Manage the Risks Drones Create for Community Associations but Don’t Ignore their Benefits

 Dean T. Lennon 

When we’ve discussed drones in the past, we have focused mainly on how condominium associations can (and should) regulate their use to mitigate the safety and liability risks

these small, unmanned aerial vehicles may create.  But risks aren’t the whole story.  Drone technology also has many potential benefits that community associations are beginning to recognize. 

The most obvious benefits involve maintenance. Drones equipped with high-definition or thermal imaging cameras can inspect building exteriors quickly, cost-effectively and safely, without putting human hands on the buildings or human feet on the roofs.

“We can go wherever a hummingbird can go,” Tom Weitbrecht, the owner of Greater Boston Drones, a company that provides drone inspection and mapping services, tells me.  “I can put an eyeball against what anyone needs to see without ever leaving the ground.” 

Anything visible to the eye – areas of stain or mildew, breached flashing, broken shingles – can be recorded in high definition and in two or three dimensions, by the drone’s camera.  A drone’s perspective may also capture details in areas a hands-on inspection can’t reach.  And you don’t have to worry about a drone falling off the roof, putting a foot through it or dropping a hammer on it.

Although these are early days for drone usage in New England condominiums, some of our clients are using the technology to inspect roofs, gutters and chimneys as part of a regular maintenance program and are reporting both efficiencies and cost-savings.    

 

Fast and Cost-effective

A condominium community with 30 buildings can inspect every roof, every gutter, and every chimney with a single drone deployment.  The cost, we are told, could range from as little as $1,500 for smaller communities, to $2,500 to $3,500 for larger communities, with 75-to 150 buildings, depending on the land area, elevations and obstructions.  Hands-on inspections would take much longer and cost more. 

Many cities – Boston among them – require periodic façade inspections for high rise buildings and drones are being used to perform that task.   Boston requires inspections by a licensed engineering firm every five years for commercial and residential buildings taller than 70 feet. Traditional inspections require engineers to assess the building from scaffolding placed around it, can take several weeks, cost owners several hundred thousand dollars, and typically require the closing or partial closing of nearby streets.  A drone can take high resolution pictures of the façade from all angles in a few hours and transmit them to engineers, who can conduct the inspection from their desks.

Even buildings that aren’t subject to the façade inspection requirement can benefit from periodic drone imaging to track changes that may indicate degradation of materials over time or highlight small problems on their way to becoming bigger ones.  A tiny water spot that has grown much larger over the course of a year probably requires attention. For a spot that hasn’t changed, monitoring may be sufficient. 

Varied Uses

Community associations can use drone imaging in a variety of ways, extending well beyond regular maintenance, all of which can provide time and money savings: 

·   Insurance. Before and after images of damaged areas can help document an insurance claim.  Some insurance adjusters are now using drones that take pictures, analyze the damage and send a report before the adjuster leaves the property. 

·       Energy conservation. Thermal images can indicate heat loss through windows and some roofs, enabling building owners to identify targets for potential energy-saving replacements or repairs.     This thermal technology works on membrane roofs common in commercial structures, but not on asphalt roofs more common in residential buildings. It also can’t be used to assess heat loss in brick buildings, but experts say it works fine in clapboard and other non-brick and mortar structures. 

·    Construction. Regular drone inspections can track an ongoing construction project in real time to be sure the work is being done properly and to identify errors or oversights. The construction engineers the association might hire to oversee the project can review drone photos from his/her desk, instead of spending countless (expensive) hours on the site, keeping eyes on the work.

·   Security and rules enforcement. These are among the obvious areas where drones can be useful, but they are also among the most problematic, primarily because of the privacy concerns these uses can trigger.  More of that below.

Privacy Concerns

Privacy is an important consideration when deploying drones in a community association.  When it comes to owner privacy, the legal rule-of-thumb holds that individuals have legal rights wherever they have a “reasonable expectation of privacy.” A unit owner clearly has a reasonable expectation of privacy within his/her unit or other areas not readily visible by the naked eye.  However, that expectation does not extend to common areas.  Unit owners do not have a reasonable expectation of privacy when walking across common grounds, the parking areas or when utilizing amenities such as a tennis court or clubhouse.  Exclusive use common area such as a rear porch or patio is a bit of a legal gray area.

