Protecting Your Solar PPA From Seizure In Foreclosure
Solar PPA developers recognize host facility foreclosure is their big risk. The impact of that risk is bigger than many PPAs realize. Unless your PPA is set up right, a foreclosure does not just mean lost revenue. The foreclosing bank may be entitled to keep the solar as part of the building. Below are a few tips on how to avoid this devastating result.
Foreclosure Law & Rooftop Solar PV
Before explaining how solar PPA (Power Purchase Agreement) developers can protect themselves, let’s begin with a few basic legal principles. Most building owners are still paying off a mortgage on their building. They got that mortgage by offering their building as collateral to the bank. If the owner falls behind on his payments, the bank can foreclose on the building. Now here’s the scary part: When a bank forecloses on a property it gets to take the land, the building, and all the permanent fixtures attached to the building. Our focus is on this last part: permanent fixtures.
When many PPA developers think about foreclosure they understand they’ll lose the ongoing energy payments, but they assume they’ll be able to salvage some value by repossessing the solar. That is not necessarily the case. If the solar PV is deemed a “fixture” on the building, then the foreclosing bank may get to keep the solar just like it gets to keep the HVAC, carpet, and water heaters.
In other words, the PPA is facing an entire wipe out if the bank forecloses.
To put it simply, in a foreclosure:
1. If the solar is a fixture, the foreclosing bank may get to keep it.
2. If the solar is separate property (also called “personal property” or “chattel”), then the PPA developer get to repossess it.
“Is Solar A Fixture” Test
To determine what is a “fixture” vs “separate property,” there is a common sense definition and then the official three part test. The common sense approach helps understand the point of the test but, when structuring deals the PPA developer must build-in facts supporting each element of the technical test.
The common sense breakdown:
Separate Property (aka Chattels) are movable possessions and separate property. These are usually items that can be removed without injury to the host building.
Fixtures are improvements or items of separate property on the premises of the business that are attached to the host building, making them part of the building.
The technical test: Courts weigh three criteria to determine if something is a fixture:
1) Permanent Attachment:
The degree the solar is permanently attached?
Solar can be actually or constructively affixed to the building. Actual attachment can be through many means, such as, nails, bolts, adhesives, moldings, ties and other fastening. Even if the solar is not physically attached, it can have constructive attachment for example, when it permanently rests upon the building and is necessary for use of the building.
The degree the solar is adapted for the use at that particular building.
Solar will have a high degree of building-specific adaptation if:
(a) it is an integral and indispensable part of the building;
(b) it would damage the building if severed;
(c) the solar is highly customized in fabrication or installation to meet the specific criteria of the building where it is installed.
(3) Parties’ Intent:
Whether the parties (i.e. the building owner and the PPA company) intend the solar to remain separate property or to become a fixture is very important. The parties intent to keep it separate will control, unless the solar has been so absorbed into the building that its identity as separate property is lost.
The clearest way to show intent is for the lender/vendor and the building owner to agree in writing that the item is not to be treated as a fixture. This express intent will be the most important factor in the three part test, unless the solar’s separate identity is lost through its use. The separate identity can be lost when the solar cannot be removed without practically destroying the solar or the building, or when the solar becomes essential to support the structure to which it is attached.
Quick Application of the 3 Part Test: Solar Hot Water Systems
The law has not yet caught up to the solar industry. In one of the few court cases remotely addressing whether solar is a fixture, the court ruled that a solar thermal hot water system was a fixture. In reaching that conclusion, the court applied the three part technical test as follows:
1. Is it permanently attached?
Yes. The solar thermal system was permanently attached by bolts and connections to the building’s plumbing.
2. Is it adapted to the building?
Yes. The court found the solar water heater was specifically manufactured and fabricated for use with that specific building.
3. Did the parties intend it to be permanent?
Yes. The court said, if “the parties had intended the solar water heater to perform a temporary task, measures would have been taken to assure its easy removal from the [building].” Instead, the solar water heater was fastened with bolts, connected to the plumbing, and holes were drilled in the structure.
Of course, any solar PPA developer knows solar hot water is far more embedded in a building than rooftop solar PV. The key, however, is making sure your deal has the right facts to prove that to a court. So, now we’ll go over a few tips for generating those favorable facts.
