Your Rooftop - To Lease or Not to Lease
By:Pamela Green and David Forgione ( The Abstract Page - February 2011)
With the Ontario Green Energy Act (the “GEA”) offering financial incentives for businesses that create green energy, a new phenomenon has been created—leases of rooftop space for the installation and operation of solar panel facilities.
The GEA was enacted in May 2009. One of the main objectives of the GEA was to expediate the growth of clean, renewable sources of energy, such as wind, solar, hydro, biomass and biogas, by creating a Feed-in Tariff Program (“FIT Program”). It achieves this objective by: (i) guaranteeing access to the provincially regulated electricity grid, when specific regulatory requirements are met; and (ii) paying producers specific rates for energy generated. The Ontario Power Authority (OPA) operates the FIT Program and is currently offering twenty-year contracts to producers of renewable energy.
As a result of the FIT Program, owners of commercial/industrial buildings are now being approached by solar power companies seeking to lease rooftop space to install and operate solar panel facilities. Rooftop solar facilities are among the highest paid forms of renewable energy under the FIT Program (meaning the OPA will pay more for this type of power than other types). However, leasing of rooftop space for solar panel systems may not be appropriate for all commercial/industrial properties and property owners should consider a number of factors before exploring this type of tenant for their property.
The initial exercise in determining whether or not to lease the roof of your building is to review the leases already affecting your property, if any. A detailed review should be conducted of the provisions of the leases governing the use, maintenance and control of the roof, the allocation of costs between the landlord and the tenants with respect to the roof, and how a rooftop tenant would affect the management and operation of the building generally. A review of existing lease provisions is essential as the leases may need amendment to allow for installation and maintenance or to address tenant concerns in relation to the rooftop solar panel system’s impact on the tenant’s business and expenses.
Property owners will also need to consider zoning compliance issues related to how the solar panels might impact height restrictions on the buildings on the property. Most municipalities now have specific provisions in their zoning by-laws dealing with rooftop solar panel systems.
Consideration also needs to be given to the property tax implications. The Municipal Property Assessment Corporation (“MPAC”) has not yet set a formal policy on how to classify and assess rooftop solar facilities however, MPAC has indicated they will likely assign an industrial classification to the use. As such, a solar panel installation may impact the tax classification and/or assessed value of your property resulting in an increase in your realty taxes. You will want to determine any realty tax implications, particularly where the installation results in a mix of industrial and commercial uses where the lower rate single use formerly applied.
If existing leases do not prohibit the installation of solar panels, the next step is to determine if your roof has load bearing capacity and what type of facility may be appropriate given issues such as weight limitations, wind velocities, placement of existing rooftop mechanicals and the orientation of the building on the property. These are investigations that professionals should undertake.
The last step is to prepare a lease of the rooftop space that is appropriate for, and particularized to, the operational requirements of the property. Some solar power companies may ask that you sign a letter of intent or an offer to lease. They often do this before investigations into feasibility have been commenced and many of these documents purport to bind the landlord to a “standard form of lease”. Any lease should address, not only where the panels will be located, but also their long-term impact on the roof and the allocation of responsibility for maintaining, repairing, upgrading, replacing, and insuring the panels and the roof. The landlord should consider indemnities for damage to the roof by the solar tenant, nuisance and insurance issues, as well as relocation and interruption clauses that limit landlord liability in the event that the roof needs to be replaced (to protect the premises of other tenants) or other circumstances that may require the relocation and interruption of the solar panel system.
There are many other matters to think about before agreeing to lease your rooftop. In the end, the lease of rooftop space may not be compatible with your other commercial uses of the property. In cases where such a lease is appropriate, lease terms should be tailored to the requirements of the specific property and the property owner should avoid signing a letter of intent, an offer to lease or standard lease form before it is reviewed by legal counsel.
Pamela A. Green is a partner in the Commercial Real Estate Group at Pallett Valo LLP in Mississauga.
David J. Forgione is a lawyer in the Commercial Real Estate Group at Pallett Valo LLP in Mississauga.