Publications

OVERVIEW

In one of the most ambitious pieces of legislation to be passed in the modern era, New York City passed Local Law 97 in May 2019 [1], as updated most recently by the New York City Department of Buildings’ (the “Department”) adoption of Section 103-14 of Chapter 100 of Title 1 of the Rules of the City of New York (the “Rule”), dated December 7, 2022 (as supplemented, “Local Law 97”). Local Law 97 aims to vastly reduce emissions over set timelines and will be sure to have lasting impacts on a significant number of property owners and tenants alike in New York City and may be a sign of things to come in other jurisdictions.

SUMMARY OF THE LEGISLATION

Local Law 97 was included in the Climate Mobilization Act, passed by the City Council in May 2019 as part of the Mayor’s “New York City Green New Deal” and applies to most buildings in New York City over 25,000 square feet. [1] The specific requirements for compliance depend on the building classification. Further, for buildings containing different occupancy classifications by use, emissions must be calculated individually for each area, and added to determine total emissions.

The ultimate goal of Local Law 97 is to reduce emissions of affected buildings by 40% by 2030 and 80% by 2050. The first calendar year for compliance commences in January 2024. The first report must be filed with the Department by May 1, 2025, then every May 1 thereafter with each filing reporting emissions for the prior year. A property owner’s failure to abide by Local Law 97 will result in violations and fines, which are likely to increase with severity and time.

The following properties are exempt from complying with Local Law 97:

• Industrial properties primarily used for the generation of electric power or steam
• Real property, not more than three stories, consisting of a series of attached, detached or semi-detached dwellings, for which ownership and the responsibility for maintenance of the HVAC systems and hot water heating systems is held by each individual dwelling unit owner, and with no HVAC system or hot water heating system in the series serving more than 25,000 gross square feet, as certified to the Department by a registered design professional
• City buildings
• Housing developments or buildings on land owned by the New York City Housing Authority
• A rent regulated accommodation
• Buildings whose main use or dominant occupancy is classified as occupancy group A-3 religious house of worship
• Real property owned by a housing development fund company organized pursuant to the business corporation law and article eleven of the private housing finance law
• Buildings that participate in a project- based federal housing program

PRACTICAL IMPACTS

Property Owner/Landlord Concerns. As a first step, property owners should confirm whether their property is a “covered property” and thus whether Local Law 97 is applicable. For property owners subject to Local Law 97, it is imperative to understand the level and cost of compliance required for their particular type of building. We recommend that property owners reach out to their environmental auditors and understand the compliance requirements for their particular type of building and tenant mix. Once the scope of compliance is understood, property owners should then consider the best ways to effectively meet the requirements of Local Law 97 as well as to mitigate the costs incurred in connection with compliance obligations arising under this new law. For example, property owners will likely want to consider ways to mitigate emissions such as adding solar panels as a source of energy or retrofitting existing HVAC systems. Other mitigation measures could include converting building systems from gas to electric and increasing operational efficiency. As one might glean from these proposals, property owners, especially owners of older buildings, are likely to incur hefty capital expenses to ensure compliance with Local Law 97. There are certain rebate, tax incentive, and grant programs available for qualified building owners including the Climate Mobilization Act enabled C-PACE (Commercial Property Assessed Clean Energy) program which can help reduce the cost incurred by property owners. In the near term, some owners of a covered building might seek an adjustment to their building emissions limit pursuant to Section 18-320.8 of the Administrative Code for any calendar year between 2024-2029. We note that any granted adjustment expires when the special circumstance justifying the adjustment no longer exists. A property owner obtaining the benefit of any emissions adjustment must certify to the special circumstance justifying an adjustment as part of the annual emissions report

In addition to the mitigation measures referenced above, commercial property owners leasing their properties to commercial tenants may consider shifting the cost of compliance with Local Law 97 onto their tenants in new leases or amendments to existing leases. Specifically, in leasing arrangements where tenants are responsible for the payment of operating expenses, landlords can seek reimbursement for compliance costs through typical operating expense provisions, as well as requiring tenants pay for such costs as part of more general compliance with laws provisions. Landlords should also consider requiring tenants to promptly report their energy consumption to allow landlords to comply with the annual reporting requirements required by Local Law 97. Savvy landlords will also make sure that any new lease agreement or amendments to existing leases include indemnification from their tenants for liabilities (including any penalties and fines) arising from or relating to tenants’ non-compliance with Local Law 97.

Tenant Concerns. While Local Law 97 is meant to require property owners
to comply with stringent emissions reduction requirements, we have seen (and further anticipate seeing) that property owners, either through new leases or amendments to existing leases, will attempt to shift to their tenants at least some portion of these compliance costs especially in the context of so called “triple net” lease arrangements. In fact, the Local Law 97 Advisory Board issued a report which, among other things, strongly recommends that property owners and tenants work collaboratively to hit emission reduction targets. This cost reallocation will likely take the form of (i) broader operating expense provisions, (ii) the shifting of obligations relating to compliance with laws to require that tenants expressly undertake the performance and incur costs of compliance relating to Local Law 97, and/or (iii) requiring that their tenants provide written reports relating to such tenant’s consumption of energy and production of carbon emissions. Effectively, we anticipate that property owners will attempt to pass along to tenants these compliance costs, similar to other operating expenses such as common area maintenance, management fees, capital expenditures, etc. In order to avoid this cost shifting, operating expense exclusion provisions should initially attempt to expressly exclude any costs incurred by a landlord as it relates to that landlord’s compliance obligations pursuant to Local Law 97.

Absent an express exclusion of Local Law 97 compliance obligations in a particular lease, there are a host of ways that tenants should otherwise seek to limit their exposure to compliance costs relating to Local Law 97. As a preliminary measure before entering into a lease, tenants should require that a landlord disclose Local Law 97 compliance measures which already have been undertaken to better understand the near and long term expenses that they may incur. Tenants should require that landlords seek the benefit of City offered mitigation programs, such as the purchase or trade of renewable energy credits or offsets to minimize any fines or penalties. Any benefits received by the landlord should be equitably passed onto the tenant. Additionally, when reviewing Local Law 97 non-compliance related provisions in a lease or lease amendment, tenants should ensure they are financially responsible for only their own noncompliance, and are not sharing the financial burden of other non-complying tenants (especially for mixed use buildings where some users consume more energy than typical office users) or creating a windfall for the landlord. For budgeting purposes, landlords and tenants could also seek to either delay a tenant’s obligation to reimburse the landlord for costs incurred in connection with Local Law 97 or even negotiate a mutually acceptable cap on a tenant’s reimbursement obligations for a particular year.

Based on these stringent compliance requirements, property owners and tenants alike undoubtedly will be burdened by higher expenses in their buildings and premises, respectively. When negotiating new leases or amendments to existing leases, it will be critical to understand what each party’s responsibility will be for current and future compliance with Local Law 97, so as to avoid any financial surprises during the lifetime of the lease.

Wiggin and Dana LLP is a national law firm with substantial experience with diverse leasing from anchor tenancies in shopping centers to large office leases, luxury brand single city retail leases, restaurant leases, warehouse occupancies as well as corporate real estate portfolios. For additional guidance on this recently passed legislation and other leasing related matters, please reach out to our Commercial Real Estate Team to develop a legal strategy to plan for near- and long-term solutions tailored to achieve your specific goals.

To read the full PDF, click here.