Hot right now: rooftop solar

Rooftop solar is increasingly common across the UK as panels become cheaper and more efficient. Anthony Alderman and Naomi Spencer identify the key issues to consider. A key question when it comes to solar power is who will benefit from the energy generated by the installation. If a solar developer installs a rooftop scheme and exports the power generated to the grid, the building owner will expect a rent and possibly a share in any profits from the sale of the electricity. If the power generated is sold to the building owner then there may only be a nominal rent, the benefit to the building owner coming in the form of cheaper electricity (or at least a more certain price). In a multi-let building it may be reasonable to include costs associated with a solar array (a group of connected solar panels) owned by the landlord in the service charge if the tenants benefit from lower electricity costs which reduce the service charge, but not so reasonable if the landlord sells the power generated to the grid, or sells it at a profit to the tenants. More generally, the approach of the parties when negotiating terms relating to a solar installation will be affected by the commercial benefit they are receiving from it. Lease, licence or reservation of rights? How best to document a rooftop solar arrangement comes down to the parties involved and their objectives. Options include: Grant of a lease Where a solar array is installed by a solar developer, perhaps looking to create a portfolio of rooftop projects, the solar developer is likely to require a lease of the roof space with rights to install the solar panels on the roof, or a lease of the roof surface itself. A lease gives the developer a property interest which is binding on the landlord’s successors in title and acceptable for funding purposes. This can work well with owner-occupied or multi-let buildings where the building owner retains the roof. It is less suitable where the whole building is let to a tenant, as it means the demise to that tenant must exclude the roof space and possibly part of the roof. The operational life of the solar installation – and the time taken to repay its cost – may be 20 years or more, and the term of any lease to a solar developer will need to be for a similar length. The length of most commercial leases is too short for the tenant (as opposed to the landlord) to either install their own solar panels or grant an underlease to a solar developer. Reservation of rights Where a landlord installs its own solar array (notwithstanding the actual installation  undertaken by a contractor) then it is obviously free to do so where it retains the roof, provided it does not interfere with the rights of existing occupational tenants. However, if the whole building is to be leased to a single occupier, then a reservation of rights is needed in the lease to allow the landlord to access the roof and install the solar panels. For existing leases, a variation is needed to incorporate the necessary reservations. A licence is generally unsuitable for a solar installation because it is a personal arrangement and not binding on successors in title. Installation and repair The solar installation is a series of photovoltaic panels attached to the roof, with cables from the panels to a connection point. On a modern roof the panels might be fixed to bars which are clamped to the roof. However – and particularly on older buildings – penetrations to the roof may be required in order to attach fixings to the roof structure. A building owner granting a lease to a solar developer will look for a set of obligations from the solar developer relating to the standard of the works – for example, to carry them out in a good and workmanlike manner, use good quality materials and in compliance with any legal requirements. A tenant will look for similar obligations where a landlord reserves rights to install a solar array. Warranties may also be available in respect of either the panels or their installation. Once the works are done it should be made clear who is responsible for any damage arising from the installation – for example, if roof penetrations lead to later damage to the roof – and for cleaning and maintaining the roof surface beneath the panels. A solar developer, or landlord installing a system under reserved rights in a lease, should covenant to keep the system in a safe state of repair so it does not cause damage or become dangerous. Insurance A building owner should ensure that a solar installation will not invalidate their building’s insurance policy and check if there will be an increase in premiums. Insurers are likely to see solar installations as increasing the risk of theft, fire and storm damage (due to panels being caught by high winds). A solar developer will usually insure their own equipment and should also carry appropriate third party and public liability insurance, but who should pay any increase in the building’s insurance is an open question. If a landlord installs a solar array, tenants may want to exclude the cost of insuring it, or any increase in the building’s insurance premium, from their own insurance contributions. Impact on future development A solar installation with an operational life of 20 years or more inevitably restricts future development or use of the roof space. Clearly, the expected lifespan of the building and the roof should exceed the expected life of the solar installation. In addition, anyone installing a solar array will seek protection from development or activity that shades the panels, such as erection of masts, roof extensions or building or tree growth on adjacent land. Any lease should state clearly the extent to which panels and connecting cables can be moved or relocated, whether permanently or temporarily (for example, to allow works to the building to take place), and who bears the cost of the relocation and any lost income from the installation (due to downtime or because the panels perform less well in their relocated position). The ultimate flexibility for a landlord granting a lease to a solar developer is the right to terminate a lease early, but the trade-off is likely to be a compensation payment. Whether this is purely to repay the cost of the installation or also includes an element of lost revenue is for negotiation, but the amount of compensation due should reduce over the term of the lease as the solar developer cumulatively earns more revenue from the installation. A minimum term during which the landlord cannot terminate may give the solar developer more certainty that it will recover its costs. Other rights and reservations Any lease, or reservation of rights in a lease of the building, must clearly set out the rights that each party will have. A rooftop solar installation requires: access to the roof to install the panels; n a cable run to and from the panels to a connection point; a connection to the local electricity distribution network or the grid, either directly or through the building’s supply (a very large scheme might even require its own converter or substation); future access to the panels and cables for repair and maintenance, or to remove the panels. Meanwhile, a building owner (or tenant with a lease of whole) wants the ability to repair and maintain the roof and to inspect the panels and require remedial action if they are becoming unsafe. Power purchase agreement Arrangements for the sale and purchase of power generated by an installation will normally be dealt with by a power purchase agreement. This is usually for a fixed period and sets out the price that will be paid for each kilowatt hour of electricity, often increasing in time in line with the consumer or retail prices index. It will also include the agreed metering arrangements. When the power purchase agreement sits alongside a lease (for example, where a landlord buys the power generated by rooftop panels as well as granting a lease to the solar developer, or where a landlord reserves rights to install the panels in an occupational lease and sells the power to the tenant), the documents must be consistent. They should be granted for the same term and if one is brought to an end early that should automatically trigger the termination of the other. Similarly, if the lease is assigned, or the building sold, the power purchase agreement should be assigned or novated to the successors in title. The ultimate green option that’s here to stay A rooftop solar array can offset carbon emissions and fulfil environmental and sustainability commitments, secure a source of electricity or create an additional income stream. A well-advised developer, landlord or occupier will always want to explore and understand their solar options. Anthony Alderman is a partner and Naomi Spencer is an associate in the real estate business group at Womble Bond Dickinson (UK) LLP Photo by Guenter Fischer/imageBROKER/Shutterstock (12983953e)