovations:

  • comply with applicable (including out year requirements of) BEPS,
  • not increase the tenant’s plug or energy consumption above an agreed baseline without landlord approval,
  • meet specified design criteria (e.g., lighting power density, HVAC efficiency), and
  • provide for landlord review and approval of design and scope.

That language prevents tenant buildouts from undermining whole building compliance.

7.  Incentives to rebalance equities

Traditional allocations (landlord pays capital; tenant pays utilities) may no longer reflect risk and value. Creative incentives help align interests:

  • GHG Reduction Bonus. A landlord could pay a tenant a percentage bonus upon completion of tenant improvements that achieve modeled reductions (amortized as a rent credit).
  • Assignment of Incentives. Lease language can be used so that tenants receive tax deductions or incentives (e.g., 179D type benefits) through assignments or sharing mechanisms.
  • On site renewable participation. If the landlord installs on site renewables, require tenants to purchase that power at or below local utility rates and offer tenants participation in PPAs where feasible.

Incentive language unlocks cooperation where otherwise each party would act alone.

8.  Penalties and enforcement

If a jurisdiction imposes fines, excess emissions charges, or alternative compliance payments on the building owner, the lease must allocate responsibility clearly:

  • Tenants should be responsible for penalties attributable to their excess consumption or failure to provide required data where their actions or admissions cause noncompliance.
  • Landlords should remain responsible for penalties caused by their failure to timely report, their failure to maintain building systems, or the consumption of other tenants.
  • The lease should specify how credits, offsets, or alternative compliance fees are applied and whether the cost of purchased credits is treated as operating expense.

This is one of the most contentious negotiation points and will soon be an issue of first impression before rent court judges. Reasonable compromise mechanisms include thresholds for tenant liability, notice and cure periods, and caps tied to a tenant’s proportionate share.

9.  Litigation is inevitable, but don’t wait

There is litigation challenging BEPS statutes in several states (including leveraging federal government objections to this regulatory scheme), and including litigation pending against Maryland’s programs. Those suits will almost certainly succeed in whole or part. Litigation, however, does not eliminate the immediate practical problem: property owners must comply with the law as it exists today or risk fines, lost incentives, or reputational harm. The prudent course is to mitigate risk today by amending leases and implementing data collection and energy management systems, even as parties reserve their litigation rights.

But it is the future litigation enforcing GHG lease provisions that scares the heebie jeebie’s out of many. Beyond the cost of compliance itself, it is that risk of litigation that is contributing to significantly driving down the value of real estate subject to these climate laws.

Closing thought

Drafting leases to address GHG obligations is an art in its infancy. The risks and opportunities are not new; I wrote about many of these issues in a 2009 law review article titled Does a Green Building Need a Green Lease?, but today the dollar stakes are higher and the mandatory statutory architecture is spreading geographically.

This post is not a comprehensive legal brief. It is a call to action: review your leases, start sharing data, define the standards that will govern performance, allocate risks, share costs and penalties with clarity, and use incentives to align landlord and tenant interests. For property owners and tenants who want to minimize surprise costs and regulatory exposure, now is the time to act. This includes, importantly, not only updating lease forms; but also existing leases.

_________________________

Join us for the next in our webinar series at the Intersection of Business, Science, and Law, “From Boilerplate to Benchmarking: The New Era of Greenhouse Gas Lease Provisions” on Tues, Nov 18 at 9 am. The webinar is complimentary, but you must register here.