What legal factors do you need to consider when approached by a company offering free solar panels using a Feed in Tariff rent a roof scheme?
For example, if you own your own home you can install solar (PV) panels on the roof. This would give you access to free electricity and you would also receive feed-in tariffs (FITs).
But if you cannot afford it (and do not want to borrow the capital cost of the equipment) you may have your home assessed by a commercial company X. X may offer to install the panels on your roof for free, in return for the FITs. You will be able to use the electricity generated free of charge but what legal pitfalls should you be looking out for?
The type of standard document produced by X often contain provisions which may come as a surprise. It is highly likely that the documents include a lease, which is why some websites (such as the Energy Savings Trust) describe this type of arrangement as a “rent a roof” scheme.
The purpose of a FITs lease
In very broad terms, X can claim FITs for the PV panels only if:
- It owns them.
- They generate less than 5mW of electricity per annum (FITs are payable for small scale renewable energy projects). A typical domestic home installation will fall well below that threshold.
- The PV panels are of a type that is approved (accredited) by Ofgem.
Ofgem records, in a central register, both the equipment that has been accredited and the owner of that equipment. It is not essential for that owner to also own the site on which the panels are situated. This is why X can install its equipment on your home and still claim FITs.
However, X needs a legal right to enter the property, install and subsequently maintain the equipment, and use any “surplus” electricity which is generated (the electricity that your clients do not require). These rights are usually granted by a lease (often called a FITs lease). The concept is, in theory, no different to granting a lease of the granny flat in your home. However, a FITs lease differs in several key respects from a typical occupational lease.
What you get out of the deal
X will have calculated that the income it expects to derive from FITs will recoup the capital cost of the equipment and provide a reasonable return on investment over the lifetime of the lease. There are two types of FIT:
- A fixed payment per kWh generated, which rises each year in line with RPI. For PV panels, the maximum period for payment is 25 years.
- A fixed rate (which can be changed from time to time by the government) per kWh of surplus electricity (that which is generated by the PV panels, is not used by you and is exported to the National Grid (the Grid) for use by others). X can opt out of this FIT and sell that surplus electricity to the Grid at the market price, if it thinks this will be more lucrative.
You will need to realise:
- You cannot store the electricity generated by the PV panels. So if you are not at home in the daytime, or cannot set their electrical appliances to run during the day, you may not benefit much from free electricity, yet this is the only benefit you will derive from the lease. On the other hand, X will be delighted if you use little of the electricity, because there will be more for it to export to the Grid (for a payment which it keeps).
- The installation will include other equipment apart from the PV panels (such as an inverter and wiring). This may be sited in the attic and the FITs lease will give X rights to enter and repair, inspect or replace this equipment. X may not exercise that right very often, but you will need to be happy that X can do so.
- There will be no guarantee of the amount of electricity that will be generated by the PV panels. This largely depends on the amount of sunlight, though it may also be affected by whether the panels are kept clean and in decent repair. Only the second factor could be influenced by X’s obligations in the lease i.e. who repairs the PV panels on the roof.
You should check with a surveyor whether:
- PV panels on the roof will adversely affect the saleability or value of their home. X is likely to want a lease for 25 years. Will a prospective buyer be put off by a “sitting tenant” of the panels? This will vary according to many factors, including:
- The type of property.
- Where the PV panels are sited and how visible they are.
- Whether such panels are common in the local market, especially on that sort of property.
- The financial benefit to the owner under the FITs lease, whether that is FITs payments or free electricity.
- The attitude of any likely lenders.
- The roof structure is capable of bearing the weight of the PV panels and that the proposed method of attachment will not cause problems (perhaps allowing water ingress). X will do a survey of the site, but only for its own purposes, such as assessing whether the panels will receive direct sunlight and can connect easily to the Grid. X will not take responsibility should it turn out that the PV panels damage the structure of the house.
- There are any planning issues – most installations may be exempt from the requirements of obtaining formal planning permission as it is a permitted development right but this depends on the circumstances and planning histrory of the property.
