06 January 2015 #Commercial Real Estate
There is no denying that the solar energy industry has enjoyed great growth in recent years and with the cost of solar energy decreasing then this can only mean the sector will continue to thrive in the near future.
At the recent British Photovoltaic Association (BPVA) annual Christmas gathering there was a very positive mood from the speakers and guests alike. Despite his late withdrawal from the keynote speech at the event the Prime Minister also showed his clear support for the industry, saying “Solar has been a huge success story for the renewables industry and has an important role to play in our diverse energy mix and, where appropriately sited, solar is rightly popular and on current trends becoming ever more affordable -- with solar likely to become the first renewable to be genuinely cost competitive with gas.”
Despite the Prime Minister’s words the industry has been hard hit by the government’s decision to withdraw the subsidies available for solar farms. The subsidies, originally intended to run until 2017, instead will be phased out by April 2015. The Environment Secretary is concerned to ensure that more farmland is being dedicated to growing crops and less to farmers populating their fields with solar panels.
As a result the solar companies will begin to focus more on roof top installations.
At present there are around 500,000 homes in Britain with solar panels and surprisingly only about 400 out of a total of 1.8 million commercial properties have solar systems installed. The opportunity is clear, so why might some commercial property owners be holding back? It could be a lack of awareness or concerns about redevelopment. Others feel the feed-in tariffs being offered are too low and unattractive at present. Eventually the cost of solar will drop so much that the tariffs may not be needed but this is not anticipated until after 2020. The tariff applies once the panels are fully installed and registered and then the rate is guaranteed for 20 years.
Some large operators have embraced roof top solar. Sainsbury’s have installed PV panels on over 250 of their buildings and Big Yellow are obtaining 20% of their total electricity demand from panels on their warehouses. Both have also scored highly on their Corporate Social Responsibility policies by cutting their carbon and embracing greener energy.
What are the key considerations for roof top solar?
There are a number of practical considerations.
Ownership and length of lease
The PV panel installer is likely to require a 25 year lease and so the building owner will need to own the freehold or a leasehold interest long enough to accommodate this.
If the property is charged to a lender they will often require a letter from the installer confirming various issues. These include confirmation that the installer will obtain all necessary consents and make good any damage caused to the roof and that the mortgagee can break the lease if the panels adversely affect saleability.
In law items that are fixed to a property can form part of the property and so the demise must be clearly defined to ensure the panels remain the installer’s chattels. The demise must also include any airspace and the surface of the roof to enable the proper maintenance of the panels.
If the roof forms part of the installer’s demise then they will usually be required to keep it in good repair. The landlord may consider keeping the repairing responsibility where there are other tenants in the building who contribute to any such repairs or where it is crucial that the landlord retains easy access to the roof or wishes to retain control over the carrying out of any repairs.
Termination and removal of panels
As mentioned above a mortgagee is likely to want a right to terminate the lease (and require the panels to be removed) if the property becomes unsalable and the landlord is likely to want the same rights. Break rights could also be in place to cover equipment failure or generation of insufficient power, redevelopment of a site or loss of accreditation or feed-in tariffs. If the Landlord breaks for a redevelopment or to facilitate a sale then the tenant is likely to want to have some compensation as an early termination will mean the tenant is unable to properly realise its return.
At the end of the term of the lease the landlord will want the ability to require the tenant to remove the equipment and make good any damage caused unless it wishes to retain the panels.
The landlord will require consent to any further additions or alterations to the panels throughout the term to ensure the roof is not overloaded or any other issues such as access to other plant on the roof is affected.
Consents and planning
In some cases planning permission will be required before the panels can be installed. If the property is held leasehold then there may also be a superior landlord who needs to give his consent to the works and to the grant of the proposed lease to the panel installer.
The landlord needs to retain tight control over assignments of the feed-in tariff lease to ensure the assignee is registered to claim the tariffs as well as being able to comply with the obligations within the lease to make payments, operate the equipment effectively and so on.
Security of tenure
A lender will usually require the lease to be excluded from the 1954 Act security of tenure provisions, so that at the end of the term the tenant will not have an automatic right to renew their lease.
It is usual for this type of lease to only require the tenant to insure the panels and not to contribute to the insurance for the whole building.
A shining example
With house builders and homeowners continuing to embrace solar power and with the expected decline in solar farms, will 2015 finally be the year that we see more of the quarter of a million hectares of UK commercial roof space being used to generate green energy?