Of the roughly 10,500 Article 320 properties that filed a Local Law 97 emissions report for 2024, 470 came in over their cap. Penalties against that entire group totaled $270,150.[1] About $575 a building. One law firm’s worked example of a single 100,000 square foot office running over its limit puts that building’s annual fine at $87,636.[2] The caps drop in 2030.
Local Law 97 assesses its penalty against the building owner. Whether the owner can bill any of it to tenants is a question the statute leaves alone. It gets answered by the operating expense clause, and specifically by whether that clause was drafted to reach a fine, a capital retrofit, or a law that was already on the books the day the lease was signed.
The first year went better than the city planned for. Department of Buildings data released this month shows 95% of the 29,000 buildings required to file were inside their 2024 limits. When the law was designed the expectation was 80%.[1] The city’s April announcement put the filing rate at 93% of covered private properties, roughly 28,000 reports, and $1,460,048 raised from carbon offset certificates sold at $268 a ton.[3] Under 10% of covered buildings exceeded the 2024 through 2029 caps. Around 57% are projected to exceed the 2030 through 2034 caps.[4] A ten-year lease signed this week runs into that second period.
The fine is annual, computed per ton, and assessed on the building rather than on any occupant. Administrative Code § 28-320.6 sets it at the difference between the building’s emissions limit and its reported emissions, multiplied by $268. Section 28-320.6.2 adds $0.50 per square foot of gross floor area per month for failing to file at all, with no liability if a compliant report lands within 60 days of the due date. Section 28-320.6.3 makes a knowing material false statement in a filing a misdemeanor, carrying a fine of up to $500,000 and a separate civil penalty of up to $500,000.[5] Every one of those sections makes the owner of the covered building liable. None of them reach past the owner.
Owners already tried to have the law thrown out. In Glen Oaks Village Owners, Inc. v. City of New York, co-op owners argued the State Climate Leadership and Community Protection Act preempted the field. On 22 May 2025 the New York Court of Appeals disagreed, reversed the Appellate Division, granted the motion to dismiss, and answered the certified question in the negative. Judge Cannataro wrote and the other six judges joined, with no dissent.[6] The 2030 caps may still move for other reasons, but not that one.
A standard operating expense clause picks up compliance costs and stops at fines. As Golenbock Eiseman put it to clients back in 2022, expenses a landlord incurs to comply with applicable laws are generally covered by these provisions, but “penalties for failure to comply with laws (such as penalties if LL97 emission standards are not satisfied) cannot usually be passed on to tenants by standard operating expense provisions."[2] So landlords have started writing a separate penalty-sharing clause instead. When they do, the pro rata share is the interesting part: a fine driven by consumption does not divide cleanly by rentable square footage, and allocating by emissions means the landlord needs tenant energy data and a way to check it.
The retrofit does come through, amortized over a life longer than most terms. Capital improvements made for emissions compliance are customarily recovered as an operating expense in annual slices over the useful life of the item, so a twenty-year plant contributes one twentieth of its cost each year.[2] A tenant five years into a five-year term pays five of those twenty slices and leaves. Whether that is unfair depends on what you think the tenant was buying, and reasonable people land in different places on it.
The carve-out tenants ask for by reflex is dated to the wrong year. Tenants routinely negotiate operating expense language limiting compliance-with-laws costs to laws enacted after the lease date, which is a sensible ask about a risk nobody can price at signing. Local Law 97 was enacted in 2019. Its first compliance year was 2024 and its first penalties were assessed in 2026. So a lease signed in 2022 with that carve-out arguably leaves the building’s largest compliance cost outside the operating expense pool, because the law is five years older than the money.[2] Landlords have been warned about this in print since 2022. Boilerplate does not read client alerts.
The same compliance-with-laws sentence has produced opposite answers in the same court on the same day. On 23 November 1994 the California Supreme Court decided Brown v. Green and Hadian v. Schwartz together, both written by Justice Arabian, both turning on the AIR form clause requiring the lessee to comply with laws “regulating the use by the Lessee of the premises.” In Brown, a county asbestos abatement order on a 45,000 square foot building cost an estimated $251,856; the lease ran 15 years at $28,500 a month, the cleanup was under 5% of the total rent reserved, and the tenant paid.[7] In Hadian, a Los Angeles seismic retrofit of an unreinforced masonry building on Sunset Boulevard cost $34,450.26; the lease ran three years at $650 a month with a five-year option at $800, the work came to 145% of the initial term’s rent and 49% of all eight years, and the landlord paid.[8] The court weighed six factors, including cost against rent reserved, length of term, who gets the benefit, and whether the work was structural. It also asked whether the government order arose from the tenant’s particular use. A carbon cap is computed from a building’s gross floor area and its occupancy groups, so on the use-nexus question a carbon penalty looks a lot more like the seismic order in Hadian than the asbestos in Brown. Against that, tenants directly account for more than half of a commercial building’s energy use, and the emissions being penalized are largely theirs.[9] On a five-year office lease neither side of that is obviously right without running the cost against the rent reserved, which is exactly what the court did in both cases.
