Why traditional leases don’t measure up and what we need instead

As demand for climate action soars, more businesses and local governments are realizing that buildings are a huge contributor to carbon emissions, particularly in cities. To address this, local governments are increasingly turning to building performance standards, such as New York’s Local Law 97, to meet their climate commitments by reducing building energy use and associated carbon emissions. However, one huge challenge to building efficiency is that incentives for tenants and landlords are often misaligned; the best solution is to replace inefficient traditional leases with performance-based alternatives. 

With traditional leases, tenants consume more energy than necessary and obligate landlords to expend unnecessary energy.

With traditional leases, tenants consume more energy than necessary and obligate landlords to expend unnecessary energy. For example, some lease terms require landlords to hardwire lights to stay on all the time or to provide heating and cooling even if leased spaces are unoccupied. The pandemic offered a stark illustration of these wasteful practices: while occupancy fell by as much as 95%, whole-building energy use only dropped by 10%-20%, according to a study conducted by Johnson Controls. A survey of New York City commercial real estate companies found similar results: only 5% of buildings experienced whole-building energy reductions above 30% while 40% of buildings only experienced reductions between 10%-30%. Better leasing practices are needed to move the needle on energy efficiency investments.

Through its Green Lease Leaders program, IMT helped pioneer what is now the industry standard for a green or energy-aligned lease. These leases correct misaligned incentives with a focus on reducing overall energy consumption on a voluntary basis and lowering operating costs for both landlords and tenants. To meet climate commitments and building performance standard targets, however, will require upgrading further to performance-based leases. These build upon the foundation of green leases to focus on whole-building energy reductions.

Now, IMT and the NYC Climate Action Alliance are debuting a new model performance-based lease to once again help set the industry standard for next-generation leasing practices. It is structured to help users proactively comply with growing climate regulations while also helping businesses to meet their own carbon reduction goals. Here’s how it works.

Key provisions in the performance-based lease

IMT’s performance-based lease differs from other leases by including a series of key provisions to align performance needs and incentives.

1. Set building performance standards to meet carbon reduction goals.

The primary goal of our performance-based lease is energy and carbon reduction. To accomplish these twin goals, the model lease establishes a performance standard, tied to the requirements of local regulations, such as Local Law 97 in New York City. Additionally, the lease applies the building performance standard to tenant spaces by defining an energy consumption limit and/or plug load standard.

2. Equitably distribute landlord and tenant responsibilities to meet building performance standards.

Landlords and tenants must both be willing to work together to achieve the building’s energy goals. The model lease sets forth the expectation that tenants must comply with energy consumption limits, plug load standards, and design criteria at their own expense. The landlord must then execute a plan defining how both parties will comply with the local regulation and offer to reward tenants for meeting these standards in a form of a bonus, such as a credit against monthly rent installments.

3. Ensure landlord-tenant transparency and accountability by tracking energy use and implementing building performance goals.

Energy data transparency is critical to both landlords and tenants can identify and address inefficiencies in energy usage and foster a collaborative relationship. To achieve these goals, the model lease requires submetering of tenant spaces and provides that landlords will bill tenants based on actual energy usage to hold them accountable for their consumption. The model lease also extends the submetering requirement to building common areas to optimize building energy systems.

4. Offer continuous monitoring via periodic recommissioning studies and mitigating plans where necessary.

Periodic recommissioning is critical to ensure that systems are operating as designed and building performance standards are met. The model performance-based lease requires a recommissioning of the tenant space every three to five years and a recommissioning of base building systems and common areas every three years. The landlord must undertake the recommendations of the recommissioning, and the landlord may meet with and/or arrange for additional tenant space recommissions if tenants are not meeting their energy consumption limit.  

5. Establish penalties should either party fail to comply with standards and meet building performance goals.

Should a building fail to meet Local Law 97 or other relevant local regulations concerning energy usage, the model lease allows landlords to pass through associated costs to tenants in proportion to a tenant’s contribution to the costs.

Learn more and take action

Buildings are at the heart of climate mitigation strategies, and change is happening in real time. The list of cities passing building performance policies is growing, and the pandemic has illuminated the inefficiencies in outdated leasing practices.  Performance-based leases incentivize landlords and tenants to cut energy waste, save financial resources, and collaborate to future-proof their businesses against performance-related regulation. If enough businesses adopt these leases, there is even the potential to lower overall energy demand and reduce the likelihood of blackouts—a valuable benefit in a rapidly warming world. 

All stakeholders involved in the leasing process benefit from a greater understanding of performance-based leases. Take action by visiting IMT’s performance-based leasing toolkit, which includes a primer on the concept of performance-based leasing, a technical memo on specific performance clauses, and the new model performance-based lease template. All are available at imt.org/performance-based leasing.

For additional background on green leasing, which addresses similar energy challenges, read All Roads Lead to Green Leasing, which outlines trends reshaping the future of buildings, and 5 Lessons from the 2021 Green Lease Leaders, which highlights the companies in the United States and beyond that are already working to put green leases into practice. 

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Lease Negotiations, Performance-Based Leasing, Commercial Office, Attorney