A drone flying over rooftops to inspect them is not likely to violate anyone’s “reasonable expectation” of privacy.  Drones flying over common areas to monitor parking or dog waste violations would also be on equally solid legal ground. 

However, drones hovering over private, exclusive use patios or outside unit windows to see if residents are violating no-smoking rules, storing belongings improperly or housing prohibited pets raise more serious concerns and should be avoided for that reason. The more intrusive the surveillance is, or is perceived to be, the greater the risk that someone will complain that their privacy rights are being violated. 

Mitigating the Risks

Privacy concerns should not make associations forego the use of drones to inspect their property or to monitor rules compliance; but boards should recognize the potential liability risks and take reasonable steps to mitigate them:

·     Whether the association is deploying a drone it owns or (as is more likely for most) hiring a third party to collect images, be specific about where the drone can fly and what images it can collect.

·       Focus on common areas. Don’t allow drones to hover near or point their cameras directly toward owners’ windows so as to see inside, even unintentionally.  Entrances and private decks and patios should also be off limits.

·    Develop policies for managing the images the drones collect, specifying who sees them, how the images are saved and for how long.

·     Explain the association’s drone policies to owners. Make sure they understand that drones the association owns or employs aren’t going to be spying on residents.

·   Inform owners when drones are going to be operating in the community, explain what they are doing and what images they are collecting.

Advance notice of drone operations is essential. If residents are on notice that drones will be operating in the area, they are less likely to be alarmed by them and suspicious about what they are doing. 

Eyes on the Present – and the Future

Privacy is a major concern when deploying drones but it isn’t the only one.  Boards should also consider the association’s potential liability for property damage or personal injury. With those liability risks in mind, boards should:

·  Make sure any company they hire is properly licensed, adequately insured and has experience doing this work.

·     If the association is deploying a drone it owns, make sure the individual operating it has the “remote pilot certificate” required for commercial operation of a drone.  The association’s use of a drone would fall into that category. 

·       Make sure the association’s insurance will cover damage resulting from a drone operated either by the association or by a third party it hires.  Even if the drone company is insured, the association may still be sued by individuals claiming harm and will have to defend that suit.  For the same reason, the association should require residents operating recreational drones to be properly insured and licensed as well.

Drone technology is still evolving.  New risks related to drone usage will no doubt be identified and boards must be aware of them. But they should also be aware of the ways in which community associations can benefit from drone technology.  That list is going to be increasing as well. 

A partner in the Braintree law form of Marcus Errico Emmer & Brooks P.C., Dean concentrates his practice on the general representation of condo and HOA boards in Massachusetts, New Hampshire and Rhode Island.  Such representation includes lien enforcement and rules enforcement matters as well as condo document amendments and interpretation.  He works closely with boards to provide legal advice and counsel for day-to-day governance issues. Dean’s email address is dlennon@meeb.com

Problem Solved: Board Members Serve After Their Terms Have Expired

Mark S. Einhorn

This is a common problem. Few condo owners want to volunteer for what can be a thankless role, at best; and even if there are candidates willing to run, associations can’t

always attract the quorum required to elect them at an annual meeting.  Many boards take the path of least resistance, allowing board members to serve beyond their expired terms, or (if one or more members have resigned) continuing to operate with fewer members than the governing documents require, assuming that it won’t be a problem.  And it may not be – until the association applies for a loan or is sued – when it may become a very difficult problem, indeed. 

As part of its review of the association’s loan application, a lender will typically request a “due authority opinion’ from the association’s attorney or the lender’s attorney, verifying that all current board members have been duly elected.  If that is not the case, the lender may reject the loan.

Unpopular board decisions – approving a common charge increase or imposing an assessment to finance a major capital expenditure, for example –may also trigger questions about the board’s authority.  In fact, one of the first things an attorney representing a plaintiff in a suit against the board will typically raise is whether the    board members were authorized to make the disputed decision.  If one or more board members were not duly elected, as prescribed by the association’s governing documents, the legitimacy of the decision may be in doubt. 

Insurance or the lack of it – is another potential concern. Directors and officers (D&O) liability insurance protects board members if they are sued for official actions.  Board members who have not been duly elected may not be covered by this insurance.  If these trustees become aware of their potential risk, the board is likely to have even more positions to fill. 

