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Landlord-to-tenant electricity generated from PV power plants: Are you still supplying or already

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published on 20th May 2021

 

Landlord-to-tenant electricity generated from PV power plants is fraught with many legal pitfalls regarding rental and funding aspects. Despite the subsequent corrective measures relating to grants and subsidies provided for in the 2020 amendment to the Renewable Energy Sources Act (EEG), the supply of electricity to tenants is not really making headway. And this is despite the fact that covering demand of rental and condominium properties for common area electricity and refinancing it as part of apportioned service charges could be – though complicated in terms of billing the service charges – a way of resolving the user-investor dilemma in landlord-to-tenant electricity supply which could be introduced simply.

 

For landlord-to-tenant electricity supply, property managers and developers should therefore always examine as an alternative to classic supply concepts also those for common area electricity and, if necessary, secure them by incorporating appropriate apportionment clauses into their tenancy agreements or condominiums’ partition deeds and community regulations. Good ideas always win in the long term. And common area electricity generated from solar installations can be considered such a good idea as it's a win-win for both landlords and tenants, because solar self-supply concepts offer advantages in terms of energy management and grid technology and because it is necessary to expand solar energy for environmental reasons.

 

 

Solar installations on rental properties

The so-called „user-investor dilemma” is still considered one of the hurdles that impede the use of solar installations on rental properties’ rooftops. Tenants have an interest in low-cost electricity from renewable sources, but cannot invest in a solar system as part of the rental property. Landlords can invest, but have no need for electricity. This hurdle to the expansion of solar energy could possibly be overcome on the basis of the law on service charges.


Although the so-called „landlord-to-tenant electricity premium” under the Renewable Energy Sources Act (EEG) was supposed to promote the supply of solar power to tenants, supplying tenants with electricity generated by an in-house PV system is considered too costly from a metering, energy management and legal point of view, especially in the case of smaller PV systems on single-family homes or small apartment buildings. Many landlords feel therefore hindered from investing in PV systems. A simpler solution for them in terms of metering and energy management would be to use the electricity generated by the in-house PV system to cover the demand for common area electricity in the rental property and to apportion the costs to the tenants as part of the service charges bill. In contrast to the landlord-to-tenant electricity premium, instead of a low incentive rate, the power producer could claim a generally higher incentive due to eligibility for the EEG surcharge reduction for electricity produced for self-supply (so-called „EEG privilege for electricity produced for self-supply” according to Articles 61a et seq. EEG). In particular the trend towards the use of energy-consuming heating and air-conditioning systems (e.g. heat pumps, geothermal heat collectors, refrigeration and air-conditioning technology, etc.), in combination with the EEG surcharge relief, is an economic lever that could make the investment in a solar installation as part of a renewable, modern heat supply system highly attractive to property owners – were it not for the fact that tenancy law imposes some hurdles:
 

 

Common area electricity generated from PV installations and tenancy law

Landlords may only include property operating costs in service charges alongside the rent if the parties agreed so in the tenancy agreement (Article 556 of the German Civil Code [BGB]). Although agreeing on apportioning service charges to tenants as the so-called "second rent" is a widespread standard, according to the provisions of tenancy law, the landlord may only apportion the types of operating costs listed in the German Operating Costs Regulation (BetrKV). In this respect, important is whether common area electricity generated from renewable sources is covered by the customary tenancy agreement clauses on service charges which usually make reference to BetrKV.


In practice, common area electricity means the electricity consumed by tenants in the jointly used facilities of the rental property. This includes, for example, electricity used for staircase and outdoor lighting, operating lifts and in heating systems for pumps and control, antenna systems, water filter and drainage pumps, refuse compressors and the like. However, the term "common area electricity" is not mentioned in BetrKV. Nonetheless, typical consumption of common area electricity can be allocated to other categories in the catalogue of types of operating costs under Article 2 BetrKV. For example, electricity used for operating heating and hot water systems is explicitly listed in Article 2 no. 4 lit. a BetrKV, but also other electricity consuming installations are listed in other categories under BetrKV. In addition, Article 2 no. 17 BetrKV makes it possible to include non-typical electricity-consuming installations in those categories. The problem is, however, that the costs allocable to the different categories of costs under BetrKV must be itemized separately in a service charges bill and therefore the different kinds of electricity consumption must also be recorded under separate items. If a property owner now wants to use the electricity generated from his PV rooftop system for self-supply to operate the property's electricity-consuming systems covered by BetrKV, he must divide common area electricity into the individual categories.

