By: Ronald S. Deutsch
Cohn, Goldberg & Deutsch
With the torrid pace of solar energy equipment installations, it has become more common to experience legal and practical issues resulting from the financing of such equipment. Such installations and financing have increased by nearly 500% in the last several years, with homeowners taking advantage of falling prices and tax credits. An average homeowner, it has been estimated, will recoup the costs of their system in approximately seven years.
Foreclosure attorneys must analyze several legal issues when discovering solar equipment financing on a property. Paramount in the analysis is whether a solar panel is a fixture or whether it is a separate property or a chattel. Priority is another critical issue that must be reviewed.
It is blackletter law that when a bank forecloses on a property, it takes the land, the building, and all permanent fixtures attached. Fixtures are improvements or items of separate property that are attached to a building, making them part of the building. Fixtures are defined in Article 9 of the Uniform Commercial Code “UCC” to include “goods that have become so related to a particular property that an interest in them arises under real property law.” State law must also be reviewed to determine whether a particular “good” is a fixture. Although not uniform, most states have adopted the critical factors established by the Ohio Supreme Court in Teaff v. Hewitt when analyzing whether a good is a fixture or a chattel. These factors are: (1) whether the good is attached to the real property, (2) whether the good has been adapted for the use of the real property, and (3) whether the parties intended a good to be permanently attached.
Hornbook fame, Professors White and Summers, proposed a half-inch formula stating that “anything which could be moved more than a half-inch by one blow with a hammer weighing not more than five pounds and swung by a man weighing not more than 250 pounds would not be a fixture”. Many examples of property found not be a fixture include such extremes as twenty-ton machines anchored in with screws. On the other hand, a mobile home was a fixture, where the intent of the parties demonstrated such an intent.
With respect to solar panels, attachment can occur through means such as nails, screws, bolts, adhesives, moldings, tiles, and other fastenings. Even if not physically attached, panels can have a constructive attachment when it permanently rests upon the building, and it is necessary for the use of the building.
In analyzing whether a solar panel has been adapted for use for the real property, a court generally reviews several factors. These include whether the solar panel is an integral and indispensable part of the property, whether it would damage the structure if it were severed, and whether the solar panels are highly customized in fabrication and installation to meet the specific criteria of the property where it is installed. The more generic and less customized, the more likely the solar panel would be found to be separate property or a chattel.
Intent is also a critical factor. That is, do the parties intend a solar panel to remain separate or mere personal property or instead intend the panel to become a fixture? The clearest way to demonstrate intent is where a lender and the property owner document their intent through the execution of an agreement in writing. Intent, however, can be overridden when a court finds that a solar panel cannot be removed without substantially damaging the structure or whether it has become essential to the property to which it is attached.
Lenders generally perfect their security interest in chattels by filing a financing statement with the applicable Secretary of State or such other office where it would normally file a financing statement covering personal property. Alternatively, a fixture filing may be filed in the local office where it would normally record a mortgage to encumber the real estate property. Fixture filings contain the same contents as a personal property filing, but includes additionally, (a) a specification that the collateral includes fixtures, (b) indicates that it is to be recorded in the real property records, (c) provides a description of the related real property and, (d) provides the name of the record owner if the debtor does not have an interest of record. Most jurisdictions also permit the recordation of a mortgage that fits the requirements of a fixture filing. Each of these steps results in a lender having a perfected security interest in the fixtures. That said, personal property and fixture filings may lapse after five years unless renewed. Mortgages offer the advantage of having a greater initial life.
In any event, if a solar energy installation is a fixture, a foreclosing bank may be able to reap the benefit of any property value accretion upon completing its foreclosure action. Lenders who finance solar energy installations that remain chattels are also protected, as they can repossess such items through a replevin action filed in the county courts.
The priority of solar panel financing must additionally be reviewed closely. With the advent of government-approved Property Assessed Clean Energy (PACE) loans, enacted in more than 30 states and the District of Columbia, mortgage lending priority rules, have been upended. No longer is the axiom that first to file is first in right controlling.
PACE financing, as defined by Wikipedia, is a means of financing energy efficiency upgrades, disaster resiliency improvements, water conservation measures, or renewable energy installations of residential, commercial, and industrial property owners. PACE enables property owners to defer the upfront costs that are the most common barrier to energy efficiency installations and thereby facilitate increased installations.
PACE loans are paid by an additional special assessment on the property’s tax assessment over an agreed number of years, while energy costs are simultaneously lowered, providing the borrower with a net financial benefit. Because the solar panels are attached to the property, the consumer can sell the property leaving the debt to be paid through the tax assessment on subsequent owners. Critical to parties handling actions involving a default in a typical mortgage is how the solar panel security interest affects their action and potential claims of priority. The analysis involves reviewing whether the asset is a fixture or not, and also whether the loan product is a PACE loan. A major problem associated with PACE loans is that it takes priority over other lien-holders and those lien-holders may not have been notified or given an opportunity to object.
Another issue arising from solar panel financing is the differing treatment of government and GSE loans at origination and or resale. Fannie Mae and Freddie Mac have refused to purchase or underwrite loans for properties with existing PACE based tax-assessments. However, the Veterans Benefits Administration (VA) in mid- 2016, announced guidelines on managing the financing of properties with PACE obligations. The Federal Housing Administration (FHA), on the other hand, will not allow a property encumbered with a PACE obligation to be eligible for its financing programs unless the lien remains subordinate to the insured mortgage. The ineligibility of a property for a new FHA loan may impact the resale of a home that has been encumbered with PACE loan by prospective Sellers.
There is a myriad of paths that must be analyzed when determining the rights of a foreclosing party or determining the advisability of financing solar energy installations. The analysis can be complex but is necessary to determine the various practical implications as well as the rights of any secured party.