Can a tenant install solar panels on a leased commercial building?

Many businesses rent the building they trade from and still want the savings from rooftop solar. Whether to buy the system or lease it is a separate question; see how a solar lease compares with buying. Whether a tenant can install panels is decided mostly by its lease, so this guide starts there, then covers the landlord's consent, the end of the lease, tax relief, service charges and rent, and the questions to put to the landlord. It is general information about the rules in England and Wales, not legal advice.

The short answer

Expect to need the landlord's written consent. A roof-mounted array is an external alteration and may involve structural fixings, and leases of part of a building commonly prohibit or control both. Where the lease bars improvements without consent, the law says that consent is not to be unreasonably withheld, although the landlord can attach conditions. A tenant that pays for the panels and holds its lease when they are fitted can claim the capital allowances. Everything else, from removal at the end to the effect on rent, depends on what is agreed before work starts.

Start with the lease

Three parts of the lease decide whether panels are possible at all.

• What is let to you. If you rent part of a building, check whether the roof is part of your premises. Where the landlord keeps it, you need rights over it, not just consent to alter what you rent. The Better Buildings Partnership (BBP), whose toolkit is the usual source of model green clauses, singles out access to and rights over the roof and airspace as points to settle before on-site generation goes in.
• The alterations covenant. RICS guidance says leases of part of a building commonly prohibit structural and external alterations while allowing internal non-structural ones with some landlord control. Read your covenant category by category, because a roof array is external and its fixings may be structural.
• Any green clauses. If your lease is a green lease, look for a renewable energy clause and a clause letting the tenant make alterations that improve environmental performance. In the BBP's model drafting that improvement right excludes structural alterations, and tenant works under the renewable energy clause remain subject to the lease's alterations provisions, so the ordinary consent process still applies.

RICS's Code for leasing business premises says a landlord's control over alterations should be no more restrictive than necessary to protect the value of its premises. RICS also says that not all landlords comply with the code, and that a tenant should not assume a landlord does unless the landlord confirms it.

The landlord's consent and the 1927 Act

If the lease forbids improvements without the landlord's licence or consent, section 19(2) of the Landlord and Tenant Act 1927 reads in a proviso that the consent "is not to be unreasonably withheld", notwithstanding anything to the contrary in the lease. The landlord can still make its consent conditional on:

• a reasonable sum for any damage to, or diminution in the value of, the premises or any neighbouring premises it owns;
• any legal or other expenses properly incurred in connection with the consent; and
• for an improvement that does not add to the letting value of the holding, an undertaking to reinstate the premises, where that requirement would be reasonable.

Know its limits before relying on it:

• It applies to a covenant against making improvements without consent. Whether a solar array counts as an improvement under your lease, and whether your covenant is of that kind, is for your solicitor to confirm.
• Section 19 does not apply to agricultural holdings under the Agricultural Holdings Act 1986 or to farm business tenancies, which matters if you are funding solar on a farm you rent.
• The Act extends to England and Wales only.
• Do not expect the Landlord and Tenant Act 1988 to force a quick answer: its duty to deal with a written application within a reasonable time covers assigning, underletting, charging and parting with possession, not alterations. Agree a response period when you ask.

Part I of the 1927 Act also gives tenants of premises used for a trade or business a formal procedure. You serve notice of the proposed improvement with a specification and plan. If the landlord objects within three months, you can apply to the court, which can certify the improvement as proper if it will add to the letting value at the end of the tenancy, is reasonable and suitable to the character of the holding, and will not reduce the value of the landlord's other property. A landlord that offers to carry out the improvement itself in return for a reasonable rent increase can prevent a certificate, unless it then fails to do the work. An improvement that is certified, or not objected to in time, may be carried out despite anything in the lease. It is a formal process with consequences, so take advice before serving notice.

Will the panels have to come off at the end?

The standard position in the Model Commercial Lease, as the BBP describes it, is that all alterations are reinstated unless the landlord and tenant agree otherwise. The RICS template heads of terms ask whether the tenant must remove all alterations at the end of the lease, or only those the landlord reasonably requires. The BBP's advice is to decide whether improving works must be removed when consent is given, and to record it in the licence to alter. Its model clause makes the tenant remove alterations unless the landlord gives notice, no later than three months before the end date, that some may stay, and requires the landlord to weigh the environmental impact of removal.

The end-of-term deal also affects money. Under section 1 of the 1927 Act, a business tenant can claim compensation at the end of the tenancy only for an improvement that adds to the letting value of the holding and is not a trade or other fixture it is entitled by law to remove, and only if it served notice of the improvement under section 3 first. So agree the options in writing at the start: the panels stay without payment, the landlord buys them at an agreed value, or you remove them and make good.

Who owns the panels, and who claims the tax relief

HMRC lists solar panels among items that will normally be fixtures. In law a fixture belongs to the freeholder, although a tenant's fixture is one the tenant may remove during or at the end of the lease. Capital allowances do not follow that property-law question. Under section 176 of the Capital Allowances Act 2001 you are treated as owning the panels for tax if you incur the capital expenditure for your own qualifying activity, such as your trade, the panels become fixtures, and you hold an interest in the building, such as your lease, at that moment. HMRC's own example is a tenant that installs air conditioning in a leased office and can claim because it holds a leasehold interest when the plant becomes a fixture.

