Hit the roof

With just five months left until the government cuts back the feed in tariff, despite rent a roof deals on hundreds of thousands of homes having been agreed between landlords and providers of solar photovoltaic panels, not a single one has been signed off.

That is a poor statistic – especially given the level of hype as companies flocked to the market over the last year.

The furious effort that has gone into getting these agreements sorted before the April deadline – after which, the drastically reduced FIT will no longer be enticing enough to make many of these deals viable – could well go to waste if lenders’ consent is not obtained for these deals soon.

With potential £250 a year savings for each tenant with PV on their roofs at stake, it is easy to see why PV providers and associations alike have levelled their frustrations at the perceived source of their problems: their lenders.

Banks, somewhat unfairly, have been accused of jeopardising these deals. The hold-ups, associations, PV providers and their respective irritated lawyers claim, is a result of their being overly cautious and tabling ‘apocalyptic scenarios’.

They have been asking what impact the deals could have on values if an association defaults on a loan and the bank has to sell, the properties it is holding as security. In this unlikely event they are concerned that the PV deals in place could significantly devalue their security.

Well, the shoe has been put on the other foot now.

As Inside Housing reports this week, guidance published by the Council of Mortgage Lenders means that many landlords could have to return to the drawing board and enter eleventh hour renegotiations with their PV providers.

The guidance spells out the minimum requirements of lenders that landlords must meet in order to obtain their lenders’ consent to push on with these deals.

At the core of the recommendations is the advise that most banks will require the power to terminate contracts with PV providers ‘without compensation and without liability for any costs of removal’ in the event of a default by an association.

This is bad news for PV providers. But then again, if they really believe that this default scenario is so very unlikely then they will surely have no problem signing up to taking on the risk that the banks were previously concerned about.

Of course, they will also have their own risk adverse funders to please. Lawyers warn that many agreements will need to be amended in the wake of the CML guidance. However, they also say that when push comes to shove, PV providers will probably will accept this, but they may well try and factor the risk into their own pricing – hence possible renegotiations with housing associations.

According to Richard Petty, director at Jones Lang LaSalle, the impact these deals could have on the value of banks security is actually huge; up to 15 per cent.

On a £500 million portfolio this would mean a bank stands to lose up to £75 million in the event of a default on the value of the security simply because of the contracts in place.

‘But surely having an income producing piece of technology installed on home that reduces bills and increases energy efficiency of the property can only be a good thing for property values?’ I hear you ask. The answer is possibly. But the impact on values that banks are concerned about has nothing to do with the PV itself.

The potential loss of value is a result of the contractual arrangements with third parties that could then make the properties harder to sell.

Mr Petty explains that if a bank finds that potential buyers don’t want PV on the roofs of the properties under the same terms that the HA has signed up to originally, then in many cases they face the prospect of paying a substantial termination fee to break and buy out the agreement, so that they can either sell unencumbered or remove the panels to achieve a sale.

In this scenario, banks would have to pay PV providers significant sums to break the rent-a-roof contracts, which have been drawn up to protect the PV providers’ security – which is the PV panels and equipment.

On top of this there is the prospect of long drawn out negotiations with lots of third parties, all with their own credit committees and sets of lawyers to appease.

When trying to sell huge portfolios, the prospect of legal wrangling is enough to kill a deal; hence the banks have said they want this get-out clause.

So housing associations are piggy in the middle right now. With no time left to start out entirely from scratch, they are at the mercy of their funders and their chosen PV providers.

The truth of the matter is that many associations probably should have approached their funders much sooner than they did. What on paper appeared quite simple has turned out to be painfully complicated.

Their complaint that banks have not acted with the urgency they required is may fall on deaf ears because, not only are these deals all different and immensely complicated, but also, banks – risk adverse profit driven organisations – are essentially being asked to take on more risk without any obvious reward. A big ask.

The CML guidance therefore should be considered good news. A line has been drawn. Everyone knows where everyone else stands.

Now that the CML has clarified lenders position, as unpalatable as it may be to PV providers and associations, changes can be made to contracts and the way is paved for the first deals to be done.

Watch this space.