Keeping Solar From Becoming A Fixture
The best way to protect your solar from being deemed a fixture is to design both the transaction and the installation for repossession. First, clearly articulate in deal documents that you have the right to remove the solar at the end of the PPA term or any time after default. Second, use plug and play installs instead of custom configuring each rooftop design, so that it can be redeployed at a later site. Third, design the array to be quickly removable without damaging the rooftop when it is gone. All deal documentation should acknowledge all of these efforts, to make clear your intention.
Let’s walk through the three part test to see how this works:
1. Is the solar system permanently attached?
It is hard to envision a commercial rooftop install that you could say for certain would not be considered permanently attached by a court. However, the degree of permanent attachment matters. Building integrated installs, such as glued on thin film sheets, will be hard to escape treatment as a fixture. On the other hand, ballasted systems with minimal attachments create a stronger argument that it retained a separate identity.
You can protect yourself by specifying how the different components will be treated. Parts of the installation can be fixtures, and other parts (i.e. the panels) can be separate property. There are a few things you can build into the system design to do this. Design a rooftop attachment that can quickly release the panels and racking. Agree in advance that in a repossession the attachments will stay and the panels go. Make sure to spell out which components stay, and which go. You could also set it up so that the permanent components are installed under a sale of goods to the building owner, while the separate property is installed temporarily under the site lease and power purchase agreement.
2. Is the solar adapted to the building?
Designing the system to be removed helps avoid the adaptation test in many ways. Here are three examples of how:
First, use a plug & play design, meaning it will work on any rooftop. Do not custom engineer the racking to fit around obstacles on the roof. Do not custom fab any components to satisfy the needs of just that building.
Second, use an installation method that does not damage the building upon removal. If you drill holes, have an agreed plan with the owner as to how they will be filled upon removal.
Third, build in components needed to remove the array. For example, add hoist hooks to frames so that the array can be removed by a crane. Use quick release wiring hooks that let you take the panels but leave the permanently affixed wiring conduits.
3. Did the parties intend the solar installation to be permanent?
The intent test asks “what did the parties intend,” and then was that intent trumped by using the item in a way that loses its separate identity. The steps above should help show the separate identity of the solar was not lost once installed. To show the parties’ intent, make sure all the deal documents consistently treat the solar like it is *not* a fixture.
This can involve a number of steps, including:
1. The site lease and PPA should have a provision where the building owner expressly states the solar is not a fixture.
2. The end of term removal provisions should be spelled out.
3. The steps the PPA provider must take to repair the roof upon a repossession or end-of-term removal should be defined in advance.
The PPA developer should record other facts that demonstrate that the solar is temporarily placed on that building’s roof. For example, it could:
1. Show how the solar racking was designed to comply with building codes in multiple jurisdictions.
2. Show a pattern of removing and redeploying other systems.
3. Document when components of the array are swapped out for repairs or efficiency upgrades.
Perfecting Your Interest
The final step is called “perfecting” your security interest. In other words, even if you’ve taken sufficient steps to ensure your solar will be treated as separate property, you’ll still need to put future purchasers and lenders on notice that you have the senior security interest in the solar. There are a number of options for doing this, including:
1. Recording an abstract of the site lease in the real property chain of title.
2. Filing a Financing Statement on the solar.
3. Filing a Fixture filing on the permanent attachments.
There a many different ways to perfect your security interest, and the process varies from state to state. The methods, strategies, and issues are complex, and outside the scope of this article.
Conclusion: Nothing Is Certain
Remember none of this is a guarantee. Solar PPAs and new efficient rooftop installation methods do not fit neatly into pre-existing buckets under the law. Existing law is based on older technologies that are not 100% analogous to the solar PPA model. Until the law settles on how to treat commercial solar PPA situations, the best advice is to the follow the basic principles from prior cases. Hopefully doing so will eventually lead to a clearer set of standards that solar PPA developer can follow to avoid a complete wipe out during a host facility foreclosure.
About The Authors
Brandon Conard is the CEO/General Counsel of Greenzu, specializing in financing commercial solar PPAs and solar leases. His expertise includes commercial energy analysis, solar fund structuring, and project finance. Previously, he led BlueMap’s energy research and engineering team providing advanced clean-tech purchase analytics to large commercial properties. As former Weil, Gotshal, & Manges attorney, Mr. Conard also understands the changing energy, tax, securities, construction, and environmental hurdles every solar project must clear. He’d love feedback on this article. Send it to [email protected]
Matt Kenefick s an attorney at the firm of Jeffer Mangels Butler and Mitchell LLP, whose practice area includes real property and insolvency matters. Send him questions at [email protected]