In this blog, I will discuss some of the common issues buyers of commercial buildings, which are subject to solar PV installations, should consider.

Following the Government's decision to withdraw subsidies for large scale solar farms this month (as opposed to 2017 as originally intended), a widening of the permitted development rights (also to come into force this month) and a decision to remove Common Agricultural Policy payments from farm land used to generate energy through solar panels, an increase in smaller roof-top solar PV installations is expected as property owners and investors look to take advantage of the dramatic decreases in the cost of equipment and continue to seek to diversify their income, reduce their carbon footprint and generate their own electricity.

As the solar industry sees a return to smaller roof-top installations, the real estate commercial market will, in turn, see more and more buildings which are subject to such installations and with this, prospective buyers are going to have to consider the practical, commercial and legal issues associated with these types of installation with increasing frequency.

On the acquisition of any such building, buyers (whether they are occupiers or investors) should consider various matters including the following:

Equipment & Installation

• Installation solar panels may be installed on/attached to a roof in a variety of ways and one of the key issues for prospective buyers to consider is whether the roof can cope with the weight of the installation. To this end surveys should be undertaken and buyers should ensure that they are satisfied with the installation;
• Quality as well as the quality of the installation, buyers should also be satisfied with the quality of the equipment and should request and consider statistics for the equipment, including those relating to how much electricity is being 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 the date of accreditation;
• Ownership - the accredited party (to whom feed-in-tariff payments are made) must be the owner of the equipment and buyers should make appropriate enquiries to ascertain;
• Current rates buyers will also want to know what the current feed-in tariff rate is and should request evidence of the date of installation and certification of the installation to determine the same. Additional rate reductions take place every three months based on the level of uptake in the preceding period;
• Planning in certain circumstances planning consent may be needed for the installation of solar panels and permitted development rights will only apply where equipment satisfies certain criteria. Buyers will also want to know that any building regulation consents required for installation works (including the electrical installation) have been obtained.

Title

• 3rd Party consents - buyers should ensure that all third party consents have been obtained for any installation and contractual structure put in place. Such third parties include superior landlords, restrictive covenant holders and registered charge holders;
• Restrictive covenants - there remains a certain amount of sensitivity in relation to solar installations and buyers should ensure that installations are not in breach of any restrictive covenants to which the property is subject and in the event there are any such breaches or potential breaches, that the risk has been adequately dealt with by way of a policy of defective title indemnity insurance or the obtaining of consent, for example;
• Occupational tenants - buyers should establish whether the airspace above the building and/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. Existing tenants in the building may also have rights to put equipment on the roof (for example, air conditioning units or telecom masts) with 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, where 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 to permit this.

Contractual Considerations

The following are two of the most common types of contractual structure buyers of buildings will encounter:

• Rent-a-roof model this being typically where the building owner grants a lease of roof space/air space to a developer/investor (as tenant) of the solar PV system. The developer/investor purchases the solar PV equipment and procures its installation. Traditionally under this model, the developer/investor will get the benefit of any feed-in tariff payments along with any sums paid in relation to any surplus unused energy which is exported back in to the main grid (export tariffs), and the building owner will get the benefit of the electricity generated. However, as feed-in tariffs have continued to be squeezed an increasing amount of developer/investors have required building owners to enter into 'power supply' type arrangements, under which building owners pay the developer/investor an agreed figure per unit of electricity generated and consumed, to make schemes viable. Such structures are sold on the basis that whilst the owners are not getting free electricity, they are getting cheaper electricity whilst bolstering their green credentials.
• Owner and developer - in this structure, the building owner is investing in the equipment itself and there will be no lease in place with a developer/investor. The building owner will have contracted directly with the supplier and installer of the equipment.

