The Real Estate Law Issues of Solar Energy

By Geoff White and Julio Driggs

The growth of the green building movement, prevalence of government incentives and mandates and increased utility costs have resulted in a significant increase in the use of solar power in businesses and homes.  The decision by owners of commercial and residential real estate to install photovoltaic (“PV”) systems is made for a variety of reasons. Some want to preserve fossil fuels and reduce air pollution. Some want to invest in an energy producing improvement to their property. Still others like the independence of a solar system, making them less vulnerable to increases in energy prices. A number of government incentives have also helped spur the growth of the solar market.  The increased interest in solar energy has created certain real estate law issues, including: the creation of solar easements, concerns regarding the enforcement of restrictive covenants, and compliance with zoning and building codes. This article will first examine recent federal government incentives that have aided the solar market and then consider the specific legal issues detailed above.

Federal Government Incentives

On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008, which, among other things, extended tax credits for solar energy systems. The tax credits apply to both residential and commercial solar installations for 30% of the cost of a system “placed in service” from January 1, 2006 through December 31, 2016. This energy investment credit also provides businesses with a 5-year accelerated depreciation for the cost of equipment used to generate solar electricity. With the 8 year extension of the solar investment tax credit, the solar industry is projected to gain 440,000 permanent jobs and $325 billion in investment by 2016.

President Obama signed the Recovery Act into law on February 17, 2009. It provides a personal tax credit for the purchase of qualified solar electric property and defines qualified solar electric property as property that uses solar energy to generate electricity for use in a dwelling. The credit is equal to 30% of qualifying expenditures, and there is no cap. The credit applies to systems placed in service prior to January 1, 2017. Expenditures for labor costs, including onsite preparation, assembly, or original installation of the solar electric property are eligible for the credit.

The Recovery Act also allows individuals and businesses to qualify for the full amount of the solar tax credit, even if projects receive “subsidized energy financing.” The term subsidized energy financing means financing provided under a federal, state, or local program whose principal purpose is to provide subsidized financing for projects designed to conserve or produce energy. A multitude of states offer such additional tax incentives for solar systems which include, sales tax exemptions on the purchase of solar systems, property tax exemptions, state personal income tax credits, solar rebates, or net metering programs, which enable system owners to sell excess power generated by their system to the utility.

Additionally, the Recovery Act provides developers a choice of either taking a 30% tax credit or applying for a grant for 30% of the project cost from the Treasury Department for PV systems, however, in order for a project to be eligible for such funds, construction must start in 2009 or 2010. The Recovery Act also expands the existing 30% solar investment tax credit to include solar manufacturing equipment. Solar manufacturing equipment is equipment used to produce solar material and components, such as, solar cells, silicon, solar collectors, and evacuated tubes. The aim of this incentive is to create an American solar manufacturing base and to maximize domestic job opportunities in the solar industry.

Solar Easements

As more businesses and homeowners use solar energy systems, solar access, the availability of sunlight to reach a building’s solar panels becomes an important consideration. Solar panels must be exposed to unobstructed sunlight in order to operate as efficiently as possible. As a result, guaranteeing access to sunlight becomes an important issue for properties with PV systems. Accordingly, the owner of a PV system must have an assurance that sunlight can reach their system. Owners of a PV system should thus consider creating solar easements.

According to Black’s Law Dictionary an easement is, “an interest in land owned by another person, consisting in the right to use or control the land, or an area above or below it, for a specific limited purpose.” Solar easements must be in writing and are subject to the same recording and conveyancing requirements as other express easements. An easement does not give the holder a right of possession, only a right of use for a specific purpose. Easements may be categorized as being either affirmative or negative. An affirmative easement entitles the holder to do something on another individual’s property, whereas a negative easement bars the property owner from doing something on their own property. A solar easement is a negative easement because it restricts the property owner’s building, improvements, trees, or landscaping. Solar easements are generally defined as an easement obtained for the purpose of exposing solar energy systems to direct sunlight. More than 35 states have enacted legislation regarding the creation of solar easements.

