Tenants and Landlords Benefit from Energy Aligned Lease Clause

An energy project can make financial sense for the building and still stall if the lease sends the cost to one party and the savings to another.

Originally published February 2013. Updated October 2026 to reflect current approaches to energy-aligned and green leasing.

A landlord is considering an energy-efficiency project.

The engineering works. The building should use less energy. Operating costs should decline.

Then someone asks:

“Who pays for the project, and who gets the savings?”

That question can stop an otherwise worthwhile capital project.

In many leased buildings, the owner makes the capital investment while tenants receive some or all of the benefit through lower energy or operating costs. The economics may work for the building as a whole while failing to work for the party being asked to write the check.

This is commonly called the split incentive.

And it is a lease issue as much as an energy issue.

The Lease Can Change the Business Case

Before approving a major energy retrofit in a leased building, I would want to understand how the lease treats the investment.

• Can the owner recover any of the capital cost?
• How are energy and operating expenses allocated?
• Who receives the savings?
• How long will the owner need to recover the investment?
• What happens if the projected savings aren’t achieved?

Those questions belong in the project business case before the work is authorized.

A technically attractive energy project can become a poor investment if the financial benefit flows primarily to someone other than the party funding it.

The reverse matters too. A tenant shouldn’t be asked to fund an owner’s capital improvement without understanding the expected benefit and how its share of the cost was determined.

The Energy Aligned Clause

New York City’s Energy Aligned Clause was developed specifically to address this problem in modified-gross commercial leases.

The model uses predicted energy savings to establish a mechanism for recovering the owner’s capital investment. Under the model, an energy specialist determines the predicted savings, and the owner’s annual recovery is limited to 80% of those predicted savings.

The remaining 20% acts as a performance buffer for the tenant if the retrofit produces less savings than expected. Because the owner recovers at 80% of predicted savings, the modeled recovery period is extended to 125% of the projected payback period. NYC.gov

That 80% structure is a feature of the Energy Aligned Clause model. It shouldn’t be read as a prediction that every energy-efficiency project will save 20%, which was an implication of the original version of this article.

The larger idea is more important than the percentages:

Structure the lease so the economics of the capital investment are reasonably aligned between the party funding the improvement and the party receiving the operating savings.

Don’t Start With the Clause

I wouldn’t begin an energy project by deciding that an Energy Aligned Clause is the answer.

I’d begin with the building.

• What improvement is being proposed?
• What will it cost?
• What energy or operating savings are reasonably expected?
• Who pays the utility bills today?
• Which tenants will benefit?
• What do the existing leases allow?
• How long will the affected leases remain in place?
• How will performance be measured?

Once those questions are understood, the owner, tenant, energy consultant and real estate attorneys can determine whether an energy-aligned provision or another green-lease structure makes sense.

Green leases today can address considerably more than recovery of energy retrofit costs, including energy management, data sharing, water, waste, indoor environmental issues and broader sustainability objectives. Baker McKenzie Resource Hub

Capital Planning and Leasing Need to Talk to Each Other

This is where an energy project can become disconnected from the owner’s broader capital strategy.

The engineering team may be evaluating replacement equipment.

The asset-management team may be looking at return on investment.

The leasing team may be negotiating renewals.

The property team may know that a major tenant’s lease expires in three years.

Each has information that can materially change the decision.

An owner considering a major HVAC or building-controls upgrade, for example, shouldn’t evaluate the project economics without understanding the leases that determine who pays for energy and how capital expenditures can be recovered.

Likewise, a significant upcoming lease negotiation may be an opportunity to address an existing split incentive before the next capital project reaches the approval table.

The lease and the capital plan are connected whether the organization manages them that way or not.

Leadership Takeaway

When an energy project has an attractive payback but still can’t get approved, look beyond the engineering.

The obstacle may be the lease.

Before committing capital, understand who pays for the improvement, who receives the savings, how performance will be established, and whether the lease supports the business case. Aligning those economics early can turn an energy project that neither party wants to fund into one that both sides can support.