Rent-a-roof Lease

Where a buyer is acquiring a building which is subject to a rent-a-roof type arrangement, it will also need to consider the terms of the lease having particular regard to the following:

• Demise such leases may demise just the airspace above a building (with associated rights to fix and run cables), whilst others may demise part of the structure and/or the surface of the roof and the airspace, for example. It is important for potential buyers to determine the extent of the demise as this will obviously effect external and structural maintenance/repair responsibility and how it is able to deal with the building going forward;
• 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 that it receives (which, for new installations, are now only payable for 20 years);
• Repair and reinstatement it is important to ascertain who is responsible for repairs to the roof particularly where the building has occupational tenants to whom the building owner may have given covenants to keep the structure (including the roof) in good repair. The lease of the equipment should also deal with the obligations of the respective parties for reinstatement of the roof to its previous state 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 in the event of equipment failure. For example, buyers should consider whether equipment can be temporarily relocated and if so, for how long and on what terms. Buyers should also consider in what circumstances leases can be terminated, for example, if the equipment is damaged and not reinstated within a reasonable period;
• Redevelopment buyers should satisfy themselves that the lease gives them sufficient flexibility with regard the redevelopment of the building, particularly where a building is coming to the end of its serviceable life;
• Insurance - the effect on the insurance policy in place over the building should generally be considered. Some leases provide for the tenant to contribute to any increases to premium which are attributable to the installation and 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, for example;
• Mortgagee protection - mortgagees will want the ability to break such leases in the event they take possession and reasonably believe that the presence of an installation is adversely affecting its 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 ultimately depend on the relative bargaining strengths of the original parties and the advice they received;
• Rights reserved and granted rights granted and reserved should be considered carefully to ensure they are necessary and relevant to the configuration of the installation and the building.

What is the attitude of lenders to roof-top solar installations on commercial buildings?

Attitude of Lenders

Buyers who are 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 in place will be acceptable to lenders.

Whilst the attitude of lenders may differ between residential and commercial real estate, it remains unclear as to whether lenders will consider the presence of a roof-top installation on a commercial building and a typical rent-a-roof lease structure as off-putting to a prospective commercial buyer, adversely affecting the value achievable for the property and as such, any security.

However, lender's sensitivity should hopefully be lower in relation to commercial properties (however the reality may be different), 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, we would urge buyers to consult their lender/potential lenders as early as possible and in any event prior to exchange of an acquisition, particularly given each lender can impose different conditions.

Lender's Requirements

Lenders will typically have relatively lengthy and specific requirements which will need to be satisfied prior to completion of any facility secured over a commercial property which is subject to a roof-top solar PV installation. These may include the following:

(i) With regard roof-top installations generally, lenders will have the same concerns as buyers in relation to matters such as:

• Equipment and installation
• Title
• Planning matters

(ii) Where there is a rent-a-roof lease structure in place:

• 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 an automatic right to a new lease;
• 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 squarely with the tenant/investor or at the very least any building owner's liability is subject to an acceptable cap;
• Lift and shift lenders will also want to ensure that building owners are permitted to remove panels to undertake essential repairs and maintenance to the subject building, without any liability/penalty;
• Mortgagee in possession lenders will be eager to ensure that the lease provides that a mortgagee in possession is able to break the lease on notice (without penalty or cost to it) if it reasonably believes the presence of the solar PV panels is adversely affecting its ability to sell the property (or is likely to do so);
• Term the term of the lease should not be longer than 30 years.

As investor/developers (as tenants) continue to push for leases which represent good security (and in some instances may in themselves be used for secured lending purposes as part of portfolio or otherwise) and building owners continue to push for a form of lease which still leaves them with a mortgagable property, tensions and conflicts are inevitable.

In my experience, some building owners have had difficulty in getting some investor/developers (who have agreed to fund installations) to accept some, if not all, of the above conditions. This has, in turn, led to an increase in the number of commercial properties which are not readily mortgagable (particularly with institutional lenders) as a result of the form of lease in place. The 'mortgagee in possession' condition is one particularly contentious condition which some lenders remain overly sensitive towards and is a prime example of where some lenders are at risk of losing sight of the not so subtle differences between residential and commercial properties.