None of this is only a New York problem. Sixteen building performance standards were on the books across U.S. cities, counties and states as of July 2026,[10] and Boston’s BERDO carries penalties of $1,000 a day for non-compliance and up to $300 a day for failing to report energy and water use.[11] A national tenant with leases in four of those jurisdictions has four different definitions of a recoverable compliance cost sitting in four different operating expense clauses, and probably has not read them side by side.
That pool is the same one that quietly refuses to shrink when a cost goes the other way, which is the subject of operating expense clauses when insurance prices fall. Carbon penalties are being added to it now, in leases signed this quarter, for costs that mostly arrive after 2030.
Knowing which leases already exclude the fine#
Acrebase reads the operating expense clause out of every lease in a portfolio and lines up what actually matters here: whether fines and penalties are excluded, whether compliance-with-laws costs are limited to laws enacted after the lease date, how capital improvements are amortized, and whether there is a cap on controllable expenses that a carbon penalty would sit outside of. For an owner with forty buildings in three jurisdictions, that is the difference between knowing the recoverable share before the notice of deficiency arrives and finding out during a reconciliation dispute. For new leases, the clause library and negotiation playbook hold the version counsel approved, so the exclusion your tenant won in March does not reappear unnoticed in a September deal.
If you are a tenant, check whether your operating expense exclusions name fines and penalties, and check the date your compliance-with-laws costs are measured from. If the clause says “enacted after the date of this lease” you may already be outside the carbon costs, and you should not trade that away for something smaller. If you are a landlord, a general compliance-with-laws provision will not carry a $268 per ton penalty on its own; say so expressly, decide now whether the share is measured by square footage or by metered consumption, and get the tenant data rights in the same amendment rather than the one after it.
Footnotes
[1] Emily Myers, “Local Law 97 Compliance Beats Expectations — For Now,” Habitat Magazine, Bricks & Bucks, September 2026 — 95% of the 29,000 buildings required to file were within their 2024 emission limits against an 80% expectation at the time the law was designed; of the nearly 10,500 Article 320 properties that filed, 470 exceeded their limits; penalties for Article 320 buildings totaled $270,150; 164 of the exceeding properties received Notices of Deficiency, prompting five to purchase offsets and 16 to begin paying penalties; around 149 requested good faith effort mitigation and 102 submitted decarbonization plans; 79 buildings used offsets, raising $1.7 million for the Affordable Housing Reinvestment Fund. https://www.habitatmag.com/Publication-Content/Bricks-Bucks/2026/September-2026/nyc-ll97-emissions-compliance
[2] Florian Ellison, “New York City Local Law 97 — Landlord Considerations in Dealing with Their Tenants,” Golenbock Eiseman Assor Bell & Peskoe LLP client alert, 24 August 2022 — worked illustration of a 100,000 square foot office building emitting 0.01173 tCO2e/sf against a 0.00846 tCO2e/sf limit producing a $87,636 annual fine; statement that penalties for failure to comply with laws cannot usually be passed on to tenants under standard operating expense provisions; capital improvement costs customarily amortized over useful life, with a twenty-year item contributing one twentieth per year; warning that tenant-requested language limiting compliance-with-law costs to laws enacted after the lease date would arguably exclude Local Law 97 from operating expenses for any lease executed after 2019; note that a penalty share allocated by energy consumption rather than square footage requires tenant consumption data and a means of verifying it. https://golenbock.com/wp-content/uploads/2022/08/Client-Alert-New-York-City-Local-Law-97-%E2%80%93-Landlord-Considerations-August-24-2022.pdf
[3] City of New York, “New Compliance Data Shows Impact of Local Law 97 to Improve Sustainability In New York City,” press release 023-26, 22 April 2026 — 93% of covered privately owned properties filed compliance reports, approximately 28,000 reports submitted, borough filing rates from 83% (Staten Island) to 95% (Manhattan), $1,460,048 raised through carbon offset certificate sales at $268 per ton, approximately 1,400 properties failed to submit reports and were issued Notices of Deficiency with a 60-day filing window. https://www.nyc.gov/site/hpd/news/023-26/new-compliance-data-shows-impact-local-law-97-improve-sustainability-new-york-city