What to do: measure common area electricity generated from PV installations, estimate its consumption or do without it?

Separate recording of electricity consumption means, first of all, measuring the different parts of electricity consumption. Measurement requires investing in metering equipment and involves recording and billing costs, which again reduce the potential economic advantages of using common area electricity generated from PV installations. At least, the law regulating service charges allows preparing estimates based on appropriate flat rates. However, what is appropriate may be disputed in individual cases. It is often difficult to use an appropriate flat rate in the case of PV electricity generated for self-supply because in times of weather-dependent gaps in the production (e.g. at night, in winter) not all electricity consumption falling under one category of operating costs can be covered by electricity produced by the PV system, but reserve electricity must be drawn from the grid. Especially for the share of solar electricity used for self-supply hardly any generally recognised values are available because the determination of flat rates is still in its infancy. In this respect, a cautious landlord will not take the risk of adding to his legally secure service charges bill an ecologically and economically reasonable, yet legally uncertain element of service charges.


However, at least for large electricity consuming installations as with the central heating system, there is still a sufficient economic incentive to use PV electricity generated for self-supply, even after deducting the metering and billing costs. Taking into account the flat-rate cost approaches already expressly recognised in some cases in lower-instance court rulings, using electricity generated from the in-house PV system for operating heating systems can be easily implemented even without additional metering technology.

The dilemma of PV electricity generated for self-supply: worthless or worth something after all?
If the landlord wants to further minimize the remaining legal risks arising from flat-rate calculation approaches and wants to apply specific PV electricity costs, the question remains: What are the actual costs of PV electricity generated for self-supply? Since the sun shines for free, a solar system only involves a small amount of operating costs (e.g. maintenance costs). It is true that the costs for the maintenance of a solar system are in principle apportionable as costs of the maintenance of the heating system; in our opinion, a separate agreement on the apportionment is therefore not necessary. However, since they make up only a very small part of the costs of a solar system, the fact that maintenance costs are apportionable cannot provide a sufficient incentive for landlords to cover the demand for common area electricity from the solar installation.


From the point of view of a PV system operator, the electricity costs should essentially be determined based on investment costs, the technical service life and the electricity generation volume forecast for that period. However, according to the legal definition of operating costs (Article 556 (1) sentence 2 BGB, Article 1 (1) BetrKV), these include only ongoing costs of use, so the investment costs typically do not constitute operating costs within the meaning of the law on service charges. The passing on of fictitious costs is generally inadmissible according to the case law on service charges. Tenancy law would thus fundamentally forbid the passing on of costs for PV electricity, so a landlord could not use his PV system in a financially viable way to cover demand for common area electricity. Since the investment costs involved in a PV system are not deductible and other costs covered by the Operating Costs Regulation are not incurred, landlord and tenant could agree on an alternative approach where hypothetical costs would be recognised, at most in deliberate deviation from the law. However, an agreement deviating to the disadvantage of the tenant from the statutory provisions of the law on service charges is ineffective (Article 556 (4) BGB). Conversely, however, an agreement concluded in deviation from the law but to the tenant's advantage is permissible, according to the aforesaid.

 

Thus, although tenancy law does create a big hurdle for the supply of common area electricity generated from PV installations, this can be overcome by signing an agreement provided that it is only advantageous for the tenant.


However, a landlord will not want to supply electricity on terms that are disadvantageous to him. Consequently, a cost approach advantageous for both tenant and landlord should be determined.


From the point of view of the landlord as operator of a solar system, the feed-in tariff under EEG is the financial basis that should enable him to cover his investment and operating costs plus generate an appropriate return. In this respect, a system operator would only supply his electricity elsewhere if he received at least the EEG remuneration for it. In business administration, this approach is recognised as the so-called „output-related opportunity cost approach”.