Other things to look out for
Are you a freehold owner or leasehold owner?
It is unlikely that X will have done any investigation into your title. You would need (with professional guidance) to ensure you have a sufficient interest to be able to grant a 25 year lease. If not, then the deal is unlikely to proceed.
Moreover, a standard residential FITs lease usually includes a warranty by you, the landlord, that they have the necessary title to grant the lease, that all third party consents that are needed have been obtained, and that there are no restrictions on the title that would prevent the installation or operation of the PV panels. This warranty is dangerous unless someone has actually looked at the title deeds to see whether there are any such restrictions and, if so, whether the FITs lease will break them. If you give such a warranty in error, and the lease terminates early as a result, you may find you owe X a significant amount of money to compensate it for the loss of the expected FITs income.
Does you need lender’s consent?
A typical residential mortgage will prohibit lettings without the consent of the lender, and this may take a while to obtain. It is difficult to predict the attitude of the lender and, at least at the moment, there is no standard line from the Council of Mortgage Lenders on FITs leases.
The lender will be concerned about whether the lease will affect the value of the property sufficiently to jeopardise what it sees as a safe loan to value ratio. This depends as much on the amount outstanding on your mortgage as the nature of the house and the current market. Some buyers may see the supply of free, green, daytime electricity as a bonus; others may not view that as outweighing (in their view) unsightly PV panels and the other landlord’s liabilities under the lease.
The lender may be reassured if the FITs lease can be terminated early, so that, should it have to repossess and sell, it can do so free of the FITs lease. Such a break right must be judged in the light of:
- Any accompanying financial penalty that would be charged on you for early termination.
- Whether X can be required to remove the PV panels when the lease ends.
Is the free electricity reliable?
You will already know that the amount of free electricity they will be able to access will vary with the weather. What you may not expect (yet appears in many standard FITs leases) is that X may have the right to break the lease early, even in circumstances where the PV panels are generating sufficient electricity for you. You may well want to negotiate this clause.
Both parties may be willing to accept an early end to the lease if the prevailing conditions prove such that insufficient electricity can be generated (perhaps a neighbour builds a block of flats or local trees grow tall enough to block the sunlight). The argument will be over who decides what is “insufficient” and what test to apply. The installation may be perfectly viable for you if it yields a small amount of electricity, but unviable for X, because the FIT payments that it receives will not cover its capital investment.
What is much less palatable for you is a right for X to break the lease if the equipment needs major repair, suffers damage or is stolen. You might reasonably expect that X would have insurance against this or should keep the panels in repair at its own cost, so can get the installation back up and running. Would you really want the aggravation of the installation of panels and potential implications for property value, if they could find the lease came to a premature end, before they had enjoyed the benefits of much free electricity?
Who repairs the PV panels and the roof?
This ought to be easy. X needs to remain the owner of the panels in order to claim FITs payments. This will usually be declared in the lease so as to counter any arguments that the panels become fixtures, and, therefore, part of the property because they are attached to it. If X owns the panels then it should repair them and keep them in working order. Most FITs leases say this.
Most FITs leases do not achieve such a clear position so far as repair of the roof. First check whether the FITs lease demises to X only the airspace above the roof, or both the area of roof on which the equipment stands and the airspace above it. If it is the former, then you will remain responsible for the roof structure and its repair. The lease may oblige them to keep the roof (possibly the whole structure of the house) in repair so that the equipment can be sure of a solid platform from which to operate without interruption. If so, you should ensure that X is obliged to give access to the relevant part of the roof below the PV panels, so that your clients can do such repair work. Many standard form FITs leases do not do this. Moreover, they usually require you, the landlord, to pay compensation for any days that the panels are switched off or removed to allow repairs.
If X is to be demised the section of the roof as well as the airspace, it will be much trickier to decide who should repair the roof. Conventionally it would be X,the tenant, and it is certainly easier for X to do it (and turn off or remove the panels to do so). However, you may not be comfortable at having to rely on X to turn up and repair that bit of the roof quickly and to a good standard. It is your home, and you will probably prefer to control when and how repairs are done.
