UPCOMING CLIMATE CHANGE REGULATIONS – WHAT SHOULD BE CONSIDERED WHEN ENTERING INTO NEW COMMERCIAL LEASES

In 2006, California adopted the Global Warming Solutions Act (AB 32). AB 32 mandates the implementation of the strictest greenhouse gas (GHG) reduction standards in the world. To meet these standards, California is in the process of developing rules and regulations that will ultimately affect all sectors of business.

One of the myriad of issues being analyzed is how to address GHG emissions from existing development. The standards will likely set limits on the amount of GHG that can be emitted by existing development and will likely require existing developments to lower their emission reductions. Identifying the carbon footprint — which is the GHG emitted for existing development – will be an integral component of this process. The technology needed to measure a carbon footprint is becoming more readily available through public and private organizations. State and local agencies as well as many of the larger companies in the State have completed, or are in the process of completing this analysis.

In addition to identifying carbon footprint and developing a GHG reduction plan, developments subject to commercial leases have to deal with apportionment of GHG reduction responsibility and, ultimately, liability amongst the landlord or the tenant. This is not simply speculation, as the importance of clarifying the responsibility of GHG emissions for leasehold interests has been identified by both policymakers and environmental groups as a priority.

Although the details of how the regulations ultimately will provide for such apportionment are still being worked out, policymakers have discussed providing deference to any contractual terms agreed to between the parties on this issue. Thus, for instance, if a landlord and tenant expressly agreed who should be held responsible for reporting GHG emissions and complying with new standards this could provide certainty regarding ultimate liability and avoid a potentially arbitrary assignment of responsibility by the State in the future.

The new standards and regulations are expected to be promulgated sometime in the next 3-5 years.  However, many commercial leases are over terms that will still be in effect even after the standards are issued. As a precaution, when entering into multi-year leases, landlords and tenants may want to discuss a number of issues relating to GHG emission/reductions. These might include:

• Cost-allocation provisions for determining baseline carbon footprint of the development;
• Provisions shifting AB 32 compliance obligations to the appropriate responsible party; or
• Provisions identifying which types of GHG-producing activities each party is responsible for, and apportioning liability amongst the parties based on emissions or reduction efforts;
• A provision allowing for amendment of the lease within a specified time frame after the standards are issued to address the issues raised by the standards.