Spoiler alert: Building Performance Standards are here to stay

Photo by Joakim Nådell on Unsplash

Building Performance Standards are one of the best tools we have to manage climate impacts from one of the largest contributing sectors - existing buildings.

And despite legal challenges, BPS are very likely here to stay. So, instead of “waiting for the litigation,” here’s what you need to know.

Existing leases are problematic for at least two key reasons: they are silent regarding new regulatory requirements (including BPS), which exposes both owners and tenants to significant risks, and in today’s world, new research suggests that a “traditional” lease means you are leaving money on the table.

The impact of Building Performance Standards

Building Performance Standards, which target existing buildings, are absolutely necessary if we are going to even come close to our shared climate goals (see this IMT article, Lessons from the Ground: Implementing Building Performance Standards). If you are new to Building Performance Standards, check out our prior blog posts. A recent paper authored by representatives from the Institute for Market Transformation (IMT) and and the US Department of Energy, Green Lease Leaders and How the Lease is Used as a Critical Tool for Decarbonization, 2024, provides a good explanation of the issues and opportunities:

“Perhaps the largest, ultimate driver toward green leasing will be mandatory requirements through local and state adoption of Building Performance Standards (BPS) which can require owners to meet a variety of energy, emissions, and social targets. As of early 2024, these policies cover about 25 percent of all buildings in the U.S (Institute for Market Transformation 2021). The National Building Performance Standards Coalition is a group of state and local governments committed to implementing BPS in their jurisdictions. They now represent about 25 percent of all U.S. buildings. Some of the BPS which have already been adopted, including Local Law 97 in New York City, have substantial fines for non-compliance. This is a potent motivator for owners to work together with their tenants.”

As of July 2024, BPS have been implemented in 13 US jurisdictions with 34 others committed (more information, here). That said, the first BPS was only implemented in 2018; what does this mean? This brand new regulatory landscape is rapidly changing. While the average lease term varies by market, in many markets it is around 7-8 years. That means that most leases are completely silent regarding these new regulatory requirements. In no other context would we accept that type of contractual risk, with that amount of money (rent) on the line - leases can, and should, be updated to address BPS requirements.

Traditional Leases leave money on the table

Green, performance - based leases are not just “nice to have,” they are critical risk management tools. Recent research by IMT found that, “…green leases now have the potential to unlock over 17 percent in energy consumption savings.”  You can read the full report, Green Lease Leaders and How the Lease is Used as a Critical Tool for Decarbonization (link here). While IMT recognizes in its report that, “While it is the measures enabled by the lease and not the signing of the lease that result in the operational savings, the lease plays a key role to ensure measures can and will be implemented, defines the efficiency standards required for the asset, and outlines the associated roles and responsibilities of both landlord and tenant.” The bottom line: leases are a key part of climate work.

What does this all mean?

“Traditional” leases expose both owners and tenants to a variety of risks, and force the parties to leave opportunities on the table. Let us be clear: BPS are regulatory requirements with real penalties. We need to stop treating them as optional and start treating them like life/safety codes, because if you understand climate change, they are. Additionally, clear lease language is also a good risk management and Good Governance (from an ESG perspective). If you have questions or want to learn more, contact us!

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. Climate Aligned Law is licensed in Washington state.