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
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.
Before entering into a Rooftop lease, Landlords and owners of commercial
real property should consider consulting counsel to review and negotiate
the terms of the Lease. The Florida business litigation attorneys at
Rosenthal Law Group are experienced at negotiating and litigating rooftop leases.
Call the offices today for further assistance.