New York City’s Local Law 97 is the most consequential piece of building legislation to hit the commercial real estate market in a generation. Most tenants have heard of it. Very few understand what it actually means for their lease - or how to protect themselves from it.
Enacted in 2019 as part of the City’s Climate Mobilization Act, Local Law 97 establishes carbon emission limits for New York City’s largest buildings - most buildings over 25,000 gross square feet. The law’s ambition is significant: it aims to reduce emissions by 40% by 2030 and achieve net-zero by 2050.
The compliance timeline is already underway. Covered buildings that exceed annual emissions limits face an annual financial penalty of $268 per ton of CO2 equivalent over the limit. The first compliance period began in 2024, with reporting due in 2025. And the pressure only increases from here: about 20% of buildings will exceed their emissions cap in the first compliance period from 2024 to 2029. In 2030, that percentage flips - close to 80% of buildings will face fines if their emissions stay the same.
For a large Midtown office building, the math can add up to hundreds of thousands of dollars in annual fines. That money has to come from somewhere.
Landlords are approaching LL97 compliance in roughly three ways, and tenants need to understand all of them.
Some landlords are investing in upgrades. HVAC retrofits, building automation systems, electrification of mechanical systems - these are expensive but they reduce emissions and get the building into compliance. A landlord who is making real capital investments is doing the right thing, but those costs may end up in operating expenses depending on how the lease is written.
Some landlords are paying the fines instead. For older buildings where the cost of compliance upgrades is prohibitive, some ownership groups have made a calculated decision to absorb the penalties rather than retrofit. At $268 per ton, fines can reach into the hundreds of thousands annually for a large non-compliant building. This is a short-term strategy - limits tighten further in 2030 and the math gets worse - but it is happening now in the market.
Some landlords are passing it directly to tenants. Explicit LL97 passthrough language in leases is becoming more common. A landlord who discloses this clearly - who puts the exposure on the table and negotiates a cap - is at least being honest about what they’re doing. The starting position across multiple deals we’ve worked is uncapped passthrough - the landlord’s preferred posture because it transfers unlimited future liability onto the tenant as the law tightens. The first negotiation is getting any cap at all. The second is getting that cap structured correctly.
And some landlords are slipping it into operating expenses without calling it what it is. This is the version that causes the most damage to tenants who aren’t paying attention. LL97 compliance costs - fines, retrofit amortization, new management fees tied to emissions reporting - get folded into the operating expense pool that tenants pay their proportionate share of under a standard lease. Nothing is labeled “Local Law 97.” It shows up as a line in the opex reconciliation, or buried in building management costs, or amortized as a capital improvement that reduces operating costs - a category many leases explicitly allow to be passed through.
Many existing leases contain provisions requiring tenants to pay their proportionate share of building operating expenses, which may include costs of capital expenditures to the extent they reduce operating costs. However, many existing leases also exclude fines or penalties from operating expenses - which means they would be a 100% landlord cost. The distinction matters enormously, and it is almost never surfaced by the landlord voluntarily.
Every Midtown office lease being negotiated today should explicitly address LL97. The questions to resolve before you sign:
Is there explicit LL97 passthrough language? If so, the first objective is getting a cap at all - landlords prefer uncapped because it transfers unlimited future liability as the law tightens in 2030. The second objective is structure: a total aggregate cap over the lease term is not the same as an annual cap. Push for annual. Both structures have settled in the $1 to $2 per square foot range in recent Midtown deals. Anything uncapped is an open-ended exposure on a liability that only grows.
Are fines and penalties explicitly excluded from operating expenses? Standard lease language often excludes fines from opex passthrough - but not always, and not uniformly. This needs to be confirmed in the lease language, not assumed.
Are capital improvement costs that reduce operating expenses included in the opex pool? This is the subtler exposure. A landlord who retrofits the HVAC system to become LL97 compliant may amortize that cost as a capital improvement that reduces energy costs - which the lease permits to pass through - even though the real driver was emissions compliance, not tenant benefit.
Across multiple deals we’ve negotiated in Midtown - across different buildings, ownership structures, and lease types including direct leases and subleases - the pattern is consistent. Landlords open with uncapped LL97 exposure, either through an explicit passthrough rider or buried in standard opex language with no ceiling. The first fight is getting a total aggregate cap on LL97 costs over the entire lease term. The second fight, once that’s won, is converting the total cap into an annual cap - because a total cap of $2 per square foot over a five-year lease is worth far less than a $2 per square foot annual cap if the fines front-load in years one and two. Both structures - total cap and annual cap - settled in the $1 to $2 per square foot range across the deals where we got it resolved. On a 4,000 square foot space, that’s $4,000 to $8,000 per year at the top of the range. Real money, but finite. Uncapped is not finite, and 2030 is not far away.
In a sublease context, the exposure compounds. The sublandlord’s LL97 obligations under their direct lease flow down into the sublease - and the consent process rarely flags it. A subtenant who hasn’t read the direct lease doesn’t know what they’ve absorbed.
For companies negotiating leases through national or MSA-based broker relationships, LL97 exposure is precisely the kind of detail that falls through the cracks. The person who negotiated the master agreement is rarely the person executing the local deal. The local broker following the MSA template may not have flagged LL97 language as a priority item. The result is leases being signed today with uncapped LL97 exposure that won’t show up in an operating expense reconciliation until years into the term - by which time the fines and compliance costs have compounded.
Local Law 97 is not a boutique concern for large institutional tenants. It applies to virtually every Midtown office building your company might consider. The buildings that are non-compliant today are going to face escalating pressure through 2030 and beyond. The question for any tenant signing a lease now is whether they are absorbing a share of that pressure - explicitly or quietly - and whether that exposure has any ceiling.
The cap is negotiable. The disclosure is not always voluntary. Know what you’re signing.