Practical and Legal Considerations for Landlords Considering Rooftop Leases

Rooftop licenses or lease agreements appear to be an easy way for landlords of commercial, retail and industrial properties to earn extra income. As new and creative uses for rooftop space develop, landlords and owners of commercial real estate are finding that to adequately protect landlords’ interests, rooftop leases should be reviewed and negotiated like any other commercial lease agreement.

Growth of Rooftop Leases

Commercial real estate owners and landlords often think of their buildings’ rooftops as a liability or merely as a place to house heating and air conditioning units. Due to generous government subsidies and tax credits, however, landlords began monetizing their buildings’ roofs by leasing the space to companies that would install and operate solar energy-producing photovoltaic panels. The demand for cellular phones and wireless networks also fueled the growth of rooftop telecommunication leases for antennas and signal towers. Landlords now lease their rooftops for income-producing uses such as restaurants, bars, theme parks, event space, green space and employee leisure areas.

A landlord that is quick to accept an offer and enter into a rooftop lease may find itself liable for unexpected obligations. Each particular use of rooftop space requires specific consideration to protect the landlord from liability and expense. Although each type of rooftop use has its own unique leasing considerations, there are several common issues landlords should address before entering into any rooftop lease agreement.

Special Considerations for Landlords

The following topics should be discussed with counsel before entering into a rooftop lease agreement:

• Specifications structure and permits. The landlord should request detailed plans and specifications of the tenant’s project to ensure that the roof is physically capable of supporting the tenant’s proposed use. The landlord should also explicitly limit the type and quantity of equipment to be installed on the roof to what is provided in the initial specifications and require the landlord’s prior written consent for any changes. The landlord may demand that the tenant retain a structural engineer or other professionals to certify that the roof can safely support the tenant’s intended use. Additionally, the landlord should insist that the tenant obtain all necessary licenses and permits for the intended use of the rooftop space from the appropriate authorities before entering into the rooftop lease.

• Representations. The landlord should resist making any representations that its roof is a viable location for the tenant’s intended purpose. Many factors affecting the future success of the tenant’s project are out of the landlord’s control. For example, a solar energy tenant may be adversely affected if a skyscraper erected on a neighboring parcel blocks sunlight for part of the day.

• Ownership. The landlord should ensure that it has exclusive rights to the roof. The roof may be encumbered by utility easements or other tenants may have rights to access the roof that would be hindered by a rooftop lease. The jurisdiction where the property is located may also have legal restrictions on rooftop uses that would prohibit the tenant’s intended use.

• Maintenance and repair. The lease agreement should specifically designate which party is responsible for roof maintenance and repair costs, especially if the tenant’s use damages the roof beyond normal wear and tear. The presence of a rooftop tenant generally increases all maintenance and repair costs associated with the roof. The useful life of solar panels or antennas may far exceed that of a roof, so the agreement must address who bears the cost of temporarily removing or relocating the tenant’s equipment if the roof is replaced during the tenancy. To reduce future expenses, if the roof is not new, the landlord should strongly consider repairing or replacing the existing roof before the tenant installs its equipment.

• Taxes. The rooftop lease agreement should address the allocation of any tax increase if the tenant’s rooftop improvements raise the landlord’s tax assessment or increase the landlord’s tax responsibility.

• Hiring practices. Solar energy tenants receiving tax credits from the federal government may require that the landlord abide by certain federally mandated terms relating to hiring policies.

• Insurance. The landlord should demand that the tenant have adequate insurance to cover its equipment. The landlord should also determine if the tenant’s intended use increases the landlord’s insurance premiums and, if so, allocate any extra costs to the rooftop tenant.

• Access and security. Most rooftop tenants, particularly solar and telecommunication tenants, require continuous access to their equipment or rooftop improvements for maintenance, cleaning and testing purposes. The landlord needs to consider:

• whether the tenant has dedicated roof access;

• the effect on other tenants if there is no dedicated access, particularly for tenants that have sensitive security needs;

• notice requirements for non-business hours access; and

• access in case of emergency situations.

• End of term. Although a rooftop lease may have a total term of over 20 years, the parties should address who is responsible for removing improvements and returning the roof to its original condition at the end of the lease term. Depending on the tenant, the landlord may demand security to ensure the performance of all end-of-term obligations.

• Environmental compliance. Disposal costs for solar panels and other “green” equipment may be significant. For example, solar panels often contain cadmium, which is a hazardous substance and must be disposed of in compliance with environmental rules and regulations. If the tenant poses an environmental risk, the landlord should demand that the tenant deliver an environmental indemnity agreement.

Practical Implications

Landlords and owners of commercial real property should ensure that their interests are properly protected before entering into a rooftop lease agreement. Form agreements presented by potential tenants may completely omit necessary terms or contain terms that are highly unfavorable to the landlord. Depending on the particular tenant and the proposed use, additional use-specific considerations may need to be addressed in the lease agreement. The landlord and its counsel should not overlook basic commercial lease terms such as indemnities, subordination, non-disturbance and attornment agreements and any other terms indicated by the specific facts of the transaction.