Solar access issues generally involve the presence and height of neighboring trees, and the height and setback requirements of neighboring buildings. Thus, owners should attempt to negotiate solar easements with their neighbors before these issues arise, if possible. One owner should attempt to receive assurances from the other that the sunlight that travels over the neighbor’s property will not be obstructed by said neighbor’s trees, landscape or improvements. Therefore, the easement shall require the neighbor, and all subsequent owners, to be restricted from building improvements or planting trees or landscaping which could obstruct the sunlight. It should also include: (1) a description of the dimensions of the easement, (2) the restrictions placed on structures, vegetation, and other objects which would obstruct the passage of sunlight through the easement, and (3) the terms and conditions, if any, under which the easement may be amended or terminated.

It is important to note that a solar easement could negatively affect the future property values of the neighbor that grants it, and that solar easements may have to be negotiated with several neighbors in order to guarantee solar access throughout the day and year.

California’s Solar Shade Control Act, enacted in 1978 (the “Act”), is the strongest solar easement law in the country in protecting owners of PV systems. It provides protection to solar system owners from shading caused by trees and shrubs on adjacent properties. Under the Act a person is guilty of a public nuisance as defined in the California Penal Code if that person fails to remove or alter a tree or shrub after receiving “reasonable notice.” Every violation of the Act is punishable by a fine not to exceed $1,000.00, which accrue at $1,000.00 per day beyond the service of notice for as long as the tree owner continues to violate the Act. A recent lawsuit by a solar system owner in California ended with his neighbors being convicted of public nuisance and being ordered to cut down a number of the redwood trees planted on their property, some of which were planted before the solar system was installed.

New York, Massachusetts, Ohio, and Indiana’s solar access laws are more representative of the laws in other states. These statutes allow for the creation of voluntary solar easements, but do not make solar access an automatic right. Solar easements in these states are required to be in writing, and are subject to the same recording and conveyancing requirements as other easements. The statutes all contain similar language regarding the required contents of a solar easement agreement, including the three items listed previously.

Restrictive Covenants

Another important consideration for solar system installation is whether there are requirements or restrictions on the installation of solar panels by restrictive covenants. A common form of restrictive covenants are the covenants, conditions and restrictions put in place by homeowners associations. Over the past thirty years, many homeowners associations have attempted to keep residents from installing solar panels because they have been considered an eyesore and not aesthetically pleasing. Some of the more common restrictions imposed by homeowners associations include requirements for prior approval, explicit restrictions on the placement of the equipment, setback requirements, height restrictions, and restrictions pertaining to architectural style.

Some states have laws that expressly forbid homeowners associations from restricting residents from installing solar panels. Only a few states provide recourse against homeowners associations that violate such laws. This leaves homeowners with the option of negotiating with the association, filing a lawsuit against the association, or risk being sued by the association for defying a restrictive covenant. Faced with these hurdles some prospective solar system owners abandon their plans for installation. Because of a lack of case law or studies on the subject, the effects of state laws governing solar installation are difficult to quantify.

Zoning and Building Codes

Another legal hurdle to installation of solar systems is compliance with local zoning and building codes. Zoning is a mechanism for local governments to regulate the use of property by placing the property within a designated zone that limits the type and intensity of the development. Zoning codes may restrict the type of activity allowed on certain property, the density at which those activities may be performed, and the height and setback requirements of a building. As a result, zoning codes can create obstacles for those wishing to install PV systems. Depending on the zoning requirements of a particular municipality, the homeowner may need to apply for special permission or a variance in order to install a PV system at their property.

There is a general sense of optimism in the solar energy industry today. Only time will tell, but power origination through the use of PV systems appears to be the way of the future in America. If you elect to utilize this form of power origination, it is important to remember to consider the real estate issues that also arise and work with an attorney that can assist with dealing with these issues.

Geoff White is a Senior Associate in the Real Estate Group of the Business/Corporate Department at Frost Brown Todd. He is a LEED Green Associate (LEED GA) and a Fellow of the Institute of Green Professionals (FIGP). A sizeable portion of his practice is spent advising clients on the legal issues of green building and sustainable development. He recently co-authored the chapter “Understanding and Mitigating the Legal Risks of Green Building,” in the Aspatore Books Inside The Minds – Negotiating and Structuring Construction Contracts. Mr. White is licensed to practice law in Kentucky and Ohio. Contact him at gwhite@fbtlaw.com or (502) 568-0202.

Julio V. Driggs is an Associate in the Real Estate Group of the Business/Corporate Department at Frost Brown Todd, which has a Resource Conservation Committee that is helping the firm go green. Mr. Driggs is licensed to practice in Kentucky. Learn more about Julio at http://www.frostbrowntodd.com/juliodriggs.