There are remedies.  If a decision is being challenged – or is likely to be – the board can call a special meeting, scramble to get a quorum or to collect the proxies required to elect the board members whose terms are in doubt.  The board would then have to vote again on the disputed issue to legitimize it.  This solution may work, but it would be far better to avoid the problem than to engage in the fire drill required to solve it.  

So, our best advice is to be proactive.  Make sure your board is duly constituted and correct any problems before a lender, a disgruntled owner, an opposing attorney or an insurer identifies them.  Start by reviewing the governing documents to see what they require and what they allow.  Some documents allow trustees to continue serving after their term has expired until a successor is elected.  Some allow the board to appoint a successor to serve the unexpired term of a trustee who resigns.  Both are temporary measures. Documents typically don’t allow trustees to serve indefinitely, but they often provide legal cover for the decisions they make until an election is held.  You want owners to elect trustees as soon as possible, either at the next annual meeting or at a special meeting called for that purpose.

Finding candidates willing to run and achieving the quorum required to elect them are real problems.  But that doesn’t mean you shouldn’t try.    Sending an urgent letter to owners explaining that if a board can’t be constituted, a court could appoint a receiver, at the association’s expense, who will assume full control of the community, often brings owners to their senses. Once those alarm bells are rung, someone will almost always step up to run for the board, and owners will almost certainly vote to elect them. 

Other steps the board might consider to avoid board legitimacy questions:

·       Amend the governing documents.

 

n  Add language authorizing the board to appoint members to serve unexpired terms if the documents don’t provide that authority.

n  Amend existing language that allows interim appointments to specify that an appointed trustee can continue serving until owners elect a replacement. 

n  Reduce the quorum requirement from a majority of owners to a more readily achievable level 33 percent is a common change.  Authorizing mail-in ballots or electronic voting can also make it easier to meet the quorum requirement.

 

·       Take care of housekeeping details.  When trustees resign or new trustees are elected, the trustee certificates on file with the Registry of Deeds should be updated to reflect the changes.  The association’s manager or a member of the board should review the certificates annually to make sure they are up to date.  This small step, often overlooked, can avoid problems that tend to arise at the most inconvenient times possible.  

Reducing the risk that board decisions may be challenged is the primary reason for ensuring that the board is duly constituted, but not the only one.  Appearances matter.  If the board is lax in following the rules about its own organization, owners might reasonably question whether it is lax in other areas – enforcing the rules or managing association finances, for example.  You want owners to assume the board is focusing carefully on governance details; you don’t want to give them cause to question whether that is the case.

 

Mar is a partner at Marcus Errico Emmer & Brooks, P.C., concentrating his practice on transactional and condominium law.  He routinely advises condominium associations and association managers on the full spectrum of matters affecting condominium communities, including:  governance issues, rules enforcement, lien enforcement, asset management, casualty loss claims, document amendments, land acquisition and development rights, election and transition procedures, contracts and general liability issues.  Mark’s email is meinhorn@meeb.com.

REBA Launches DEIB Initiative (Diversity, Equity, Inclusion and Belonging)

Kate Moran Carter

 The REBA Board of Directors has created a new section, Diversity, Equity, Inclusion and Belonging (DEIB), which will collaborate with the Association’s other sections to foster a more diverse, expansive, and inclusive

leadership and membership to better reflect the people, companies, and communities we serve.  This new Section will have a particular focus on identifying actionable and measurable ways to address the challenges faced by lawyers from underrepresented, historically excluded, and systematically oppressed populations.

The work of DEIB will further REBA’s core mission of better advancing the practice of real estate law in an ethical, professional and collegial way, consistent with the DEI statement of the SJC’s Standing Committee on Lawyer Well-Being.

We believe our profession is strongest when its membership reflects the population we serve.

REBA recognizes the importance of diversity, equity, inclusion and belonging initiatives to achieve and maintain a more diverse and inclusive organization that welcomes all real estate professionals from a broad range of backgrounds.  A more diverse and expansive membership, including real estate lawyers of different genders, familial statuses, personal and/or social identities, ages, races, ethnicities, neuro/physical abilities, religions, cultures, sexual orientations, geographic locations, professional affiliation, and experience, is a benefit to our existing members, our clients, and the bar in general.

