Updating Commercial Real Estate Leases for ESG Regulations Including Boston’s BERDO 2.0

Boston’s 2013 Building Energy and Reporting Disclosure Ordinance (BERDO) was amended in September 2021 to expand the energy reporting and disclosure requirements to a targeted carbon reduction regime.   Adoption of environmental, social, and governance (ESG) regulations, like BERDO 2.0, impose new obligations on commercial buildings.  The amendments, known as BERDO 2.0, enhance existing regulations to reduce carbon emissions for several categories of large existing buildings, and include several new benchmarks and requirements commencing in 2025.  Owners and managers of commercial buildings should be aware that failure to comply with emissions standards or to accurately report data may result in costly fines, and should implement strategies to comply in advance of the new deadlines.

The effect of ESG regulations will vary depending on a building’s infrastructure, uses, and tenants.  Building owners and managers should review and update leases to comply with enacted, imposed, or voluntary ESG procedures, including BERDO 2.0.

capturing berdo 2.0 related costs and expenses

Revising and modernizing leases and occupancy agreements for new transactions (or lease amendments, if practical) to include specific ESG and BERDO 2.0 provisions is essential in this process, not only for compliance but also to recapture expenses and obtain information relating to compliance. This includes provisions governing operating costs and expenses, maintenance, alterations and improvements, taxes and assessments, and data collection and reporting to recover the costs and expenses of compliance and required capital improvements.

Reducing carbon emissions will likely result in new costs and expenses that may not be captured in current lease or occupancy agreements, including building improvements, third party consultants, supplies, & etc.  Owners should seek to include such costs as additional rent, or other economic considerations in its leasing calculus and adapt its lease accordingly.  Non-capital improvements can be billed and passed through so long as the applicable lease or other operating agreement contemplates a comprehensive and general array of costs.  Many such commercial documents are broadly crafted to do so.  However, including specific compliance costs is a good idea.  Capital improvement costs, when included, are often limited to certain categories which will need to be reviewed to ensure inclusion of ESG infrastructure improvements, but these costs likely may be required to be amortized over an acceptable period with the yearly amortized portion treated as operating costs for the building passed through to tenants.  Moreover, because existing, older buildings present more robust challenges in reducing and ultimately eliminating carbon emissions, many ESG programs offer owners alternative compliance options in the form of payments (e.g., BERDO 2.0’s Alternative Compliance Payments) or various power purchase options.  These alternative payments, like taxes and other municipal assessments, need to be considered as to whether they can and should be passed through to tenants via existing operating expenses or the “tax” provisions.  If not, consider updating these provisions to include such payments and purchases.

berdo 2.0 reporting requirements

BERDO 2.0’s (like many other ESG regulations’) annual reporting requirements, require building owners to report on energy and water use, building primary uses, applicable renewable energy credits (RECs) and substantive terms of energy purchases.  Compliance will require tenants to report such information to landlords (or provide landlords with access to their utility data) and provide for appropriate allocation of costs and expenses for reporting, certifying (including third-party certifications), and otherwise bringing the building into compliance over time.

Accordingly, it is vital that lease provisions obligate tenants to deliver data and documentation related to their respective premises as necessary for and within a time frame sufficient to allow the owner to properly complete all reporting forms, online data entry platforms, and engage third party verification providers.  Bearing in mind that violations of reporting procedures are, at least under BERDO 2.0, subject to daily fines for noncompliance, consider making such fines a tenant reimbursable expense or, in certain cases, an event of default if a tenant fails to comply with ESG requirements, including data requests or to provide accurate information, particularly where such failure results in fines or penalties assessed to the owner.

tenant alterations and improvement provisions

Tenant alterations and improvement provisions must require such work to be performed in accordance with sustainability laws, practices, and comply with ESG and/or BERDO 2.0 requirements and acknowledge that compliance measures may change from time to time.  Consider including additional prerequisites and landlord approval rights for third-party professionals whom tenant may engage during design or construction of alterations.  This will allow landlord to confirm that plans, procurement of materials, construction, and waste management conform to ESG and/or BERDO 2.0 requirements and other building sustainability practices.  Landlords may wish to include specific tenant obligations to comply with applicable ESG requirements when procuring furniture, fixtures, carpeting, materials, supplies appliances, and equipment brought into the building.

Waste management provisions may need to be updated to meet ESG and BERDO 2.0 requirements.  For example, if a building owner is required to set up building-wide infrastructure for recycling or single-stream waste removal, in addition to cost additions, management may need to provide bins and products to effect the program, and tenants be required to comply with the program, including recycling protocols and/or separate waste stream disposal as designated.

definitions of building “owner”

Note that some ESG regulations will define the building “owner” or the applicable responsible party differently, and may even include a large, long-term tenant as an “owner”.  For instance, BERDO 2.0’s definition of “owner” allows the actual owner to designate a building tenant as owner where a lease assigns maintenance, regulatory compliance, and/or capital improvement costs to tenant(s) and has a term of at least thirty (30) years (including renewal options), provided that such designation is provided in writing to the Air Pollution Control Commission.

conclusion

ESG regulations will continue to require building owners and managers to vigilantly review all aspects of their buildings to ensure not only compliance with the evolving regulatory framework but also that leases and occupancy agreements contain appropriate provisions to capture the intended economic dynamics of the transaction.