[4] NYC Accelerator, “Local Law 97” — coverage of buildings over 25,000 gross square feet, two or more buildings on the same tax lot over 50,000 square feet, and condominium groups over 50,000 square feet under one board; first compliance period 2024–2029 and second 2030–2034; annual report due 1 May with a 60-day grace period to 30 June; penalty of $268 per ton of CO2 equivalent over the limit; fewer than 10% of properties exceeded the 2024–2029 caps on 2024 benchmarking data while approximately 57% are projected to exceed the 2030–2034 limits. https://accelerator.nyc/building-laws/ll97
[5] Local Law 97 of 2019, as codified in the New York City Administrative Code: § 28-320.6 Penalties (civil penalty of not more than the difference between the building emissions limit for the year and the reported building emissions for that year, multiplied by $268); § 28-320.6.1 (aggravating and mitigating factors a court or administrative tribunal must weigh in setting the amount); § 28-320.6.2 Civil penalty for failure to file report (not more than gross floor area multiplied by $0.50 for each month the violation is not corrected within the 12 months following the reporting deadline, with no liability where a compliant report is filed within 60 days of the due date); § 28-320.6.3 False statement (knowingly making a material false statement in a filing under the article is a misdemeanor subject to a fine of not more than $500,000 or imprisonment of not more than 30 days or both, and the violator is also liable for a civil penalty of not more than $500,000). Annual reports are required by § 28-320.3.7. https://www.nyc.gov/assets/buildings/local_laws/ll97of2019.pdf
[6] Glen Oaks Village Owners, Inc. v. City of New York, No. 42, APL-2024-00106 (N.Y. Ct. App. 22 May 2025) — the Climate Leadership and Community Protection Act does not preempt the field of greenhouse gas emissions regulation, so Local Law 97 stands; order of the Appellate Division reversed, defendants’ motion to dismiss granted, certified question answered in the negative; opinion by Cannataro, J., joined by Chief Judge Wilson and Judges Rivera, Garcia, Singas, Troutman and Halligan; no dissent; the court relied in part on the Climate Act’s savings clause preserving compliance with local laws. https://climatecasechart.com/case/glen-oaks-village-owners-inc-v-city-of-new-york/
[7] Brown v. Green, 8 Cal.4th 812 (23 November 1994) — 45,000 square foot building at 8921 Venice Boulevard, Los Angeles; AIR form lease for a 15-year term at $28,500 per month; paragraph 6.2(b) required the lessee to “comply promptly with all applicable statutes, ordinances, rules, regulations, orders, covenants and restrictions of record, and requirements in effect during the term or any part of the term hereof, regulating the use by the Lessee of the premises”; county asbestos abatement order with cleanup estimated at $251,856, less than 5% of the total rent reserved over the term; held the lessees assumed the cost. https://scocal.stanford.edu/opinion/brown-v-green-31613/
[8] Hadian v. Schwartz, 8 Cal.4th 836 (23 November 1994) — commercial property at 2906 Sunset Boulevard, Los Angeles; three-year term at $650 per month with a five-year renewal option at $800; Los Angeles earthquake hazard reduction program order on an unreinforced masonry building, survey, redesign and reconstruction totalling $34,450.26, being 145% of the rent reserved over the initial three-year term and 49% of the aggregate rent over the combined eight years; six-factor Sewell analysis; judgment of the Court of Appeal reversed and judgment directed for the lessee, the court holding the parties intended the lessor to bear the cost of complying with orders not arising from the lessee’s particular use. https://scocal.stanford.edu/opinion/hadian-v-schwartz-31661/
[9] Institute for Market Transformation, “How High-Performance Leases Help Landlords and Tenants Achieve Sustainability Goals” — tenants directly account for over 50 percent of building energy use while owners are held responsible for whole-building decarbonization, the split incentive that high-performance leasing is meant to close. https://imt.org/how-high-performance-leases-give-landlords-and-tenants-something-to-agree-on/
[10] Facilities Dive, “The 2026 map of building performance standards across the US” — 16 building performance standards on the books across U.S. cities, counties and states as of July 2026. https://www.facilitiesdive.com/news/map-tracking-building-performance-standards-across-the-us/743214/
[11] Steven Altmann, “A New Era of Energy Efficiency: The Impact of Boston’s BERDO and New York City’s Local Law 97 on Commercial Lease Transactions,” Hinckley Allen, 25 November 2024 — BERDO penalties of $1,000 per day for each day of non-compliance and up to $300 per day for each day of failing to report energy and water consumption; Local Law 97 fines of $268 per metric ton over cap plus $0.50 per square foot per month for failure to file. https://www.jdsupra.com/legalnews/a-new-era-of-energy-efficiency-the-6252953/
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