Pennsylvania Realtor Transaction Alert: Solar Panel Systems

Background

One outgrowth of the ever-increasing focus on climate change and the touted benefits of renewable energy in America today has been the rise of solar energy businesses marketing solar panel systems to residential homeowners. Confronted with increased costs of electricity, these homeowners may, for the first time during their home ownership, view solar panels as an investment worth considering. Homeowners are told that the system will substantially lower their electric bills, they will receive tax credits, and if purchased and financed, the system may pay for itself in a comparatively short time.

Types of Solar Transactions

• A typical residential solar transaction can take one of three forms, all of which involve the installation of the solar panel system on the roof of the home and the execution by the homeowner of a long-term agreement with the solar entity, often for a 25-year term:

1. Sale – the solar panel system is sold to the homeowner by an entity that arranges for the installation and often arranges financing of the purchase by a lending entity without a down payment, i.e., 100% financing. The seller-installer and lender are typically two different entities but typically work collaboratively.
2. Lease – the solar panel system is leased by a solar entity to the homeowner under a lease with monthly rental payments.
3. Power Purchase Agreement (PPA) – the solar entity retains ownership of the solar panel system, does not lease it but instead the homeowner agrees to purchase electricity generated by the system.

• In connection with these transactions, the solar entity usually will file a Uniform Commercial Code financing statement (UCC-1) reflecting a security interest it has in the solar panel system only (not the homeowner’s property).
• A warranty is provided on the solar panel system.

Impact on Purchase and Sale Transactions

Solar panel system agreements can greatly impact the purchase price of a home and the timing of settlement. Specifically:

• System is Owned by Seller – if the system is owned by the seller, the seller can transfer the agreement(s) relating to the solar panel system (including the balance of the warranty) if the buyer meets the solar entity’s credit requirements.
• System is Leased or Covered by a PPA – if the system is leased by the seller or the seller is a party to a PPA, the seller has three options:
  • To transfer the PPA to the buyer if the buyer meets the solar entity’s credit requirements, in which event the buyer will assume all of the seller’s rights and obligations under the PPA including the obligation to purchase electricity and make monthly payments and receive the benefit of the balance of the warranty. Otherwise, the seller will need to pay off the financing at settlement.
  • To prepay this Power Purchase Agreement and transfer only the use of the system, in which event the buyer will only need to sign a transfer agreement to assume the seller’s rights and non-monthly payment obligations under this PPA and receive the benefit of the balance of the warranty. The amount of the prepayment can be substantial e.g., in excess of $25,000.
  • If the seller is moving to a new home in the same utility district, where permitted by the local utility, the system can be moved to the new home, but the seller will need to pay all costs associated with relocating and redesigning the system, execute and provide the same access and ownership rights to the solar energy as provided for the PPA.

Whether a buyer is willing to assume the agreement(s) with the solar entity is a critical factor in evaluating offers, particularly given that agreements could be in effect for many years after settlement.

Seller’s Property Disclosure Statement

The existence of the solar panel system and the type of agreement relating to the system must be disclosed in the Seller’s Property Disclosure Statement.

Many homeowners have encountered difficulties with solar energy entities regarding the solar panel systems including:

• Non-performance or underperformance
• Shoddy installation resulting in leaking roofs
• Damage to the home
• Failure to honor the warranty
• Lack of customer support – non-responsiveness

If any of the foregoing exist, it should be disclosed in the Seller’s Property Disclosure Statement.

• A copy of the seller’s agreement(s) with the solar entity should be given to the buyer.

Practice Tips

If there is a solar panel system on a house:

• Make full disclosure of all relevant information to prospective buyers and provide a copy of the agreement(s) between the seller and the solar entity to prospective purchasers.
• Have the agreement(s) relating to the solar panel system reviewed by an attorney familiar with such agreements as the lack of understanding of the type of agreement could be very costly and possibly result in liability exposure to the seller, the buyer, and their respective real estate agents. A seller should not sell a home only to learn after settlement that the they remain obligated to make payments to the solar energy entity.
• Have the title company conduct a UCC search.
• The Pennsylvania Association of Realtors’ standard form agreements do not yet contain provisions relating to solar panel systems. The inclusion of such provisions may be necessary.
• If the seller has not communicated with the solar entity regarding transfer procedures, including prepayment amounts, before signing a listing agreement has been signed, the seller should begin those communications immediately
• Clearly determine whether the prospective buyer is willing to assume the seller’s obligations under the agreement(s) relating to the solar panel system.

About the Author- Biz Law

John F. Lushis Jr., Member of the firm and Co-Chair of the Economic Development Law Practice, focuses on real estate, commercial transactions, and economic development law. He advises on leases, acquisitions, financings, and commercial agreements, representing businesses and non-profits like Lehigh University and Lehigh Valley Health Network.

John has extensive experience with tax-exempt financings, tax increment financing projects, and public-private partnerships (P3), including leading a groundbreaking P3 project in Pennsylvania that inspired statewide legislation. He also counsels on solar leases for green energy projects and provides environmental legal support to businesses.