The development of most commercial solar photovoltaic systems follow a similar path. A Solar Developer either directly or indirectly provides the engineering, design and construction of the system, and also is responsible for securing a location and a buyer for the system’s output. Specifically, solar developers generally must secure 3 agreements with third-parties:
1. a power purchase agreement (a “PPA”) with a buyer of the electricity the solar system produces (an “Offtaker”), which among other things, establishes the purchase price (usually a specific dollar amount per kw/h produced);
2. a long-term site lease for the property that the system will be built on with a suitable landlord; and
3. a finance agreement with a Bank or Investors (I’ll refer to Banks and Investors as “Bank” for the remainder of this article) to finance the construction of the solar project (usually as a true lease or tax flip)
Solar Developers know that the shorter the PPA and Site Lease are, the quicker the Offtaker and Landlord will sign them. For this reason, Solar Developers often try to remove unnecessary legal language to shorten the agreements. However, sometimes Developers remove terms that they think are unimportant, only to have to go back and ask the Offtaker or Landlord to agree to amendments, which slows everything down and often requires concessions.
Banks will make sure that the solar project agreements provide robust legal protections before they will fund the project. During the due diligence process, lawyers will comb through the PPA and Site Lease for key terms. When these key terms are missing, the project will not be funded until the Solar Developer goes back and has them added. This requires having the Offtaker and Landlord agree to amend the original PPA and Site Lease, and gives the parties an opportunity to renegotiate the terms, often to the detriment of the Developer. At the very least, having to go back and get an amendment takes time, and can hold up the project for weeks, sometimes months.
There are 6 legal terms that Solar Developers often cut out that Banks will always need to see. They are: (1) “Consent to Collateral Assignment”, (2) “Lender Step-In Rights”, (3) “Representations and Warranties”, (4) “Subordination, Non-Disturbance, and Attornment”, (5) “No Encumbrance”, and (6) “Recording the Short Form Lease”. Each will be explained below.
1. Consent to Collateral Assignment
Banks will want their money back if a Developer defaults. The best way to ensure that happens is for the Bank to take over the project and collect the PPA revenue payments directly. “Collateral Assignment” enables this by pledging the PPA, Site Lease and other project documents as collateral to the finance agreement. Most importantly, the Offtaker must explicitly consent to the assignment to the Bank. Without consent, the Offtaker could argue that the PPA and Site Lease are invalid if the finance party takes ownership of the agreements (basically arguing “Our agreement was with the Developer, not the Bank”). As a result, Bank lawyers will always require “Consent to Collateral Assignment” to be included in each agreement.
2. Lender Step-In Rights
“Step-In Rights” should be included as part of the “Consent to Collateral Assignment”. They outline when and how the Bank can step-in if the Developer defaults on or violates the PPA and/or Site Lease. In essence, this allows the Bank to cure a default on the Developer’s behalf without the Offtaker being allowed to terminate the agreements, despite the Developer breaching them. This provides an additional backstop for Banks if the Developer defaults, and is why lawyers will require “step-in rights” to be included in the agreements.
3. Representations and Warranties
Both the PPA and the Site Lease should provide for certain Offtaker and Landlord representations and warranties. Among these, Banks will always require the following be included: (1) “Formation”, (2) “Authority”, (3) “No Violations or Defaults”, and (4) “No Third-Party Rights”. Collectively, these representations and warranties provide the following:
1. Confirms that the Offtaker is a valid and duly formed entity
2. Confirms that the Offtaker and the individual(s) representing the Offtaker are authorized to enter a PPA and/or Site Lease
3. Confirms that the Offtaker is not violating or defaulting on other agreements by entering the PPA and/or Site Lease
4. Confirms that the agreement is only between the Offtaker and Developer
Many lawyers and some non-lawyers may feel like these are obvious representations. However, if they turn out to be untrue, then the entire agreement may not be enforceable. For that reason, Bank’s lawyers will demand to see them.
4. “Subordination, Non-Disturbance, and Attornment” (SNDA)
In most cases the property owner has a mortgage on the property. In the event of foreclosure, the mortgage-holder will seize the property which could put the solar facility in jeopardy. The SNDA states that the solar facility will not be seized during or after the foreclosure process. In general, mortgage-holders will have a claim to all personal property and fixtures located on the property in question, so Banks will require mortgage-holders explicitly agree to the SNDA. The actual SNDA agreement is typically separate from the PPA or Site Lease, and is often required on systems larger than 250 kW. Savvy Developers should include a clause in the PPA and Site Lease that require delivery of an SNDA. In many cases, Bank’s will not approve construction until this is complete, so starting this process early is critical.
5. “No Encumbrance”
To secure funding, Developers will pledge the solar system as collateral to the Bank. “No Encumbrance” says that the Offtaker will never pledge the Developer’s solar system as collateral for their own debts. This insures that the solar system will not have any competing liens. Lien disputes can be drawn out and expensive, and Bank’s lawyers will want to avoid that situation and will require a “No Encumbrance” provision.
6. “Recording the Short Form Lease”
“Recording a Short Form Lease” is a term that should be included in the Site Lease. It permits the recording of an abbreviated version of the Lease, or “Short Form”, in the public real estate records. This puts the world on notice that the Developer has leased the property for the term of the PPA (The Site Lease’s term should be as long or longer than the PPA’s term, usually around 20 years). As a result, if the landowner sells or leases the land, the Developer’s lease will have senior rights. In other words, a new buyer can’t invalidate the Developer’s lease. The landlord must consent to the recording, and the Site Lease should include a “Short Form Lease” as an attachment.