Solar Developers know that the shorter they make the PPA and Site Lease, the quicker the Off-Taker will agree to them. Obviously, taking out unnecessary legal language to shorten these agreements is good. However, we often see Developers remove terms they think are unnecessary, only to see the Bank or investors later demand those same terms be included. This forces the Developer to go back and ask the Off-Taker to agree to the amendments, which slows everything down and often requires concessions. The better path is to add these terms at the onset. This article covers six legal terms that Developers should always keep in their PPA and Site Lease.
Why Keep?
Before project funding, the Bank makes sure the project has robust legal protections. During this process, lawyers look for the PPA and Site lease to include the same terms that Developers sometimes mistakenly remove. When missing these terms, the project won’t be funded until the Developer goes back and adds them. At best, this adds months until the project finally closes. At worst, it gives cause for the Off-Taker to renegotiate other contract terms, like the PPA rate.
The Six Terms
There are six terms that Developers often cut out that the Bank’s lawyers 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 is explained below.
1. “Consent to Collateral Assignment”
The Bank wants their money back even if the Developer defaults. The obvious way to do that is for the Bank to take over the project and collect the PPA revenue. “Collateral Assignment” enables this by pledging the PPA and/or Site Lease as collateral to the Bank’s loan. Importantly, the Off-Taker must explicitly consent to the assignment. Without consent, the Off-Taker could argue that PPA and Site Lease are invalid if the Bank takes ownership of the agreements. They could say, “Our agreement was with the Developer not the Bank”. Thus, the Bank’s lawyers require “Consent to Collateral Assignment” to be included in each agreement.
2. “Lender Step-In Rights”
“Step-In Rights” are included as part of “Consent to Collateral Assignment”. They outline in what ways the Bank can step-in if the Developer defaults on or violates the PPA and/or Site Lease. This essentially means that the Bank can cure a default on the Developer’s behalf. If that happens, the Off-Taker can’t terminate the agreements despite the Developer breaching them. This provides additional protection if the Developer defaults. Thus, the Bank’s lawyers require “step-in rights” to be included in the agreements.
3. “Representations and Warranties”
There are four terms within “Representation and Warranties” that should never be taken out. They are (a) “Formation”, (b) “Authority”, (c) “No Violations or Defaults”, and (d) “No Third-Party Rights”.
- (a) Confirms that the Off-Taker is a valid and duly formed entity.
- (b) Confirms that the Off-Taker and individual representing the Off-Taker are authorized to enter a PPA and/or Site Lease.
- (c) Confirms that that the Off-Taker is not violating or defaulting on other agreements by entering the PPA and/or Site Lease.
- (d) Confirms that the agreement is only between the Off-Taker and the Developer.
Yes, these are pretty obvious representations. However, if they turn out to not be true then the entire agreement could be unenforceable. That’s why the Bank’s lawyers demand to see them. When missing, the Developer must go back and have the Off-Taker certify in writing that each of these points are true.
4. “Subordination, Non-Disturbance, and Attornment” (SNDA)
In most cases, the Off-Taker has a mortgage on their property. In the event of foreclosure, the mortgage-holder will seize the property from the Off-Taker. The SNDA states that the solar system will not be seized in this process. The mortgage-holder must explicitly agree to this. The SNDA is separate from the PPA and Site Lease but is customarily required as a condition in either agreement. The Bank typically requires an SNDA in any system above 250kW. The Developer should include a clause in the PPA or Site Lease that obligates the Off-Taker to deliver the SNDA. The Bank won’t permit any construction until this is complete. Approval takes months, so starting the process early is critical.
5. “No Encumbrance”
To secure funding, the Developer pledges the solar system as collateral to the Bank. “No Encumbrance” says that the Off-Taker will never pledge the Developer’s solar system as collateral for their own debts. This insures that the solar system won’t have any competing liens. Unsurprisingly, lien disputes can be complicated and expensive. The Bank’s lawyers want to avoid that outcome, so they require a “No Encumbrance” provision.
6. “Recording the Short Form Lease”
“Recording the Short Form Lease” is a term only included in the Site Lease. It records an abbreviated version of the Lease, or “Short Form”, on public record. This puts the world on notice that the Developer leased the property for the next 20 years. As a result, if the landowner sells or leases the land, the Developer’s lease still has senior rights. In other words, a new buyer can’t invalidate the Developer’s lease. Importantly, the Off-Taker must consent to the recording. The Site Lease should include the “Short Form Lease” as an attachment.
Don’t Forget These Terms
We understand that Developers only want to include what’s necessary in their PPA and Site Lease. The six terms covered in this article absolutely fall under that category for Investors. Admittedly, these terms do make the PPA and Site Lease a little longer and slow down the project’s front end. The upside though? On the back-end, funding the project is far quicker and less stressful for the Developer.
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