Lou, Bald Eagles and Carbon Emissions

Congratulations are in order since there is a new member of my family, but please do not call me grandpa.

His name is Lou and he weighs in at a svelte 12 pounds.

He stands a good 18 inches off the ground.

That is, on all four legs.

You see Lou, my closest thing to a grandchild, is a rescue dog recently adopted by my son Adam and daughter-in-law Natalie (adorable picture below… of Lou, not Adam and Natalie).

After a hard start living on the street, Lou is now luxuriating in the Boston area.

Our role as doggie grandparents was put to the test when we were slated to babysit Lou when “his parents” went out on the town.

Kind of an open book exam. Lou survived, so maybe we can be trusted with real grandchildren one day.

Of course, I do get easily confused and may soon be diapering Lou and feeding the future heir in a bowl on the floor.

Many people adopted new pets during COVID and then realized that they bit off more than they could chew, but if there was not already enough to worry about there is a new issue.

Bald Eagles.

Bald Eagles?

Yes, Bald Eagles have made a remarkable comeback from near extinction and since an Eagle can easily grab a 12-pound salmon in its talons for a healthy snack, little pooches and kitties are not so safe anymore.

On top of Eagles, there are Hawks, Condors and Coyotes.

Some people have taken to dressing their little ones in spiked collars and armored vests (adorable but ridiculous picture below of a “coyote vest”).

Coyote Vest

Hey, whatever it takes and quite stylish.

I am considering getting similar “landlord vests” for the Mintz & Gold leasing team.

Landlords and their attorneys can be quite intimidating but let them try to take away our clients’ Yellowstone injunction rights when we are wearing one of those trend setters!

Tenants also need protection from costs associated with recent laws coming on the books across the country regarding carbon emissions.

For example, NYC has new carbon emissions limits for most buildings over 25,000 square feet under Local Law 97 of 2019, which sets the goal of reducing building emissions by 40% by 2030 and 80% by 2050.

The law imposes mandatory building emissions limitations for 2024-2029, tougher emissions limitations for 2030-2034, and even tougher emissions limitations are expected thereafter.

We first highlighted this concern in an issue roughly eighteen months ago and now are starting to see this law being addressed in landlord lease drafts. Even if not specifically addressed, often operating expense provisions are broad enough to potentially sweep these costs in as escalations.

Many laws provide such stringent requirements that engineers view required payments more as “taxes” than penalties for non-compliance.

Get out your landlord protection vests since, not surprisingly, landlords are trying to pass the annual compliance costs and longer-term capital expenditures onto their tenants.

Not to cut landlords too much slack, but it is somewhat understandable since tenants in a commercial building generate a majority of the carbon emissions.

The issue facing industry participants moving forward is how to create an equitable allocation of these costs.

It is reasonable for tenants to pay for their own excess energy usage, but not the excess usage regarding all of the building common area and building systems (e.g., HVAC) and not the excess usage of other tenants.

In today’s issue we update our initial thoughts from 2019 based on current trends.

Follow these ten suggestions to address your lease’s carbon emissions provisions and you will be as content as Lou after a good belly rub.

  • If possible, resist compliance. Perhaps only applicable to very large tenants, although you will have a stronger argument with respect to capital costs since one can argue that your landlord should have anticipated the compliance obligations of existing laws.
  • Treat as any capital cost. If you cannot avoid paying your share of capital costs, then provide for customary operating expense escalation limitations:
    • Limit payments to the extent the work actually reduces the building’s carbon intensity (or at a minimum a good faith intention should be supported by third-party reputable analysis).
    • Amortize such capital costs on a straight-line basis over such item’s useful life in accordance with GAAP.
    • Larger costs should be bid out to independent contractors.
    • Include auditing rights with an independent dispute resolution mechanism.
  • Avoid double charges. In NYC, landlords have the ability to pay for capital expenditures to meet LL 97 through Commercial Property Assessed Clean Energy (C-PACE) loans. Repayment of these loans are made together with and are listed as separate line items on the landlord’s property tax bills so make sure it is clear under your lease that the definition of “Taxes” (for which you likely pay your proportionate share over an agreed upon base year) will not include such charges.
  • Allocate payments based on your actual usage. You want to be sure that you only pay for your own excess energy usage, not the excess usage of other (potentially heavy user) tenants.
    • LL 97 allocates an amount of “ordinary” usage to each building so make payments only to the extent your usage exceeds your proportionate share of such ordinary usage (rather than potentially paying your proportionate share of the above line usage of all tenants).
    • It should be possible to establish a per square foot calculation which will clearly define your share of baseline energy usage and to prepare a lease provision that obligates you to pay any excess per square foot usage as evidenced by your submeters or meters.
    • Provide that no charge will be levied upon you for any period during which no such penalty was levied upon the building or during which your use did not exceed your allocation of ordinary usage.
  • Address common areas and base building systems. Many landlords are trying to pass along to tenants their proportionate share of carbon emissions charges based on building common areas and base building systems (not just overtime HVAC usage by individual tenants), but that would result in all costs falling on the tenants and the landlords having no skin in the game. It would be more equitable for your landlord to cover these charges but tenants do utilize these areas and systems and you may need to pay some portion thereof. Also determine whether these costs are significant enough to challenge (i.e., is a larger issue for a large tenant).
  • Require landlord efficiency. If you cannot avoid paying some portion of charges associated with the building common areas or systems, then your lease should require that your landlord operate the building as efficiently as possible. In addition to a general covenant to that effect, you should speak to your engineers about providing specifics, such as use of a Real Time Energy Management System and/or regular recommissioning of the building using ASHRAE standards.
  • Allow use of credits. Give yourself the right to purchase and surrender qualifying carbon credits and allowances and/or renewable energy certificates in lieu of paying some or all of your share of your energy usage costs.
  • Cap your annual costs. Try to limit your annual increases (e.g., 105% of the prior year’s costs). The ramifications of these new laws are unclear and this may allow you to spread out huge unanticipated costs.
  • Reporting/audit rights.
    • Require regular reporting from your landlord, including copies of all reports submitted to and received from the municipality and an annual report showing details regarding the total building emissions, common area and building system emissions and your premises’ emissions along with the LL97 carbon emissions allowance.
    • You should be entitled to review and audit your landlord’s calculation of your emissions related payments.
  • Dispute resolution. Allow for expedited arbitration or some other independent dispute resolution mechanism to resolve any disagreements.

I love the old New Yorker cartoon where the disgruntled dog walks away after returning a fetched stick thinking “It’s always ‘good dog.’ Never ‘great dog.’” Follow the ten suggestions above and you will not need your landlord vest to negotiate a great (not just good) lease carbon emissions compliance provision.