A lawsuit challenging Local Law 97 was dismissed, now what?

Photo by Danist Soh on Unsplash

Building Performance Standards are a new type of regulatory tool designed to reduce carbon emissions of existing buildings - a key step towards meeting climate goals. A steadily increasing number of jurisdictions are committing to the National Building Performance Standard Coalition, and implementing Building Performance or Emissions Standards.

It was only a matter of time before these new regulatory tools were challenged in court. One of the first major lawsuits was filed in New York, challenging Local Law 97.

On November 3, the lawsuit was thrown out. You can read the entire Decision & Order, here. In this post, we talk about the practical impacts and what this means for the future of Building Performance Standards.

What happened?

As a quick recap, there were three plaintiffs in this case: owners of two co-ops in Queens (about 2,900 units) and the owner of a mixed-use commercial building in Manhattan.

The Plaintiffs brought five claims: preemption, three due process claims (related to the civil penalties, retroactive application to existing buildings, and as vague and ambiguous), and arguments that the penalties amount to invalid use of taxes.

The Defendants - the City of New York, the New York Buildings Department and its Commissioner - moved to dismiss all of the Plaintiffs’ claims. On November 3, the Judge agreed and tossed the case out. The Plaintiffs have a right to appeal, and it remains to be seen if they will.

Why does this matter?

Jurisdictions with Building Performance Standards have been keeping an eye on this lawsuit, as it is one of the first major legal challenges to this new regulatory tool. Our firm has been watching this lawsuit because we have heard a number of building owners state that they are delaying assessments and upgrades because they are “waiting” for similar lawsuits to be filed in other jurisdictions, including Washington state.

The first major lawsuit has now come and gone and the deadlines - and the law - stand.

And while one of the challenges with Building Performance Standards is that they are not, well, “standard”, as states and cities have taken a variety of approaches, there are common themes that can guide a reasonable path forward, given market trends and lessons learned from the challenge to LL 97.

What are some of the practical implications?

There are very few certainties in life and in the law, but given a variety of global and national trends, it is very likely that Building Performance Standards, as a necessary and effective tool to mitigate the built environment’s significant impacts to climate emissions, are more likely to become the norm than the exception. The fact that the first challenge to Local Law 97 was thrown out provides further support for this trend.[1] And this map from IMT shows the growing number of jurisdictions that have implemented performance standards, or signed on to the National BPS Coalition.

So how can building owners and tenants manage the risks of this evolving regulatory landscape, while capturing opportunities to take a leadership position with respect to climate work?

Waiting for the litigation doesn’t make sense

For the reasons outlined above, and because it’s not just “litigation” that is driving increased scrutiny regarding building performance, smart owners should start assessing their portfolios and implementing improvement strategies designed to at least meet baseline requirements. And from a regulatory standpoint, building performance standards are not the only tools driving performance, climate disclosure laws, including SB 253, also play a part (read our blog post on SB 253, here).

Regardless of the status of future legal challenges, the market is recognizing the value of clean, healthy buildings.

There are a host of market drivers that are pushing buildings to perform better including, an increasing:

• Number of companies making “net zero” commitments (now half of the world’s largest companies).

• Volume of research that companies with robust ESG strategies (including those that relate to the assets they own or lease) perform better from a risk management and ESG standpoint.

• Participation in real estate specific ESG frameworks like GRESB (see 2023 reporting results here).

• Number of tenants looking for amenities and health/wellness strategies that align with their values and ESG goals (and a very tenant-friendly market in many urban areas).

Layer these market drivers over the new regulatory requirements, and waiting really doesn’t make sense.

Collaboration is key

Collaboration towards shared climate goals is key, as tenants have a huge impact on building performance. Recent research from JLL demonstrates that tenant activity accounts for 55 - 75 % of operational emissions, depending on climate, and above 90% for industrial spaces.

Collaboration between owners and tenants is central to effective decarbonization and managing the transition risks of BPS compliance. As such, owners will want to update their lease language and templates to address costs and benefits of certain upgrades (and penalties) in a fair and transparent way, along with other building performance-specific requirements like sub-metering, utility and other data sharing, and related metrics.

The goal is to create a collaborative agreement that equitably aligns the costs and benefits.

From an ESG standpoint, updated leases are just good Governance. They demonstrate to investors, insurers, lenders, and other stakeholders that these compliance-related risks are being managed contractually. Put another way, there is a big difference between saying you have had these conversations with your tenants and an enforceable lease contract that clearly outlines the expectations, obligations and consequences, for both owners and tenants.

And keep in mind that the LL 97 lawsuit involved multi-family projects. Multi-family leases present unique issues, and smart owners are going to want to start putting their renters on notice now. Because even though in most jurisdictions multi-family and affordable housing have some of the longest compliance cycles, they have the additional layer of issues (including landlord-tenant laws and protections) that do not exist in commercial leasing relationships.

Finally, while we currently generally think of Building Performance Standards in terms of energy efficiency, Building Performance Standards can relate to any metric that can be measured, including water. Leading experts expect that water will quickly be a much larger part of ESG conversations.

The average lease term means that the ESG world will change significantly over the life of the lease - prepare for the future by creating reasonable frameworks that afford some flexibility.

The bottom line: Don’t “wait for the litigation” and hope plaintiffs in your jurisdiction fare better than those in New York. Start taking reasonable steps towards reducing the climate impacts of your portfolio. This includes exploring all potential funding sources for capital improvements, including the Inflation Reduction Act, and other capital financing tools.

Climate Aligned Law: making sense of sustainability. Because it just doesn’t have to be that hard.

If you need help updating your lease or lease templates, contact us:

[1] This is true even though LL97 was watered down through the rule-making process, with the new, and highly criticized, “good faith effort” pathway, which really only offers short term relief.

This is common sense, but bears repeating: this blog is intended for informational purposes and does not contain or convey legal advice. The law is inherently fact specific. General information, including this blog, should not be used as a substitute for competent legal advice from a lawyer you have retained and who has agreed to represent you.