What Buyers Need to Know About Purchasing a Property with Solar Panels - Ontario’s microFIT Program

Key Considerations for Before Closing on a Property with Solar Panels

By Slonee Malhotra

Solar panels can add a layer of complication to a real estate transaction. If you're buying a home in Ontario that was built or renovated sometime between 2009 and 2017, there's a decent chance those panels on the roof aren't just decoration and they're generating a monthly cheque under a 20-year contract with the Independent Electricity System Operator (the “IESO”). A microFIT contract is an agreement between the homeowner and the IESO, and if not handled properly, a buyer can end up owning a roof full of panels with all payments directed to the seller. microFIT contracts do not transfer with a house automatically; the contract must be dealt with as its own piece of the real estate transaction.

What Is microFIT?

Ontario's microFIT Program ran from October 2009 until the application window closed on December 1, 2017, and in that window it produced more than 30,000 contracts across the province.[1]  Homeowners, farmers, schools, and municipalities installed small (10 kW or less) solar systems and signed a standard-form microFIT contract directly with the IESO, guaranteeing a fixed price per kilowatt-hour of electricity sold to the grid for a full 20-year term.[2]  The program has been closed to new applicants for years now, but existing contracts remain in force, some running into the 2030s. A microFIT contract provides a fixed price for the electricity produced by the project and enables the owner to earn a reasonable return on their investment over the term of the contract.

A microFIT solar panel contract offers several distinct advantages including;

• an ongoing, predictable income stream for the duration of its term regardless of the rate of electricity in the market;[3]
• a guarantee by the IESO of generation payments such that if the local distribution company fails to pay amounts due, the supplier may, after exhausting recourse against the LDC, seek payment directly from the IESO;[4]
• reasonable expenses incurred to earn income under the contract are deductible, including the increase in property tax and insurance, legal, engineering, and installation fees that form part of the equipment's capital cost;[5]
• the facility gives rise to a separate business or property income stream but does not affect the principal residence status of the home; and [6]
• the IESO does not charge a fee to assign a microFIT contract, and the assignment process does not alter the underlying contract price or remaining term.[7]

Some of the disadvantages however, include:

• Payments received under a microFIT contract are taxable as income from a business or property, determined on a case-by-case basis, and reportable in the year the amount is earned rather than the year it is received;[8]
• Since the facility generates business or property income, it does not qualify for the Home Renovation Tax Credit notwithstanding that the equipment is installed on a residential property;[9] On a future sale of the property, a portion of the sale price must be allocated to the solar facility and reported separately, which may result in a recapture of previously claimed capital cost allowance even where the residence itself remains exempt from tax as a principal residence; and[10]
• Costs for repairs, maintenance and inspections could be very expensive.

Assignment Requirements

A microFIT contract is a personal agreement between the supplier and the IESO and does not transfer automatically upon a change in property ownership. The IESO does not compel an assignment and does not intervene in the underlying real estate transaction.[11]

The assignment process is administered through Beacon, the IESO's online contract management portal, and requires the active participation of both the outgoing supplier (the Assignor) and the incoming owner (the Assignee).[12]

Most active microFIT contracts require the Assignee to be an eligible participant and the registered legal owner of the property, with the supplier's legal name matching the parcel register exactly. The IESO charges no assignment fee, although the Local Distribution Company may charge a fee to establish a new Generator Account and the buyer must notify the Local Distribution Company once the assignment is complete.[13] It is advisable to address the contract assignment process directly in the Agreement of Purchase and Sale.

What Inquiries should a Buyer and his/her solicitor make?

A buyer’s solicitor should make direct inquiries of the seller regarding:

• Whether the property has a solar facility subject to a microFIT contract and which version applies;
• Whether the solar panels are owned outright or subject to a lien, loan, or financing arrangement;
• The identity of the original installer, and whether that company remains in operation;
• Whether a third-party agreement exists for maintenance and if it survives a change in ownership;
• Whether the agreement of purchase and sale address generation payments made to the seller during the assignment process;
• Whether there are additional costs? e.g. maintenance, insurance, temporary removal or third-party supplier costs; and
• Whether there is an existing homeowners' insurance policy and if it extends to the facility.

Termination Provisions

A microFIT contract may be terminated in the following circumstances:

• By the supplier, voluntarily on 30 days' written notice to the IESO.[14]
• By the IESO, for breach of any of its terms and failure to remedy the breach within 10 business days of receiving notice.[15]
• Termination for Failure to Assign. An unassigned contract can itself become a breach and could risk termination if not corrected after notice.[16]
• By a Third-Party Installer’s default: Where the panels are financed, leased, or subject to an ongoing services agreement, a third-party default can end the contract or cause a breach.

Conclusion

The value of a microFIT contract depends entirely on getting the details right. Confirming its assignment, the equipment's ownership and maintenance obligations before closing is what ensures the contract and its benefits transfer to the intended party.

If you are buying or selling a property with a microFIT installation, or any other renewable energy contract, please contact Slonee Malhotra (slonee@sorbaralaw.com) of SorbaraLAW today.