New Model High-Performance Lease Helps Unlock NYC’s Ambitious Climate Goals
In August 2021, the Institute for Market Transformation, with pro bono assistance from SPR, released a model high-performance lease that will provide critical assistance for commercial building owners and tenants seeking to advance building decarbonization and comply with NYC Local Law 97. A “high-performance lease” is a commercial lease that contains provisions that mandate compliance with certain energy efficiency and carbon emissions requirements. In most standard lease arrangements, the building owner pays for energy efficiency investments, but the tenants receive the financial benefit of these investments. High-performance leases seek to balance the economic burdens and benefits of making energy efficiency improvements.
The model lease can help NYC building owners comply with Local Law 97, which requires most New York City buildings over 25,000 square feet to meet increasingly stringent carbon emissions caps starting in 2024 or face significant penalties. However, tenants are responsible for at least half of all energy consumption in commercial buildings. Therefore, in order to meet Local Law 97’s stringent emissions caps, commercial landlords must find a way to incentivize or require their tenants to adopt energy efficiency measures. One means of doing so is for landlords and tenants to enter into a high-performance lease.
The key concepts of the model lease include the following:
- Establishing Building Performance Standards: The model lease articulates the energy consumption goals for the building and the leased premises, the capital improvements that must be undertaken to meet these goals, and, if applicable, the design requirements for the leased premises that a tenant must meet to achieve the leased premises’ energy consumption goals.
- Shared Responsibility to Meet Building Performance Standards: To help achieve compliance with the building performance standards, the model lease sets forth specific landlord and tenant obligations and offers ways for both parties to share the costs of meeting these obligations. For example, the model lease requires that the tenant contribute to the landlord’s cost of the capital expenditures required to meet the building performance standards by permitting some of these costs to be passed through to tenants as an operating expense. The tenant also plays an active role in meeting building performance standards under the model lease. The tenant must comply with the energy standards and design criteria for its space, and the landlord must incentivize to the tenant’s efforts by paying the tenant a bonus for making improvements that are necessary to comply with these standards.
- Landlord-Tenant Transparency and Accountability: The model lease ensures that landlords and tenants will have equal access to information about tenant and building energy consumption by requiring that submeters be installed in tenant spaces and in building common areas, and by requiring that results of energy usage and recommissioning studies be shared with both parties.
- Periodic Recommissioning: Recommissioning involves testing building systems, equipment, and operations to ensure optimal energy efficiency and to identify and address any inefficiencies. The model lease requires a periodic recommissioning of the tenant space, which includes an evaluation of plug load consumption, water consumption, and operating hours. The model lease also requires that the landlord periodically recommission the base building systems and common areas.
- Mitigation Plan: The model lease includes a plan for mitigation if the building’s energy consumption goals are not achieved, requiring the landlord to work with all of the building’s tenants to establish an energy optimization plan for the building and each leased space. In addition, if the tenant exceeds its individual energy use limit or goal, the model lease requires the landlord to arrange for the premises to be recommissioned at the tenant’s expense. The model lease allows landlords to pass through any penalties incurred by the landlord that are equitably attributable to the tenant’s consumption of energy over its energy use limit or goal.
The model high-performance lease is an important step toward encouraging greater collaboration and strategic partnerships between building owners and tenants by equitably aligning the costs and benefits of energy efficiency investments. As commercial building owners work toward achieving major reductions in carbon emissions and meeting their LL97 requirements, high-performance leases can play a critical role.