Rooftop Leasing Hazards

In the last several years there has been an explosion of activity in the solar rooftop sector in Ontario. Due almost exclusively to the feed-in tariff (FIT) regime where the power procurement agency (the Ontario Power Authority, or OPA) pays elevated electricity prices over 20 years for power from systems that meet the program requirements, the quick maturing of this industry has resulted in some successes, but also a large degree of confusion and uncertainty.

When the FIT program was launched by the OPA, many domestic and foreign groups began signing up large building owners to lease option agreements. These agreements allowed the power developers to lease the rooftop space in order to install photovoltaic systems and generate power to deliver to the provincial grid. The agreements tied up the rooftops for a period of time while applications were processed by OPA.

Other more adventurous building owners decided to hire companies to develop PV systems on their rooftops for their own benefit. The program was far more popular than anticipated, and with the OPA bending over backwards to allow announcements of projects by politicians, FIT became less of a European-style feed-in tariff program than groups of similar projects announced periodically. The dream of a straightforward application and contract process was quickly twisted into a series of delays and frustrating encounters with bureaucrats, followed eventually by the contract being announced with hundreds of others by the Minister. It was obvious that reality did not closely reflect the FIT program on paper.

As building owners looked more closely at the lease terms being offered to them, they were often surprised to see the risks they were being asked to take. For example, many rooftop leases provided that part or all of the risk of increased property taxes was to be borne by the building owner.

Another common term of the leases was to restrict the ability of the building owner to complete roof maintenance and replacement work, and if such work was done too often or too slowly there was a requirement to compensate the rooftop tenant for lost profit. Assuming the building owner had a mortgage or a ground lessor, the leases required that the lender and/or landlord execute documentation confirming that the solar rooftop equipment did not become a fixture, and providing rights to the rooftop tenant’s lender in the event of a default. Finally, there were issues where there did not seem to be an easy solution – for example, who is responsible for clearing snow from the rooftop – the party who cares most about the load on the rooftop (the owner), or the party who cares most about the delicate equipment (the tenant)?

Beyond the contractual issues, practical problems quickly came to the forefront. Some building owners had to deal with installers who caused significant damage to their roof. The structural capacity of the rooftops often limited the system size, or required the use of lighter, more expensive equipment. While some systems penetrated the roof membrane to attach to the building infrastructure (sometimes resulting in leaks, etc.), other system designs were non-penetrating; but if they were installed improperly, considerable damage could be done to the building. Besides load and membrane issues, there were various electrical problems that occurred in some cases, which resulted in damage as well. Add to this the concerns relating to connection to the local grid and all the time and money spent on lawyers, and some building owners reached a breaking point.

So, why did building owners continue to move forward with these projects? In some cases, they did not. However, many did continue with the developments, largely because of the opportunity to turn untenantable space (the rooftop) into a good revenue source. For every landlord frustrated with the program and/or their developer, there is another one pleased to see the monthly income generated from the rooftop. Some building owners have even installed screens in their reception areas, where a guest can watch real-time production data from the solar rooftop while they wait for their appointment.

Overall, the FIT program has had mixed results. It has expanded an industry and created some jobs, it has begun to reduce Ontario’s reliance on fossil fuels – and it has added some revenue for those building owners willing to deal with the challenges.cce

Aeron Atcheson is a partner with Miller Thomson LLP. He is based in London, Ontario.