Decarbonize NY - Contractor Performance Provisions in Retrofit Contracts
News, thoughts and tools to guide property owners and managers, lenders, developers and
sustainability professionals in their pursuit of a greener New York.
Introduction: The Stakes Under Local Law 97
Now that New York City’s Local Law 97 (LL97) is in effect, most buildings exceeding 25,000 square feet are subject to strict greenhouse gas emissions limits, which are set to tighten significantly in 2030. Non-compliance can result in costly fines of up to $268 per metric ton of emissions above the building’s annual cap.
As owners and managers commission major retrofits to comply with these caps, a critical legal and financial question has emerged: What happens if a contractor fails to deliver the promised emissions reductions?
Standard construction agreements (such as AIA form contracts) focus primarily on physical completion and equipment warranties, not emissions cap compliance. To protect against performance shortfalls and LL97 penalties, owners and managers should structure their contracts to place the risk that retrofits will not deliver the intended emissions reductions on the contractor. Below are some ways that this risk reallocation can be achieved through carefully drafted contract provisions. It is assumed in this article that the contractor will handle both design and build out.
1. Best Option: Contractor Warranty of LL97 Compliance
- The Best Case: An express warranty from the contractor that the retrofit will achieve specified carbon emissions reductions.
- The Reality: Contractors typically resist guaranteeing regulatory compliance because many variables, such as occupancy, usage patterns, and weather affect total energy usage, and without taking those issues into consideration, the contractor may be warranting something beyond its control.
- The Compromise: Contracts can tie the performance warranty to the International Performance Measurement and Verification Protocol, which is a globally recognized framework used to measure, verify, and quantify emissions savings from efficiency projects. In such cases, the contractor warrants system-level performance under specified parameters, transferring risk back to the owner if the baseline parameters are exceeded.
2. A Similar Approach: Pass-Through Fine Indemnification
- The Best Case: An explicit requirement that the contractor reimburse the owner for fines resulting from failure to comply with LL97 caps the upgrades were meant to address.
- The Reality: Contractors will rarely agree to unlimited liability for municipal fines, because a single system failure could expose them to open-ended damages.
- The Compromise: Contractors are more likely to agree to a capped indemnity, tied to the total contract value or a percentage of the contractor's general liability insurance coverage, combined with a carve-out that excludes fine indemnification if the shortfall is caused by improper maintenance or unapproved operational changes.
3. A Contractor-Friendly Alternative: Right to Remediation
- The Best Case: If the building is underperforming post-retrofit, the contractor must repair, re-engineer, or supplement the equipment at its own cost to achieve the promised target.
- The Reality: Contractors are more likely to accept this remedy because it leverages their existing workforce and vendor relationships.
- A Consideration: The agreement should set a time (e.g., 60 to 90 days from notice) for the contractor to implement corrective measures, to ensure prompt remediation.
4. Performance Based Approach: Payment Retainage During Measurement and Verification Period
- The Best Case: Retainage (usually 5–10% of payments) should be held through a post-competition Measurement and Verification (M&V) period (often 12 months after commissioning), during which the promised energy savings can be verified.
- The Reality: Contractors and sub-contractors are likely to resist this, because they cannot afford to have substantial capital tied up for a full year.
- The Compromise: A bifurcated retainage model: standard retainage is released upon substantial completion and a smaller “Performance Holdback” (e.g., 2.5–5%) is maintained through the 12-month M&V cycle to cover necessary adjustments or remediations.
Strategic Recommendations for Owners & Managers
- Modify Standard Form Agreements: Never execute a standard AIA or DBIA (Design-Build Institute of America) form contract for an energy retrofit without a LL97 rider drafted by experienced counsel. These form agreements do not address LL97 requirements and typically waive consequential damages, which can bar recovery for fines arising from non-compliance with LL97.
- Standardize the M&V Plan: Include a well-designed Measurement and Verification protocol as an exhibit to the contract to define how post-retrofit performance will be audited, measured, and verified.
- Align Operations and Maintenance: Ensure that building staff receive comprehensive commissioning documentation and training since contractors can be relieved of their contractual guarantees if non-compliance stems from poor maintenance or unauthorized operating adjustments.
Conclusion
Achieving LL97 compliance requires more than building retrofits based on a well thought out design—there must be clear contractual accountability and risk allocation. By incorporating performance-based remedies, clear baselines, and structured holdbacks, owners and managers can execute energy retrofits with confidence.
