A number of landlords, owners and tenants are installing rooftop solar panels on commercial properties. The idea demonstrates a high regard for the use of sustainable energies and offers some tax incentive/carbon credit potentials.

These are all advantages I encourage, but as a commercial real estate/leasing lawyer, I cannot help but turn my mind to the potential legal/leasing implications of such installations, particularly when the owner of the building has tenants occupying space in the building, or is thinking of selling the building. This is not to say that I am against such installations. Far from it! But some reflection is required before entering into leases for solar panels. Here I’ll discuss briefly the preliminary considerations landlords and tenants might discuss before having such panels installed.

Who controls the roof?

In ground leases, the entire property and building are leased to the tenant and thus it is the tenant and not the landlord who has control of the roof.

In a single tenant building, the landlord may offload the responsibility for the roof to the tenant, or alternatively, the lease may allocate rooftop obligations between the parties. For example, the tenant might have day-to-day repair and maintenance obligations for the roof, while the landlord’s obligations are limited to its capital costs. In some cases, the landlord retains the roof obligations, but offloads some costs to the tenant, or may allocate costs depending on whether the maintenance and repairs are structural or non-structural.

The first step, then, in any discussion of leasing the roof for solar panels is to look at the lease or leases of the building to determine: 1) who controls the roof; 2) how the costs are allocated to the landlord and tenant(s) with respect to the roof; and 3) whether or not any rents earned by the landlord or the tenant in respect of the solar panels need to be attributed against other operating costs or are for the landlord’s or tenant’s account alone. Another consideration is to determine who will be entitled to the benefit of the carbon credits that might be associated with the panels.

It is also critical to examine any reciprocal operating agreements or agreements with “shadow anchors”, which might limit rooftop use or require certain equipment to be screened from view (which could hamper the operation of the panels), or which might prescribe maximum building heights (which are perhaps affected by rooftop installations).

Solar Panel Lease Considerations

If the panels are not to be purchased, but rather the roof is to be leased to the solar company, the next step is to look at the solar panel lease itself. A landlord or owner should consider: 1) where the panels will be located; 2) their weight and impact on the roof and its maintenance; 3) the allocation of responsibility for maintaining, repairing, upgrading (as the technology evolves), replacing, and insuring the panels, and relocation rights and costs.

An owner/landlord needs to think about maintenance and safety issues, and whether or not the installation will affect any existing rooftop warranties or guarantees, or any signage, dedicated HVAC, telecommunication or satellite rights granted to others. Will the installation affect other utilities in premises in the building? Are any hazardous substances involved? Parties will want to consider whether or not the panel lease, which is usually for a long period of time, can be terminated, or must be assumed by a transferee.

Don’t Forget the Taxman!

Finally, consider property tax implications. The panels and the foundations on which they rest might be tax exempt in proportion to the power they produce for sale to the general public, while not exempt if the electricity is solely for property use, or if the owner is generating income from leasing the rooftop, as opposed to generating income from sale of electricity.

While not intended to hinder or postpone any consideration of whether or not to take advantage of the benefits of such technologies, the foregoing considerations are preliminary to your discussion with the solar panel company before having panels installed.