REBA members will join our colleagues across the broader Massachusetts bar, paying special attention to the additional stressors, burdens and entry barriers confronted by lawyers from underrepresented, historically excluded, and sometimes systematically oppressed populations, and addressing these challenges.

I want to thank Paul Alphen, Carrie Rainen, Julie Barry, Kim Martin-Epstein, Kim Bielan, Ally Castaldo, Darly David, Kathleen Heyer and Ryan Douglas, members of the DEIB working group who spent many hours over several months developing our DEIB mission statement and action plan.

To view the Section’s mission statement and 12-point Action Plan, click here.

To join the new DEIB Section, email Nicole Cohen at cohen@reba.net. 

A member of the REBA Board of Director, and Co-chair of its Land Use and Zoning Section, Kate will also Chair the new DEIB Section.  A shareholder and director at Dain, Torpy, Le Ray, Wiest & Garner, P.C., Kate’s practice focuses on real estate land use and title litigation, and helping her clients manage risk and resolve disputes to avoid litigation. Kate can be reached at kcarter@daintorpy.com.

Personal Finance Basics: Budgeting, Student Loans and Retirement Planning (Video)

Paperless Power: Exploring the Legal Landscape of E-Signatures and eNotes

Beth A. Goldstein and  Dustyn Marie Macia

In an era characterized by rapid technological advancements and the profound shift towards remote work, the traditional concept of signing documents with pen and paper has evolved. Electronic signatures, or e-signatures, have emerged

as a convenient and efficient alternative, promising to streamline processes, reduce paperwork, and enhance accessibility. Organizations are increasingly embracing e-signatures for a wide range of transactions, prompting a closer examination of their legal validity.

WHAT IS AN “E-SIGNATURE”?

An e-signature encompasses any electronic sound, symbol, or process associated with a record and executed with the intent to sign. These can range from scanned images of handwritten signatures to digital representations generated by specialized software.

GOVERNING LAW:

The governing law for e-signatures in the United States includes both state-specific laws, like those based on the Uniform Electronic Transactions Act (UETA), and the federal ESIGN. ESIGN applies to interstate and foreign transactions, harmonizing electronic transactions across state lines. Many states, including Massachusetts, have adopted UETA, reinforcing the legal standing of e-signatures within their jurisdictions (MUETA).

VALIDITY AND REQUIREMENTS:

Generally, e-signatures are legally binding in the Commonwealth of Massachusetts.  However, certain documents like wills, adoption papers, and divorce decrees are excluded from the scope of ESIGN and MUETA to safeguard consumer rights and maintain traditional legal practices.

The following components must be present for e-signatures to be fully protected and upheld under ESIGN and MUETA:

• Intent: each party intended to execute the document;
• Consent: there must be express or implied consent from the parties to do business electronically (under MUETA, consumer consent disclosures may also be required). In addition, signers should also have the option to opt-out;
• Association: the e-signature must be “associated” with the document it is intended to authenticate; and
• Record Retention: records of the transaction and e-signature must be retained electronically.

Meeting these requirements ensures that e-signatures have the same legal validity and enforceability as traditional handwritten, wet-ink signatures in Massachusetts.

 

ENFORCEABILITY OF E-NOTES AND CONCERNS FOR FINANCIAL INSTITUTIONS:

An eNote is an electronically created, signed, and stored promissory note. It differs from scanned signatures on paper or PDF copies. Governed by Article 3 of the Uniform Commercial Code (UCC), eNotes are considered negotiable instruments and therefore require special treatment. ESIGN provides a framework for their use, emphasizing the concept of a “transferable record.” This electronic record, meeting UCC standards, grants the same legal rights as a traditional paper note to the person in “control.” The objective of “control” is for there to be a single authoritative copy of the promissory note that is unique, identifiable, and unalterable.  Therefore, proving authenticity and lender control over eNotes can be complex.

In Massachusetts, specific foreclosure laws require the presentation of the original note. Thus lenders should be cautious with eNotes, as possessing an original, physical note greatly reduces enforceability risks.

Further, financial institutions often face heightened scrutiny when using e-signatures due to the sensitive nature of financial transactions and the potential risks involved to ensure security, compliance, and consumer protection.

