BPS and Penalties…let’s talk about it

In the past, references to fines or penalties in a lease were pretty benign and largely glossed over; now, with the adoption of Building Performance Standards, penalties have come into the spotlight. There’s a lot of unknowns, and some nuance and important history, so let’s get into it.

Historically Speaking

Traditionally, commercial leases addressed penalties as something that could not be passed through to tenants, so, for example, they were excluded from the definition of Operating Expenses.

This may include language similar to:

“Operating Expenses shall not include …costs, fines, judgments, liens, interest or penalties incurred due to a violation by Landlord of any Applicable Law.”

This type of language, and restriction on a Landlord’s ability to pass fines through has historically made sense, and comes from a place of fairly allocating risk between the Landlord and Tenant; for aspects that a Landlord has control over, including life safety issues, environmental hazards, or the other general categories called out in the above example, the Landlord should be responsible for any associated fines. The idea is to avoid a situation where a Landlord creates or fails to mitigate a safety issue, and just passes any fines on to the Tenant(s) - because that wouldn’t be fair. Or, put simply, regulatory fines have traditionally been seen as an “owner’s risk.”

Then Building Performance Standards Entered the Chat

Building Performance Standards completely changed the real estate game; BPS are important decarbonization tools because they address the “code gap” left by existing buildings: BPS set specific deadlines for existing buildings over a certain size to achieve quantified standards of performance, and impose penalties for non-compliance. Starting with Washington DC in 2018, an increasing number of state and local governments across the US have implemented BPS policies to meet climate action goals (IMT resources).

While BPS vary slightly - they have one important comonality - they all consistently impose performance obligations on the Landlord (not the Tenant(s)). For example, under Seattle’s Building Performance Emissions Standard:

Greenhouse gas reductions

A. Building owners shall reduce the GHGIs of covered buildings to meet their standard GHGITs for each compliance interval… (SMC 22.925.040.A. emphasis added).

Photo by Zlaťáky.cz on Unsplash

But here’s the kicker: in a multi-tenant building (or, sometimes, even single tenant), the Landlord is responsible for the overall building’s regulatory compliance, but without any control - contractual or otherwise - over the tenant’s utility usage. For the first time ever, Landlords need the cooperation of Tenant(s) to ensure Tenant Premises are operated in a way that align with the building’s regulatory performance standard.

Because what’s scary for Landlords is that they can Potentially (that’s Potentially with a Capital P) pass through costs associated with Capital Expenditures necessary to get a building into compliance from a design standpoint, but if a Tenant’s operation and use is responsible (or largely responsible) for excessive utility usage that tips the building out of compliance, the Landlord will ultimately be the entity that is subject to a penalty and fined.

A few examples from Washington / Seattle

Given these nuances, an increasing number of jurisdictions are enacting or adding language to their BPS legislation that addresses the issue of penalties:

For example, Washington HB 1543, signed by the Governor on May 13, 2025, amends/clarifies some rule language in the Clean Buildings Performance Standard (CBPS, Washington’s state level BPS), and reflects recommendations from the 2024 Clean Buildings Workgroup Report. This includes a section related to penalties:

The language added by HB 1543 is underlined.

It appears that the Clean Buildings Act does not dictate whether Landlords can pass compliance costs on to Tenants, but with this amendment, it is clear that as long as Tenants are cooperating, Landlords cannot pass on penalties.

The City of Seattle takes a more tangential approach and specifically addresses Tenant data sharing in its Building Emissions Performance Standard (affectionately known as BEPS):

Seattle Municipal Code Chapter 22.925.130.B. Even though Seattle requires this type of collaboration, Landlords should consider adding language to their leases that clarifies aspects such as: format of data, levels of assurance, costs, platforms to be used, etc.

Seattle also provides a unique carve-out, allowing the City to impose fines directly on obstreperous Tenants:

Seattle Municipal Code Chapter 22.925.180.B. Note that the penalties for Tenants are significantly less than Owners in 22.925.180.A.

Both of these examples make clear the importance of adding data sharing provisions to leases (see blog post, here), and potentially clarifying what terms like “allow access”, and being “responsive” means.*

This is where leases come in.

As noted above, BPS have only been around since 2018 - that’s a blink of an eye in terms of the law (resource here). And since 2018, BPS have been implemented at a pace that far exceeds the average lease term, so the great majority of leases do not even contemplate this “new” type of BPS regulatory structure, including penalties (or any other important aspects of BPS, like energy budgets for tenants and data sharing requirements).

The issue is that BPS penalties - which can be triggered by or contributed to by Tenant use - do not align with the other types of penalties that have traditionally been addressed by leases.  So, things need to change.

Where does that leave us?

Well, hopefully not confused, but if you are, you’re not alone - this is a new and quickly evolving space.

First, we encourage Landlords and Tenants to work together to avoid penalties in the first place. And in most jurisdictions, state and local governments do not really want the money that comes from penalties - they want the decarbonization that comes from compliance so they can meet their climate action plans. And while it may take a few cycles to iron out a penalty amount that deters Landlords from “just paying the fine,” that will likely eventually happen.

A few key points we have learned along the way:

• Now is the time to rethink the Landlord / Tenant relationship as one that is collaborative, and aligns Landlords and Tenants to work towards shared climate goals. This will require an industry mind-shift.

• Lease templates need to evolve to meet the unique requirements of new regulatory tools. There is a delicate balance between creating clarity and allowing flexibility, given the pace of change.

• The issue of penalties is another reason for owners to establish the ability to obtain Tenant utility data, set clear energy budgets for Tenants, and closely monitor use.

• There are lots of resources available, including those prepared by industry leaders like the Institute for Market Transportation, as well as government entities like the Washington State Department of Commerce.

This area is changing rapidly, we welcome comments and ideas from other practitioners and industry experts.

*With respect to utilities, there’s perhaps increased concern with Triple Net leases, where Landlords typically do not have access to utility information, as Tenants pay the utility directly - among other issues, it could be difficult if not impossible to figure out which Tenant(s) are causing the building to fall out of compliance. But arguably for both NNN and Gross leases, Landlords should consider implementing energy budgets for individual Tenant Premises, because access to utility data is not the same as an ability to require reduced utility usage to maintain overall building-level compliance. This question came up during a recent webinar hosted by the Department of Commerce (slides here).

Disclaimer / Warning: This is common sense, but bears repeating: this blog is intended for informational and educational purposes and does not contain or convey legal advice. The law is inherently fact specific and rapidly changing. General information, including this blog, should not be used as a substitute for competent legal advice from a lawyer, licensed in your jurisdiction, who you have retained and has agreed to represent you.