In 2022, Maryland took a significant stride toward increasing environmental sustainability by implementing a greenhouse gas disclosure law. This legislation not only marks a notable achievement for environmental advocates but also impacts commercial real estate transactions. Specifically, the new law demands a closer examination of commercial lease agreements to ensure compliance. As discussed in Does Your Lease Comply with Maryland’s New Greenhouse Gas Disclosure Law, a recent webinar presented by the MSBA’s Environment and Energy and Real Property Sections and featuring Stuart D. Kaplow, Esq. there are certain issues business and property owners should be aware of with regard to Maryland’s new greenhouse gas emission laws.
The Legislative Landscape: Maryland’s Unique Approach
Senate Bill 528, now known as the Climate Solutions Now Act of 2022, (the Act) is regarded as the most stringent state law in the United States for reducing greenhouse gases. The Act requires the state to achieve net-zero greenhouse gas emissions by 2045. It also mandates a 60% reduction in statewide greenhouse gas emissions from 2006 levels by 2031. Covered buildings, as defined by the Act, must achieve net zero by January 1, 2040, five years before the general economy. Maryland also adopted the most recent version of the International Green Construction Code and is currently the only state to do so.
Reducing Greenhouse Gas Emissions
Under the Act, covered buildings include commercial multifamily structures with a gross floor area of 35,000 square feet or more, excluding certain types of buildings like parking garages, elementary or secondary schools, and specific historic, manufacturing, and agricultural facilities. The owner of such a building is obligated to achieve a 20% net reduction in greenhouse gas emissions from 2025 levels before January 1, 2030. Subsequently, they must attain a 40% reduction before January 1, 2035, and reach net-zero emissions before January 1, 2040.
The Act refers to direct greenhouse gas emissions, a term used only in Maryland, that mainly refers to scope one emissions, which are on-site emissions, such as those from gas or oil burners for heating. Calculating greenhouse gas emissions involves determining the emissions generated by burning specific fuels. For instance, one gallon of home heating oil burned produces 22 pounds of greenhouse gas emissions. The government regulates not only greenhouse gas emissions but also energy use intensity.
Lease Modifications: Navigating Compliance
Existing leases, including standard lease forms, should be revised to incorporate sharing greenhouse gas emission data. The responsibility for reporting lies with the building owner, but often, the tenant holds the necessary information, and current leases generally need more provisions for tenants to provide this crucial data. The Act mandates electric and gas companies to supply energy data to owners of covered buildings for benchmarking purposes. However, more than this data is needed for compliance with the state’s greenhouse gas emission disclosure requirements.
Building owners need additional information from tenants, such as employee census and metrics related to greenhouse gas emissions. This data is crucial for accurate calculations required for reporting to the state. The lack of specific lease provisions addressing this issue means that language must be inserted into leases to facilitate data transfer from tenants to landlords. This is especially critical for commercial buildings where tenants may pay their utility bills directly, creating a need for collaboration.
Proposed regulations and drafts further complicate matters, introducing requirements for tenants to request data from building owners and imposing obligations on covered buildings with fewer than five tenants. The lease language needs to address these issues and specify the sharing of necessary data. The absence of such provisions may lead to challenges in complying with the reporting requirements.
Additionally, other changes in leases may be necessary, including introducing energy consumption limits for tenants, retro-commissioning provisions to improve building efficiency, and considerations for sub-metering. New terms and jargon related to greenhouse gas emissions and energy efficiency will likely become integral to lease negotiations.
Incentives and Penalties
Landlords can provide incentives, such as bonuses and rent reductions, to tenants who exceed the mandated building standards for greenhouse gas emissions reduction. This creates a scenario where tenants capable of achieving a 50% reduction in emissions, for instance, can provide additional benefits to landlords beyond the standard requirement of 20%. Greenhouse gas reduction bonuses are now being integrated into leases to align tenant actions with landlord interests.
Traditional tax incentives, like the federal 179D tax deduction, are also part of the landscape. Building owners can assign these tax credits to tenants, which may further complicate the allocation of incentives. Regardless, the issue of incentive distribution is a significant aspect of the overall process.
Lease agreements must also account for potential violations and outline consequences for tenants and landlords. The penalties for non-compliance must be clearly stated, especially considering the broader implications for the entire building if a violation occurs.
There is a pending proposal for a disclosure requirement in contracts of sale for buildings. This would mandate the owner to disclose compliance with greenhouse gas emission laws to potential buyers. While this is not inherently problematic, the specifics of implementation and enforcement still need to be clarified. Importantly, there is no proposed grandfathering, and the regulations, once finalized, are expected to take effect for buildings starting January 1, 2024.
Anyone involved in commercial real estate lease transactions needs to understand the implications of the Act. The MSBA webinar, Does Your Lease Comply with Maryland’s New Greenhouse Gas Disclosure Law, served as a valuable resource for real estate practitioners navigating the complexities of Maryland’s new environmental regulations and is just one of the many free courses available as a benefit to MSBA members, easily found in the resource & learning library.