RECORDABLE DOCUMENTS:

E-signatures have become widely accepted for recording purposes, including in real estate transactions, due to their convenience and efficiency. The implementation of e-signatures for recording has been facilitated and standardized by legislation such as the Uniform Real Property Electronic Recording Act (URPERA).  While URPERA offers a comprehensive framework for electronic recording, its adoption varies from state to state. In Massachusetts, URPERA has not yet been formally adopted, leaving recording procedures subject to individual county regulations.

BEST PRACTICES:

Despite the legal recognition of e-signatures under both ESIGN and MUETA, to ensure compliance, organizations should adopt the following best practices:

1.    Obtain Consent: Obtain (and retain) affirmative consent from parties to conduct transactions electronically.

2.    Association: Establish a clear and direct connection between an electronic signature and the electronic record it is intended to authenticate.

o    Embedding: One common method of meeting the association requirement is embedding e-signatures directly within electronic documents.

o    Metadata and Audit Trails: Another method is using metadata and audit trails. Metadata contains signature details like signing date, time, signer identity, and transaction specifics. Audit trails chronicle all document actions, reinforcing the link between signatures and records.

 

3.    Ensure the Integrity of Electronic Records

o    Authenticity and Integrity: Use secure methods to authenticate the identity of signatories and ensure the integrity of the electronic records. This can include digital signatures, encryption, and secure access controls.

o    Single Authoritative Copy: For transferable records (eNotes), ensure that there is a single authoritative copy that is unique, identifiable, and unalterable except through authorized actions.

4.    Maintain Accessibility and Retainability: Ensure that electronic records are retained in a format that is accessible and readable for the required retention period. This includes being able to accurately reproduce the record in its original form.

5.    Security Measures: Implement robust cybersecurity measures to protect against unauthorized access, alteration, or destruction of electronic records. This includes using firewalls, encryption, and secure user authentication methods.

6.    Provide Consumer Protections: Ensure that consumers have the option to receive paper records and can withdraw their consent to electronic records at any time.

7.    Legal and Regulatory Updates: Keep abreast of any updates or changes in the legal and regulatory landscape regarding electronic transactions and records. Adjust policies and practices accordingly to remain compliant.

CONCLUSION:

While e-signatures offer significant benefits for modern commerce, including efficiency and convenience, their adoption requires careful consideration, especially regarding legal and regulatory compliance. By adhering to best practices and remaining vigilant, businesses and individuals can leverage e-signatures effectively in today’s digital economy.

A partner in the Boston firm of Sherin and Lodgen LLP, Beth Goldstein is a partner in the firm’s real estate department and chair of its renewable energy practice. She represents buyers, sellers, developers and lenders in both traditional commercial real estate transactions and those involving the purchase, sale, financing, leasing, and development of renewable energy projects.  Beth can be contacted at bgoldstein@sherin.com. 

Dustyn Marie Mascia is of Counsel in Sherin and Lodgen’s real estate department and a member of its commercial finance group. She represents financial institutions and other lenders in commercial and industrial, asset-based, commercial real estate, affordable housing, renewable energy loan and credit transactions.  Dustyn’s experience includes drafting and negotiation of loan and credit documents, interest rate swap documentation, participation agreements, and intercreditor and subordination agreements.  Her email address is dmascia@sherin.com.

 

 

 

Top Nine Issues in Solar Rooftop Leasing

Jennifer I. Connelly

Introduction:  Our country is undergoing a major transition to a clean, sustainable energy ecosystem that is dependent upon the integration of renewable energy resources into our existing energy infrastructure. One

of the most popular renewable integration strategies to date is the installation of solar photovoltaic systems onto rooftops of existing commercial and industrial buildings in order to sell clean energy to consumers. However, while this allows a building owner to facilitate the generation of renewable energy - and additional income - onsite at a property, few realize that there are a number of legal, financial and operational issues that must be addressed up front to ensure the long-term viability of each rooftop solar project. This article will walk property owners through the process of solar rooftop leasing and discuss how to navigate the risks and liabilities associated with these projects. If all of these items are considered and the parties involved commit to working together, this is an excellent opportunity to create additional revenue streams, benefit the environment, and maximize the usefulness of commercial property.

