Solar leases are set to become common instructions for Scottish transactional lawyers as the move towards net-zero continues. This is a positive trend and this article outlines considerations for landlords and tenants alike.
Here Comes the Sun
Per head of population, Scotland is leading the UK's renewable revolution; our electricity generation is now equivalent to approximately 90% of our electricity consumption, yet our solar offering represents less than 5% of all renewables in Scotland. It is fair to say that we are gifted with much more wind and rain than sun, and that may explain the lack of uptake in solar leases and production of solar technology, but the reality is that in Scotland there is much less competition for land, a less dense population and a large number of rural communities who would benefit significantly from a broader reach in solar technology than might be the case in the rest of the UK.
Solar developers face a number of hurdles in Scotland with the lack of permitted development rights available north of the border, coupled with business rates creating an additional tax burden, making for a less appealing prospect. However, with significant investment into Scottish grid infrastructure for the deployment of wind, there is an enormous untapped potential for solar power should National Grid/District Network Operators (“DNOs”) recognise the compliment that solar power can offer wind power, when there is such an enormous demand, lack of supply, and spiralling costs.
Scotland is excellently placed to grow solar energy to more than 10 times the current levels, to help reach our net-zero ambition and create thousands of jobs for skilled workers.
What is a solar lease?
A solar lease is, in most cases, a ground lease specifically designed to allow a solar farm to operate on the land being leased. The infrastructure required to operate a solar farm is quite simple and much less obtrusive than, for example, wind turbines. The lease will generally be for a fairly significant term in excess of 20 years. The operator will require connection to a substation and facilities to connect into the grid. How that will be facilitated, and any necessary arrangements with DNOs (including rights to call for direct leases), are key considerations for developers.
Rent is usually structured as a base rent plus an additional rent linked to installed capacity, with provision for review and potential index linking given the current market and the length of the term - all quite similar to a wind farm lease.
Solar farms are typically made up of panels of photovoltaic (“PV”) cells arranged together in arrays (“the solar PV”). The solar PV are mounted on structures that allow them to be directed towards the sun. These structures, with an inverter (to convert the electricity from direct current to alternating current), meters, battery storage system, and cables linking the components together form the PV System.
A PV system can be small or large, and used for powering a single property, many properties, or for the purposes of exporting electricity to the grid.
What duties are the parties under?
The nature of the property will dictate what practical considerations the parties will have to address when setting out their respective obligation in the lease: a PV System installed on a rooftop under a solar lease will, for example, have different access requirements from one installed under a solar lease of a field that was previously used for agricultural purposes.
The landlord and tenant will be required to conduct themselves in a manner consistent with their contractual lease relationship. The tenant will be expected to pay rent and, where appropriate, service charge; rates to the local authority; not to use the property for anything other than the use permitted under the lease; repair and maintain the property and the PV System; and obtain consent from the landlord, where necessary, to carry out works, repairs, or alterations.
The Landlord will be required to maintain its wider property to a level that allows the tenant to use the solar farm for the permitted use, not to damage or interfere with the tenant’s use of the property or the PV System. There is obviously considerable focus on any factors which may influence the light to the solar farm, and the parties should look to agree at an early stage, the parameters for this. For example, no-build zones within the vicinity, height of neighbouring buildings, and the potential effect on future neighbouring development plans should all be considered and set out clearly in the lease.
These duties must be observed throughout the term of the lease but the degree to which the parties have observed them will dictate their respective obligations and rights at the end of the lease.
Don’t let the sun go down on me
There is no reason to expect any unique obligations on the parties in a solar lease when it terminates. When the end of a solar lease is approaching the parties will have the same concerns as under any other lease.
Solar leases may contain a clause allowing for the tenant to seek an extension. If the installation of a PV system on a particular property has proven to be profitable a tenant will no doubt look to take advantage of such an opportunity. Landlords and tenants should give careful consideration to those provisions when negotiating the lease at the outset to ensure that they have appropriate rights to ensure acceptable extension terms when expiry of the original term approaches.
Whilst the rules regarding termination of leases in Scotland may be subject to change in the near future, at present a landlord or the tenant would be required to serve a valid notice to quit in order to terminate a solar lease at its contractual expiry. Failure by either party to serve such a notice may allow the lease to continue on the same terms for a further year, under a common law principle called tacit relocation.
The condition of the subjects is something a landlord would seek to review in anticipation of the lease coming to an end. The installation and operation of the PV System will have an impact on the condition of a property, and a tenant would typically be expected to make good any damage caused during installation, over the term of the lease, or during the removal of the PV System at the end of the lease. If the tenant fails to repair, this could form the basis for a dilapidations claim by the landlord against the tenant.
Lawyers and clients will have to be live to the requirements of tenants and landlords under solar leases as more of them come into operation in Scotland.
For more information on the operation and legal implications of solar leases in Scotland and Solar PV in general, contact your regular CMS advisor or local CMS experts.