Navigating Local Law 97: Condos and Co-ops Cannot Rely on Penalty Relief
Since 2019, NYC co-op and condo insurance costs have surged 120%, while utility costs have gone up 33%. Facing these growing pressures, the Council of New York Cooperatives & Condominiums (CNYC) recently petitioned City Hall for a cap on Local Law 97 fines and to allow penalties to be reallocated into on-site electrification retrofits.
Given that City Hall has shown a preference for aiding compliance over issuing fines, there is a possibility that some form of relief may be granted. But in the meantime, boards must accept the reality:
- Zero Policy Changes: The CNYC proposal is just a recommendation. No City Council legislation has been passed and no Department of Buildings rules have been changed.
- Fines Accrue Annually: Buildings exceeding carbon limits remain exposed to mandatory fines of $268 per metric ton over their cap, which if left unpaid can attach to the property as liens.
Plan Accordingly
Deferring compliance in the hope for a future penalty cap will put your capital reserves at risk. Boards must budget based on the current law. If administrative relief eventually passes, there’s no guaranty that it will materially reduce the cost of non-compliance and given that the law mandates increased caps over time, prolonged non-compliance is not a viable option. If relief is granted, treat it as unexpected savings, not a strategy to be relied on.
If you have questions about any of the CNYC recommendations, or would like advice in complying with Local Law 97, please contact a member of our team.
On The Horizon
- Litigation Update – The Gas Ban Clock Has Started – In our last issue, we reported that a rehearing en banc was likely in the Second Circuit case upholding NYC's Local Law 154 and the NYS All-Electric Buildings Act. The petition was in fact filed in late July, and on August 26 the Second Circuit denied it. The challengers now have until November 24 to seek review in the U.S. Supreme Court. Under the parties' stipulation, the State's new-construction gas ban remains suspended until 120 days after the Second Circuit's mandate issued on September 2 if no Supreme Court petition is filed; if a petition is filed, the suspension continues until 120 days after the Supreme Court denies review. If the Supreme Court accepts the case, then the stay will continue until the Supreme Court renders its decision. In practical terms: if no petition appears by Thanksgiving, the statewide ban takes effect on December 31, 2026.
- Items to Watch – DOB Signals the LL97 Rules May Move – Alongside the first-year compliance data, the DOB's Deputy Commissioner for Sustainability indicated that the agency is conducting a series of studies that could change how the City approaches Local Law 97 enforcement and compliance. No proposals have been published, and nothing suggests relief from the 2030 limits—but DOB has already issued three rule packages, and a fourth would not surprise us. We are monitoring the City Record for any DOB rulemaking.
- Get Ready Now – Rent-Regulated Buildings' First LL97 Reports – Buildings with 35% or fewer rent-regulated units became subject to LL97's reporting requirements as of January 1, 2026, with their first compliance reports due May 1, 2027—covering calendar year 2026 energy data. That means the reporting year is already three-quarters over. Owners of covered rent-regulated properties should confirm which LL97 article and pathway applies to their building, make sure benchmarking data for 2026 is complete and accurate, and retain a Registered Design Professional well before the spring 2027 filing crunch.
- Upcoming Deadline – LL87 Energy Audit Reports Due December 31 – Unless granted an extension, covered buildings whose tax block numbers end in 6 must file their Local Law 87 Energy Efficiency Reports—documenting an energy audit and retro-commissioning—by December 31, 2026. Failure to file carries a $3,000 penalty in the first year and $5,000 for each additional year of noncompliance. If your block ends in 6 and no audit is underway, the window to retain an auditor and complete the work this year is closing.
Contact
Please do not hesitate to reach out to us if you have any questions regarding these developments. Contact Michael J. Clain, Partner, Benjamin M. Ellis, Special Counsel, or William C. Ladd, Associate.
Disclaimers
In some jurisdictions, this material may be deemed as attorney advertising. Past results do not guarantee future outcomes. Possession of this material does not constitute an attorney/client relationship. This information is provided for your convenience and does not constitute legal advice. It is prepared for the general information of our clients and other interested persons and it may include links to websites other than the Windels Marx website. This information should not be acted upon in any particular situation without first consulting with an attorney and obtaining legal advice based on your specific facts and circumstances.