Industrial property owners in particular are increasingly turning to rooftop solar facilities to add value to their portfolios and maximize the profitability of their assets, as well as to increase renewable energy sources for the greater good. While the general principles of commercial leasing apply to rooftop solar leases, there are a few issues that are unique to solar rooftop leasing. 

Property owners looking to investigate rooftop solar should be aware of the following issues.

Typical Deal Terms:  Generally, the term of rooftop solar leases is between 15-25 years, and sometimes there are options to further extend. Rents can be fixed, but more commonly are calculated based on a dollar amount per megawatt of installed capacity, and sometimes may contain an escalation year over year if negotiated. Prior to commencing construction of the solar facilities, some landlords may require tenants to provide either a cash or letter of credit. The solar energy produced by the solar facilities may either be sold to an offtaker (sometimes a public utility company) or put into a community solar program, or the landlord could enter into a power purchase agreement with the solar tenant and provide the building with discounted electricity to reduce energy costs for building occupants. A decommissioning assurance provision is often required to secure the tenant’s obligation to remove the solar equipment at the end of the term, either in the form of a bond, letter of credit, or cash account, typically funded in the last five years of the lease term. The solar tenant will need several easements or license areas to support the installation of the equipment, including a ground area for a transformer pad, any necessary utility easements, and a construction laydown area to stage materials, the latter of which is temporary. One threshold issue to consider as a landlord exploring whether to enter into a solar rooftop lease is whether there are any third party approvals required, including without limitation consents needed from lenders or building tenants or joint venture partners; it is important to start a dialogue early on with any such stakeholders, including internal stakeholders at the landlord entity who may not be as prepared to take the risk of trying something unfamiliar with their asset management.

Ownership and Control of the Roof: Property owners need to be mindful of whether they have granted rights in the building’s rooftop to any of the building’s tenants. In multi-tenant buildings, generally, the landlord retains exclusive ownership and control of the roof, and in single-tenant buildings or ground leases, the roof may be under the tenant’s control, including maintenance and repair obligations. If the building tenant is responsible for the roof’s maintenance under the terms of the building lease, or if the building tenant leases the entire property (land and building), the landlord will need to amend the building lease to obtain control over the roof and take over the maintenance and repair responsibilities so that the landlord may legally lease the rooftop to the solar provider. 

Age of the Roof:  Many solar tenants are looking for a site with a brand new roof at the inception of the solar lease, since the term of the solar lease will be 20-25 years, and sometimes there are options to extend the term further. That said, however, the landlord will want to retain the option to replace the roof during the term of the solar lease in the case of emergency, and carve out opportunities to repair the roof during the term of the solar lease if that becomes necessary. If the roof is not new at the inception of the solar lease, but contains 10 or 15 more years of useful life, a building can still accommodate a solar facility, but landlords will need to negotiate with solar tenants in order to allocate the cost sharing of a mid-term roof replacement, as well as the mechanical and operational logistics of having to remove the solar panels from the roof and then reinstall them once the new roof has been completed. Additionally, some landlords may elect to pull forward roof replacements that had been planned for a few years away in order to accommodate the solar facility’s installation, which is also subject to negotiation. 

Integration with Existing Users of Building and Potential Future Users:  The solar tenant ought to accommodate any existing rooftop equipment, such as HVAC units, but landlords may wish to set aside additional areas for future equipment needs before the solar facility plans are set in stone. For example, landlords may envision future tenants requiring additional rooftop HVAC units during the term of the solar lease, and if so, it would be prudent to designate certain solar-free “reserve areas” in advance if a landlord wishes to plan ahead (though sometimes this is not necessary depending on the site specifics). 

Interference is another area to consider. Landlords generally prioritize the needs of their primary building tenants as these tenants are landlords’ main investment and income source. It is important for the rooftop solar lease to contain provisions that require the solar tenant to remedy any interference it may cause with the operations of the building tenants; sometimes this comes in the form of parking lot disputes. Also, building access should be dealt with appropriately in the solar lease; generally, solar rooftop tenants are limited to accessing the exterior of the building only, and access to the roof is by exterior ladder, but sometimes landlords will allow the solar rooftop tenant to access through the interior of the building if it is able to do so. If there is a power purchase agreement, then the solar rooftop tenant will need access to the building’s electrical room to tie into the building’s electrical system. 

