Rooftop solar panels: key questions for buyers, sellers and lenders

Paul Burton addresses uncertainties over the sale of industrial properties with solar panels installed. The introduction of the original government incentives for rooftop solar PV installations resulted in an abundance of so-called “rent-a-roof” arrangements on large industrial premises. However, when the solar bubble burst (albeit the first green shoots of a resurgence are visible), it left a potentially problematic legacy for prospective buyers seeking to acquire industrial assets with rooftop solar PV installations in place, as well as lenders. There are no clear guidelines for lenders, nor much in the way of established practice, leading to industrial premises subject to rent-a-roof arrangements being appraised case by case with little consistency. For buyers of buildings with solar installations, they can be faced with a grey area with little certainty, or even predictability, in the attitudes of lenders. Prospective buyers and lenders should consider numerous practical, commercial and legal issues associated with this type of installation. Equipment and installation Installation – solar panels may be installed on or attached to a roof in various ways. Surveys should be undertaken and buyers should ensure that they are satisfied with the installation and whether the roof can support it. Quality – buyers should be satisfied with the quality of the equipment and should request data, including how much electricity is generated. Duration – the remaining period that any feed-in tariff will be paid over to the owner of the installation will need to be determined. Depending on the date of accreditation of the installation, the period may be 25 or 20 years from then. Ownership – the accredited party (to whom feed-in-tariff payments are made) must be the owner of the equipment and buyers should make enquiries to ascertain this. Rates – buyers will want to know what the feed-in tariff rate is and should request evidence of the date of installation and certification of it to determine this. Building regulations and planning – buyers will want to know that any building regulation consents required for installation works (including the electrical installation) and perhaps planning permission have been obtained. Title Third-party consents – buyers should ensure that all third-party consents have been obtained for any installation and contractual structure is in place. Third parties include superior landlords, restrictive covenant holders and registered charge holders. Restrictive covenants – given the sensitivity around solar installations, buyers should ensure that installations do not breach any restrictive covenants to which the property is subject and, in the event there are or could be any, that the risk has been dealt with – for example, by way of a policy of defective title indemnity insurance or the obtaining of consent. Occupational tenants – buyers should establish whether the airspace above the building or roof has been let (inadvertently or otherwise) to an occupational tenant and that sufficient and necessary rights have been reserved under any occupational lease to enable access, for example. Tenants already in the building may have rights to put equipment on the roof (say, air-conditioning units or telecom masts) or associated rights, including access. Neighbouring land owners – neighbouring properties may have the benefit of rights of light or air across a roof and buyers should be satisfied that any installation does not obstruct such rights to an actionable degree. Further, if parts of an installation are on third-party land (perhaps cables or meters) buyers should be confident that the necessary rights or consents have been granted. Contractual considerations In the main, there are two types of contractual structure buyers will encounter: Rent-a-roof model – the building owner grants a lease of roof space/airspace to a developer/investor (as tenant) of the solar PV system. The developer/investor purchases the equipment and procures its installation. Normally under this model, the developer/investor will get the benefit of feed-in tariff payments along with any sums paid for surplus, unused energy that is exported back into the main grid (export tariffs), and the building owner will benefit from the electricity generated. However, feed-in tariffs have been squeezed and more developer/investors are requiring building owners to enter into “power supply” type arrangements. Under these, building owners pay the developer/investor an agreed figure per unit of electricity generated and consumed in order to make schemes viable. Such structures are sold on the basis that, although the owners are not receiving free electricity, they are benefiting from cheaper electricity and boosting their green credentials. Owner and developer – here, the building owner is investing in the equipment itself and there will be no lease in place with a developer/investor. The owner will have contracted directly with the supplier and installer. Rent-a-roof leases A buyer acquiring a building that is subject to a rent-a-roof type arrangement will also need to consider the terms of the lease, in particular: Demise – such leases may demise just the airspace above a building (with associated rights to fix and run cables), while others may demise part of the structure and/or the surface of the roof and the airspace. It is important for a prospective buyer to determine the extent of the demise because this will affect external and structural maintenance/repair responsibility. Length of term – typically, the contractual term will be 20 or 25 years to enable the tenant to recoup its initial investment from the feed-in-tariff payments it receives. Repair and reinstatement – it is important to ascertain who is responsible for repairs to the roof, particularly if the building has occupational tenants to whom the owner may have given covenants to keep the structure (including the roof) in good repair. The lease of the equipment should also deal with obligations to reinstate the roof to its previous condition at the end of the term. Termination and suspension – buyers should establish what happens if they need to repair the roof for reasons unconnected with the equipment or should the equipment fail. For example, buyers should consider whether equipment can be temporarily moved, for how long and on what terms. Buyers should also consider in what circumstances leases can be terminated. Redevelopment – buyers should satisfy themselves that the lease gives them enough flexibility on redevelopment of the building, particularly if it is ageing. Insurance – the effect on the policy in place over the building should be considered. Some leases expect the tenant to contribute to any increases to premium that are attributable to the installation. Leases should make clear how third-party liability insurance is dealt with and whether the costs of any interruption to the tenant/landlord’s business are insured. Mortgagee protection – mortgagees will want to be able to break such leases if they take possession and reasonably believe that the presence of an installation is adversely affecting the ability to sell a property (or is likely to do so). This type of provision will be unpopular with tenants (who may have invested in the installation) and whether a lease contains such a provision will depend on the bargaining strengths of the original parties and the advice they received. Rights reserved and granted – these should be necessary and relevant to the configuration of the installation and the building. Attitude of lenders Buyers looking to acquire with third-party funding, or who may wish to use their property for security in the future, will need to be satisfied that the installation and any associated contractual structure will be acceptable to lenders. It remains unclear as to whether lenders will consider the presence of a rooftop installation on a commercial building and a typical rent-a-roof lease structure as offputting to a prospective commercial buyer, adversely affecting the value achievable for the property and, as such, any security. Lenders’ sensitivity should be lower in relation to commercial properties, particularly if any lease in place is well negotiated (from the building owner’s perspective) and as energy prices continue to rise and corporate green credentials become increasingly important. In any event, buyers should consult their lender or potential lenders before exchange of an acquisition, particularly given each lender can impose different conditions. Lenders’ requirements Typically, lenders will have lengthy and specific requirements to satisfy before completion of any facility secured over a commercial property subject to a rooftop solar PV installation. On rooftop installations generally, lenders will have the same concerns as buyers on matters such as: equipment and installation; title; and Planning and building regulations. If there is a rent-a-roof lease structure in place, other requirements may include: Security of tenure – the lease will need be contracted out of the Landlord and Tenant Act 1954 to ensure that, at the end of the term, the tenant will not have the right to renew it. Accreditation – proof of accreditation of the installation will need to be provided. Insurance – the lease should clearly set out who is to insure the equipment and any liability for damage caused to property or injury to any person occurring during the operation of the equipment. Repair obligations – lenders will require that leases provide that repair and maintenance responsibility sits with the tenant/investor or, at least, any building owner’s liability is subject to an acceptable cap. Lift and shift – lenders will want to ensure that building owners are permitted to remove panels to undertake essential repairs and maintenance to the building without any liability/penalty. Mortgagee in possession – lenders will be eager to ensure that the lease provides that a mortgagee in possession can break the lease on notice (without penalty or cost to it) if it reasonably believes the presence of the PV panels is affecting its ability to sell the property (or is likely to do so). Term – the lease should not be longer than 30 years. The acquisition of or lending against industrial premises with solar PV installations in situ will complicate the sales process but, with the right advice, the challenges can be navigated. Paul Burton is a real estate partner at JMW Solicitors