As the UK remains partly dependent on imports of fossil fuels to run its power stations, electricity prices are likely to remain high, susceptible to geo-political issues, and may remain so until the UK achieves energy security from locally sourced generation where renewables will play an increasingly significant role. The government’s September 2024 update on energy trends revealed that in the first two quarters of 2024, solar photovoltaics – or solar panels – represented over 80% of added renewable energy capacity in the UK.

Given this backdrop, businesses are also turning to renewable alternatives to power their properties by installing rooftop solar arrays.

Financially for a landlord this can be quite attractive. We are seeing returns on investment typically aimed at the 7-to-10-year region and if the lease mechanics offer a willing tenant, suitable lease term and physical building size and structure then it may be an attractive proposition. In this scenario the landlord would typically pay for the installation and recover the cost by charging the tenant for the solar generated electricity that it consumes. A pricing mechanism can ensure the solar price floats at a margin beneath the mains grid price so the tenant is always incentivised to draw power from the solar array. The landlord will recover the cost either as a utility charge or factored into the lease as an additional rent. The parties should however avoid any discussions of exclusivity as it will be necessary for a tenant to maintain a grid connection to cover any gaps in the solar supply.

Any solar surplus can be sold to the grid however there may be a greater price incentive for tenants to soak up additional power by the installation of electric vehicle charge points for their own vehicle fleet or battery storage for discharge at peak times. Certain funds acting as landlords should also consider their tax liabilities in case any significant supply to the grid outside of their property undertaking affects their tax position. The mechanics of the proposal will need to dovetail with any new or existing lease arrangements. For a landlord installation consideration must be given as to whether the roof structure been demised to the tenant and who controls the airspace above. A tenant will no doubt expect any enhanced insurance costs, maintenance, repairing or reinstatement obligation to remain with the landlord. Care must be exercised to ensure the installation doesn’t invalidate any roof warranties although mounting the array on racking systems has proven to be a way of minimising roof penetrations.

Tenants are also keen to ensure their alienation opportunities are not adversely affected. Recovering the power costs under the lease means the obligation continues under an assignment, however where the parties enter a separate power purchase agreement, care should be taken that imposing a new agreement as a condition of assignment doesn’t fall foul of s19(1A) of the Landlord and Tenant Act 1927. It may after all prove essential for a landlord to ensure the continuity of tenant supply. As the solar market begins to mature, some of the installation variables are starting to level out. China dominates the global supply chain of panel hardware where large-scale manufacturing has enabled prices to fall whilst photovoltaic conversion efficiencies have improved and will continue to do so as new technologies are introduced which continue to enhance the proposition.

Authored by Paul Stones.