Insolation (Let The Sun Shine):  Solar tenants require a certain degree of insolation assurance, which means they need to understand that sufficient sunlight will reach their solar facilities for maximum energy production. It is common for solar leases to contain protective language that landlords will not do anything to impair the sunlight or cast shadows over the solar facilities. Landlords should work to carve out certain rights that would preserve their autonomy and flexibility for leasing out their primary asset (the building), including the right to carve out existing rooftop installations and landscaping. Landlords will also want the right to relocate and increase the size of rooftop HVAC units in the event that a new building tenant demands greater HVAC capacity, recognizing, however, that the landlord may need to compensate the solar tenant for decreased insolation.  

Casualty Implications: Generally, if a building is materially damaged and the landlord does not have the obligation to restore it under other binding agreements (such as a building lease), then the landlord should have the right to terminate the solar lease.  In some instances, and as a compromise, language can be inserted stating that the parties will use best efforts to find an alternative location for the solar facilities; however, landlords generally cannot guarantee that a new location will be available.  If the landlord is obligated to rebuild the building, then it shall do so, and under this scenario, the solar tenant typically receives a proportionate abatement of rent during the time the roof is unusable. It is important for landlords to consider that they should not be forced to rebuild their primary asset (the building) just to satisfy the solar tenant.

Financing Friendly Provisions in Lease:  Given that solar developers are making such a large-scale, long-term investment in the solar facilities to be installed, tenants generally obtain leasehold financing from traditional lenders and equity from tax credit investors. The federal investment tax credit is currently 30% of most of the costs of the solar facility (which can increase to up to 60% if certain requirements for adder credits are met, such as using certain domestic equipment, or construction of solar facilities in certain low income areas or sites where fossil fuels previously dominated), which credit is taken over the first five years of the solar facility’s operation. Solar lenders and tax equity investors require the solar lease to contain several lender-friendly provisions, including notice and cure rights, and other terms more likely to be seen in a ground lease than a building lease, including the right to obtain a subordination, non-disturbance and attornment agreement (SNDA) from any landlord lenders. This is different from traditional commercial leases in which most tenants request, but are unsuccessful in obtaining, an SNDA from the landlord’s lender. 

Solar Tenant Owns The Solar Facilities:  Solar leases generally contain an extremely specific delineation of who owns what. The solar facilities, though possibly considered “fixtures” under property law, are expressly and exclusively owned by the solar tenant. In addition, solar leases also specifically delineate who owns (usually the solar tenant) the various “Environmental Attributes” and “Incentives” that are allocated to or generated by a solar facility, including carbon trading credits, renewable credits, tax credits, accelerated depreciation, etc. It is important to ascertain each party’s ownership of the various assets, and Environmental Attributes and Incentives. 

Interruption of Electrical Output / Lost Energy Revenue: The solar tenant generally will want assurance that it will be compensated for any time that the solar facilities are “down” due to an event caused by the landlord. The concept of “lost energy revenue” is often seen in solar rooftop leases. This represents the sum of all revenue that the solar tenant would have received from the sale of energy that would have been generated from the solar facilities, the revenue it would have received from solar incentive programs or rebates or assistance programs, and tax credits that the solar tenant would have received (or for recapture of the tax credits). It is not uncommon for the solar tenant to give the landlord a certain fixed number of days (or kilowatt hours of production) each year for the landlord to make repairs without having to pay the tenant the lost energy revenue. This is an important concept to protect the solar tenant from downtime caused by the landlord’s actions, as the solar tenant also has obligations to whoever is purchasing the power and to its financing parties and tax equity investors. 

Conclusion:  In conclusion, the risks and rewards of solar rooftop leases are many, but with an understanding of the various intricacies of the market and with the advice of experienced counsel, industrial property owners can undertake these transactions with confidence and contribute to the reduction of carbon emissions and make some additional income at their properties while they are at it. 

A partner in the Renewable Energy Group of the Boston law firm of Sherin and Lodgen LLP, Jennifer Connelly possesses broad experience in real estate acquisitions, development, leasing, and financing. In particular, Jen represents retailers, developers, and institutions on all aspects of commercial real estate transactions. Jen’s email address is JiConnelly@sherin.com.

This article was originally published by the Massachusetts Chapter of NAIOP.