Can X assign or sublet the Property without asking for your consent?
As with any lease, you will need to vet the alienation provision. The tenant will have many obligations that are crucial to you; in particular keeping the equipment operational, and removing it at the end of the lease. You should have the right to approve any prospective assignee or subtenant, even if they are a group company. However, many standard FITs leases confer much more freedom of alienation on the tenant (in the same way as is common in mobile phone mast leases).
Compensation payable to X if FITs income is not what X anticipated
Many standard FITs leases require you, the landlord to pay X compensation if the lease is terminated early, or the site turns out not to be as good at generating electricity as was expected, repairs to the house mean the PV panels have to be switched off or moved, or a third party emerges who has the right to insist such use stops.
You must ensure that you understand this onerous obligation (and have the money with which to meet it) and are happy with the circumstances in which it is payable. They might rightly say they are only prepared to pay compensation if they terminate the lease early for purely personal reasons. In other circumstances they may say that X should take its chance; should do its initial site and title assessment better; should remove the panels at the end of the lease and put them up on some other site in order to recoup its investment; or factor in more “down time” in its financial calculations.
If you agree that some variety of compensation is justified, then you will need to make sure that the proposed method of calculating that compensation is fair. The tenant usually states what it expects, which may be a combination of:
- A capital payment (usually where the lease is terminated early). This may be geared to the average expected income from FITs for the unexpired residue of the lease with a discount for early payment, or to the depreciated capital cost of the PV panels.
- A daily rate of compensation (usually in the case of interruption to operation of the panels for repairs or caused by third parties exercising their rights over the site). That daily rate will be linked to the average daily rate of FIT payment for the equipment, calculated for a period equal to the interruption. If it is linked to average FITs received, there must be some mechanism for keeping records of the FITs received, and a right for the landlord to inspect those on notice, so that the landlord can verify the calculation. You may be able to negotiate that compensation is only payable after a fixed period of interruption.
Watch out, too, for when the compensation is to be paid. Some FITs leases require the compensation to be paid some time before the effective date of termination, which seems unfair.
Removing the panels at the end of the lease
This can be a real source of disagreement. Most homeowners will not want redundant panels to remain on their roof. Once the lease terminates, in almost all cases, your client will want X to remove the panels, so that they do not have to face the cost of repairing or removing them when they start to become dangerous.
To save cost, X will resist any obligation to remove the panels, whatever the reason for the termination, but will want the option to remove them (in case they can be reused elsewhere). It may be possible to compromise so that the obligation to reinstate will not apply if it is unreasonable to require this, or it is you who terminate the lease for their own purposes (perhaps so that they can redevelop the site).
Restrictions on use of your home
Often standard form FITs leases restrict you, the landlord, from using their home, or the garden, in a way that would block the sunlight to the PV panels, or otherwise obstruct their operation. This will prevent you from, for example, erecting new buildings on the site, altering the other parts of the house, or allowing the plants to grow tall, if doing so obstructs sunlight. These restrictions will go on for the length of the lease (often 25 years). You must be sure that this does not compromise their plans for the house or put off a potential purchaser, were you to sell it.
Some FITs leases require the landlord to grant any wayleave agreements that may be required; for example, for cables from the panels to connect up to the Grid. Your clients could be seriously disadvantaged by this, unless they have the power to refuse where it is reasonable to do so, perhaps because the terms of the wayleave agreement are too one sided.
Security of tenure
You must obtain professional advice to ensure that the FITs lease is contracted out of the security of tenure regime in Part 2 of the Landlord and Tenant Act 1954. If this is forgotten, it will mean that the lease could be renewed at the end of 25 years, because X is a business tenant.
If you have any questions or require advice on FITs leases please contact Mark Sadler @ kenneth elliott + rowe solicitors on 01708 757575 or email firstname.lastname@example.org – we offer a fixed fee consultation on such matters.