Leases: A Critical Tool for Clean Buildings Act Compliance

In Washington State, buildings are a significant source of greenhouse gas emissions, second only to transportation. In 2019, the legislature passed the Clean Buildings Act (the Act) to create energy performance standards for existing buildings larger than 50,000 square feet, and amended it in 2022 and 2023 to broaden the types of buildings that must meet these standards. Building owners and tenants, including local governments, can leverage lease agreements to support compliance with the law, reduce risk, and delineate the responsibilities of landlord and tenant.

Building Performance Standards

Building performance standards (BPS), including the Act and Seattle’s Building Emissions Performance Standard (BEPS), are new regulatory tools — the first BPS was enacted in 2018 in Washington, DC.

The impacts of performance standards are novel, as they are the first time jurisdictions have legally required existing buildings to perform in accordance with set operational standards, by certain timelines, or face real penalties. This means that owners and tenants are now faced with a host of new issues, and very little precedent.

As outlined in previous blogs, the Act is an important climate action tool that imposes obligations on thousands of publicly and privately owned buildings in Washington State. Entities that own or lease space in buildings covered by the Act need to understand compliance issues and penalties and manage associated risks and opportunities through updated lease language.

The Importance of Leases

Since a lease defines the landlord-tenant relationship, it is also a critical regulatory compliance and risk management tool. As the primary agreement that governs the relationship and outlines how the building will be operated and maintained, leases can help ensure compliance with BPS requirements.

That said, given that BPS laws are so new, “traditional” leases do not address the issues germane to compliance and do not clearly define expectations and responsibilities. In fact, the great majority of leases that exist today do not even contemplate the unique regulatory and technical issues associated with BPS requirements.

Below are some key issues to keep in mind when considering BPS in the context of the landlord-tenant relationship.

Compliance with laws

While most “traditional” leases contain an ambiguous requirement that the parties comply “with all applicable laws,” this broad language does not address the specific aspects of compliance with the Act. Without additional clarity, the table is set for conflict and disagreement over numerous aspects of “compliance.” These issues are further complicated in jurisdictions that have overlapping state and local standards and requirements, such as Seattle and Denver.

Energy budgets

The Act sets performance requirements for the entire building, but to support compliance, owners should consider detailing tenant energy budgets in the lease. Particularly, multi-tenant building owners may want to set fair and transparent energy or other use restrictions for each tenant, generally based on square footage and use.

Capital expenditures

Depending on the age and design of the building, significant upgrades may be required to achieve BPS requirements. These upgrades are likely to be capital in nature, meaning that a building owner may have limited ability to pass through a meaningful portion of those costs onto tenants. The allocation of the costs of building upgrades has long posed a barrier in commercial leasing because, outside the context of regulation, owners generally do not have an incentive to perform capital improvements that will largely benefit tenants in the form of lower utility bills — this is known as the “split incentive.”

Updated lease language can clarify the types of expenditures that can be passed through to tenants and outline a fair allocation of costs, thus aligning owners and tenants instead of placing them at odds with one another.

Data collection and sharing

A key component to achieving compliance with performance targets is accurate data. As data collection and access issues (as well as confidentiality concerns) become an increasingly common part of building operations, they should be addressed in the lease. Otherwise, owners may have no other avenue to access this information and, as a result, may be unable to meet their reporting requirements — exposing them to potentially hefty penalties for non-compliance.

Additionally, with accurate data collection and transparency, all parties will be better equipped to make real-time adjustments needed to ensure compliance with BPS limits. To reduce administrative headaches down the road, the parties can also agree up front to the format, collection and reporting tools, frequency, quality assurance, cost sharing, confidentiality concerns, and any other data-driven issues. And public agencies owning buildings will want to consider any additional concerns germane to the Public Records Act.

Allocation of penalties

Generally speaking, all performance standards, including the Act, authorize the imposition of penalties on building owners for non-compliance.

Traditional leases generally do not permit owners to pass legal penalties or fines imposed on the building through to the tenants. This could result in an owner being solely responsible for payment of noncompliance penalties even though they were without fault — e.g., because tenant energy usage tipped a building out of compliance, or a tenant refused to provide data that the owner could not otherwise access. This is why data sharing and access is also critical: Without clear lease language, owners may be left without recourse.

Lease term/duration

Another difficulty posed by “traditional” leases is their length. A typical lease can have an initial term of anywhere from 5–20 years, during which time the key lease terms are set. This can be problematic because it assumes the regulatory landscape will remain static. The rapid rate of BPS implementation across the country suggests otherwise, and virtually all BPS contemplate increasingly stringent performance requirements over time.

Perhaps more impactful is that the climate will continue to change — in some areas significantly — during the term of a lease. A modern, performance-based lease should provide for contingencies related to energy and water use budgets over time. Such contingencies are necessary to meet increased heating and cooling demands and the associated increasing impacts to a building’s systems, which may require even higher levels of performance to hit compliance targets.

What Should Your Agency Do Next?

BPS laws will provide challenges to “traditional” leasing structures, but also the opportunity for creative and willing parties to reevaluate the landlord/tenant relationship. If you are an entity that owns or leases existing real estate, here are a few key considerations:

• Be prepared! Understand what is required of your building and the timelines for compliance — they are fast approaching.
• Review the rules! Public agencies are likely to own and lease commercial and potentially multi-family buildings, as well as many unique buildings like courthouses, pools, and community centers, which may have different requirements, pathways, exemptions, and options for compliance.
• Assess where deficiencies exist and prioritize any necessary building system upgrades.
• Review your existing leases and templates, identify key areas for future updates (e.g., energy budgets, data sharing, capital expenditures, penalties, etc.) and begin to implement necessary updates when able.
• Communicate with your tenants about upcoming requirements and building needs: Education and collaboration are key.
• Get support! Reach out to consultants and other experts for specific questions.

Author disclaimer: This blog is for informational and educational purposes and does not provide legal advice. It is not intended to be used or relied upon as legal advice in connection with any particular situation or facts.