• Shared cost. If landlord and tenant both pay towards the same system, only the lowest interest counts, normally the tenant's lease. If instead the landlord contributes a capital sum towards your cost, you are treated as not having incurred the part it meets, and the landlord may claim on its contribution if the conditions in sections 537 and 538 are met.
• Hire purchase. HMRC says the hire purchase rules do not apply to an asset that is a fixture; the fixtures rules decide instead, so agree the timing of relief with your accountant before relying on hire purchase.
• End of the lease. You stop being treated as the owner when your lease ends, and the landlord is treated as the owner from then. Your disposal value is any capital sum you receive for the panels, such as compensation, or nil. A new lease of the same premises granted to you on renewal is treated as the same qualifying interest.

Solar panels are special-rate expenditure. The annual investment allowance gives 100% relief on up to £1 million of qualifying spending a year, and companies cannot claim full expensing on solar panels. See capital allowances on solar panels for what the relief is worth, and who claims capital allowances on solar panels for the landlord, lender and PPA cases.

Service charge, rent review and business rates

RICS's service charge standard treats the costs of dealing with landlord consents for alterations as part of the landlord's investment, not as service charge items, so handling your request should not reappear in the service charge, although section 19(2) still lets the landlord ask you for its reasonable expenses as a condition of consent. If the landlord installs panels itself and wants to recharge them, the same standard says improvement costs above normal maintenance, repair or replacement should not go through the service charge unless they have been fully communicated to and agreed with tenants after a cost-benefit analysis over the term of their leases.

Check the rent review clause next. The BBP's principle is that works a tenant carries out voluntarily, at its own expense and in line with the lease, are disregarded at review, which it describes as the normal position in modern review clauses and in the Model Commercial Lease. An older lease may differ, and there is no point paying for the panels and then paying for them again through the rent.

In England, plant and machinery that generates power from photovoltaics is excluded from rateable value for days before 1 April 2035, which helps whichever party pays the rates; see business rates on rooftop solar.

Insurance, repairs and export payments

Panels add load, fixings and cable routes to a roof that someone else may be responsible for repairing and insuring. Before work starts, agree who insures the panels and the liability risks of the installation, whether the landlord's insurer needs notice, who maintains the system, and who pays to lift and refit the array if the roof needs repair. If you will export power, Smart Export Guarantee suppliers ask for MCS or equivalent certification on solar PV up to 50 kW, the system needs an export meter and an export MPAN, and the SEG contract requires you to tell the supplier about a change in ownership or in who is entitled to payment, which can happen when the lease ends.

What to ask the landlord before you commit

1. Is the roof part of the premises, and if not, will the landlord grant the rights needed for panels, cables and inverters?
2. Will it consent, and on what conditions: drawings, structural survey, installer, insurance and working hours?
3. Must the panels be removed at the end, and can that be settled now in the licence?
4. Will the panels be disregarded at rent review?
5. Would it contribute, buy the system at the end, or rather install the system itself and sell the power to the occupier?
6. Who repairs the roof under the panels, and who pays to lift them?
7. Does a superior landlord or the landlord's lender also need to consent?
8. Does the landlord confirm that it follows the RICS leasing code?

Line the finance term up with the lease: a loan, lease or PPA that outlasts your lease leaves you paying for panels you can no longer use. Compare the routes on finance options compared and, once the landlord's answer is in writing, request a costed quote.

Honest limits

Every lease is different, and whether a landlord's refusal or conditions are reasonable depends on the facts. The statutes discussed here apply in England and Wales, so a business in Scotland or Northern Ireland should take local advice. Use this guide as a checklist for the conversation with your solicitor and accountant, not as a substitute for it.

Questions business owners ask

Does a landlord have to agree to a tenant installing solar panels?

Not automatically. Where the lease bars improvements without consent, section 19(2) of the Landlord and Tenant Act 1927 means consent is not to be unreasonably withheld, but the landlord can attach conditions such as a reasonable sum for damage or loss of value, its expenses and, where reasonable, a reinstatement undertaking. The section applies in England and Wales and not to agricultural holdings or farm business tenancies.

Who owns the solar panels when the lease ends?

In law a fixture belongs to the freeholder, though a tenant's fixture may be removable during or at the end of the lease, so the licence should say what happens. For capital allowances the tenant stops being treated as owner when the lease ends and the landlord is treated as owner from then; the tenant's disposal value is any capital sum it receives, or nil.

Can a tenant claim capital allowances on solar panels?

Yes, if it incurs the capital expenditure for its own trade or other qualifying activity and holds an interest in the building, such as its lease, when the panels become fixtures (section 176 of the Capital Allowances Act 2001). If the landlord contributes a capital sum, the tenant is treated as not having incurred the part the landlord meets.

Will solar panels increase the rent at review?

They should not if the review clause follows the approach the BBP describes as normal in modern review clauses and the Model Commercial Lease, which disregards works a tenant carries out voluntarily at its own expense and in line with the lease. Older leases can differ, so check the wording before installing.

How long does a landlord have to answer a request to install panels?

The Landlord and Tenant Act 1988 duty to respond within a reasonable time applies to applications to assign, underlet, charge or part with possession, not to alterations, so agree a response period when you ask. Part I of the 1927 Act has a separate notice procedure for business premises, with three months for the landlord to object.