May 26, 2020
The Climate Mobilization Act (the “Act”) is a set of laws enacted by New York City to reduce greenhouse gas emissions and improve the energy efficiency of certain buildings. The cornerstone of the Act is Local Law 97 of 2019 (“Local Law 97”) which places a ceiling on the amount of greenhouse gas that can be emitted by buildings that are in excess of 25,000 square feet (however, it should be noted that there are some exceptions) commencing in calendar year 2024. In order to assess the amount of greenhouse gas being emitted by their buildings, covered building owners will need to determine the energy consumption of their buildings (such as by determining consumption of base building systems, including, heating ventilation and air-conditioning systems and those supplying gas service to the building) because the level of energy consumption determines a building’s carbon emissions.
The emissions ceiling applicable to each building will decrease over time and covered building owners may need to perform significant energy efficiency retrofits in order to meet and keep pace with the ambitious requirements of Local Law 97. Owners of covered buildings that exceed their building emissions limit will be subject to significant civil penalties based on the difference between the proscribed emissions limit for the subject building and the actual emissions of such building multiplied by $268.00 (however, it should be noted that in some instances aggravating or mitigating factors may impact the severity of the penalty).
Local Law 97 places the burden of compliance on owners of covered buildings; however, tenants should also be aware of and carefully consider the potential impact of the law when negotiating a lease for office space in multi-tenant buildings in New York City. Below are some steps that tenants negotiating office leases can take in preparation for Local Law 97.
- Tenants should be proactive and engage prospective landlords regarding Local Law 97 during term sheet negotiations. This conversation may include asking prospective landlords whether they have performed any efficiency audits to assess existing building systems, what steps they plan to take to address Local Law 97, whether the cost of compliance has been factored into the rent or will be passed-through to occupants of the building, and what green lease provisions (if any) are included in the landlord’s form lease.
- Tenants should consider the financial impact of any steps that a prospective landlord may take (or fail to take) in furtherance of Local Law 97. Specifically, tenants will want to pay close attention to the operating expense provisions of any proposed lease to avoid or mitigate the pass-through of certain expenses to the tenant.
- Retrofits will likely involve improvements that are required to be capitalized in accordance with generally accepted accounting principles. In some instances, tenants may be able to exclude such expenses, but tenants will often ultimately compromise with language that allows for the inclusion of such expenses (i) to the extent required to comply with laws enacted after the effective date of the lease, (ii) to the extent required to comply with laws enacted prior to the effective date, but for which the obligation to comply arises after the effective date of the lease, or (iii) that actually reduce, or, are intended to reduce, operating expenses provided that such expenses are amortized over the useful life of the applicable capital improvement. The inclusion of provisions regarding capital improvements required to comply with laws enacted prior to the effective date of the lease or that reduce (or, are intended to reduce) operating expenses are particularly relevant to Local Law 97. Although enacted in 2019, the obligation to comply with Local Law 97 commences in calendar year 2024. Additionally, many upgrades and energy efficiency retrofits will reduce the operating expenses of the building. To the extent possible, tenants will want to focus on excluding or limiting these provisions. For example, tenants may seek to exclude the inclusion of expenses required to comply with laws enacted prior to the effective date of the lease and include only those expenses that actually reduce the operating expenses of the building.
- To the extent the cost of capital improvements in respect of Local Law 97 are included within operating expenses, such costs should be reduced by the amount of any governmental or other incentives the landlord may receive to defray the cost of such improvements. This may include loans received through the Property Assessed Clean Energy Loan Program established by the Act, which are repaid by building owners through property tax assessments. Since tenants are typically responsible for paying a share of property tax assessments through the tax provisions of the lease, tenants will want to consider excluding assessments in repayment of Property Assessed Clean Energy loans from their tax obligations since such costs effectively represent a pass through of landlord’s capital improvement expenses.
- Tenants consuming less energy in mixed-use buildings that include restaurants or other high energy consuming occupants should consider to what extent costs relating to energy efficiency retrofits and upgrades should be passed through to the tenant. A typical tenant in such a building will want to discuss with a prospective landlord how it will allocate the cost of retrofits and upgrades among occupants of the building. If there are occupants that disproportionately contribute to a covered building’s overall consumption it may be fair for a greater percentage of the costs associated with retrofits and upgrades to be passed through to such occupants.
- As noted above, the failure to comply with Local Law 97 may result in the imposition of significant penalties. The most consequential fines will result from a failure to meet proscribed emissions limits, but fines may also be assessed for a failure to comply with the law’s reporting requirements. Tenants should exclude from operating expenses any fines or penalties that arise by reason of the landlord’s failure to comply with Local Law 97.
- Tenants should review any green lease clauses proposed by prospective landlords to confirm that they will not result in burdensome costs or unreasonably interfere with the tenant’s business. Tenants may consider what steps can be taken as part of an initial fit-out of the tenant’s premises that would assist the tenant in complying with the landlord’s green initiatives. By way of example, if a landlord’s form lease includes covenants restricting tenant’s electric usage, the tenant may ask the landlord to install motion sensors in the tenant’s premises as part of an initial fit-out to assist tenant with such compliance. If the tenant is performing its own fit-out, though, then the tenant may want to negotiate a tenant improvement allowance to reimburse the tenant for the cost of such work.
- Tenants also should consider the extent to which retrofits, upgrades and green lease principles coincide with their organizations’ own energy efficiency goals and negotiate lease terms that account for the mutual benefits of such goals.
These are just a few considerations that tenants should address when negotiating office leases in New York City. Tenants should also be advised that additional rules and guidance regarding Local Law 97 are expected, and may alter some of the points discussed above. Moses & Singer is monitoring the evolving impact of Local Law 97 on commercial leasing, and we look forward to assisting our clients with navigating the impact of Local Law 97 on their forthcoming leases. Please contact me at (212) 554-7652 or firstname.lastname@example.org with any questions.