 
Conversely, from the perspective of a tenant who has to reimburse the electricity consumption costs, the costs incurred by the tenant for the purchase of electricity from the public grid should be used as the basis for comparing whether the use of PV electricity generated for self-supply is advantageous for him (the so-called „input-related opportunity cost approach”). Since the customary market electricity prices for household customers are much higher than the EEG feed-in tariffs for solar systems, the opportunity cost approach ensures a win-win for both landlords operating solar systems and tenants. In this context, any electricity price at a level between the EEG remuneration and the price of electricity purchased from the public grid ensures the legal validity of an agreement under Article 556 (4) BGB as it is advantageous to the tenant as specified in this provision. Since also in the case of self-supply electricity must be constantly drawn from the grid to secure electricity supply in times of gaps in the production due to weather conditions and time of day (e.g. at night), an objective benchmark is always at hand. PV electricity generated for self-supply is subject to only a reduced EEG surcharge (the so-called „EEG privilege for electricity generated for self-supply” according to Articles 61a et seq. EEG), so that the costs of purchasing electricity from external sources, reduced by the value of reduction in the EEG surcharge, can be used as an appropriate and objective benchmark to determine a cost approach that will be equally advantageous for landlords and tenants.


On the other hand, with Article 42a (2) sentence 4 EnWG (Energy Industry Act), the statutory regulations relating to the incentivisation of landlord-to-tenant electricity provide for applying a fictitious cost approach for PV electricity generated for self-supply. But this is only an approach to reverse the unjust enrichment effect arising from invalid landlord-to-tenant electricity agreements. The provision is intended to have a sanctioning effect on the landlord in order to deter him from concluding ineffective „tie-in” agreements and is therefore neither applicable nor suitable as a reference criterion in the present case.


Given the preceding consideration, there are objective and sufficiently flexible factors substantiating a change in long-term tenancies and allowing for concluding an agreement on apportioning the costs of common area electricity generated from PV installations that will be legally effective and deviate from the law only in favour of the tenant as prescribed by the statutory provisions.

PV electricity for operating heating systems: Who has the key …

The costs of operating a heating system are not only subject to BetrKV, but also the requirements of the Heating Costs Regulation (HeizkostenV). Thus, in the case of common area electricity generated from PV installations that is used for operating heating systems (e.g. pump electricity, heat pumps, etc.), the provisions of HeizkostenV must be additionally observed. However, HeizkostenV only regulates the distribution of costs in the case of multiple users of a heating or hot water system and the division between heating and water heating costs. In this respect, HeizkostenV mainly regulates the admissibility of cost allocation keys and the distribution methodology. But also here, the electricity used for operating the heating system is generally recognised as a component of the costs of heating (Article 7 (2) sentence 1 HeizkostenV).


However, according to Article 9 HeizkostenV, in the case of combined heating and hot water systems, it is necessary to divide the energy costs into energy required for hot water and energy required for heating. The costs should be divided in such a way that the costs for heating water are deducted from the total costs and the remaining amount is recognised as costs of heating. If solar thermal energy is used for heating water, this portion of energy should be excluded from the calculation of costs according to some opinions on Article 9 (2) HeizkostenV, so that the heating costs are not calculated too low. However, this contradicts the history of the law because the legislator had expressly refrained from a regulation on the exclusion of heat generated from solar energy when amending Article 9 (1) HeizkostenV. Furthermore, those who support the exclusion only refer to heat generated from solar thermal energy. The exclusion of heat generated from solar electricity, however, has no economic justification at all.


Since Article 2 HeizkostenV stipulates that the law takes absolute precedence over provisions included in a contract, it is not possible to agree on deviating provisions in a contract even if it is advantageous for the tenant. Given the user's right to reduce the share attributable to him by 15 per cent when the costs are not billed on the basis of consumption (Article 12 (1) HeizkostenV), there is still some risk as regards the apportionment of costs for the use of PV electricity generated for self-supply in combined heating and hot water systems. In the current amendment to HeizkostenV, the legislator has so far missed the opportunity to remove this legal hurdle for landlord-to-tenant supply of heat generated from renewable sources.


In the case of combined heating and hot water systems, the hurdles enshrined in HeizkostenV for the refinancing of solar thermal systems therefore cannot be removed. There is still some residual legal risk also as regards the use of solar electricity. In the case of simpler supply concepts, on the other hand, we believe that the view saying that HeizkostenV does not prevent the allocation of the costs of solar electricity generated for self-supply as costs for operating heating systems – using flat-rate cost approaches or a opportunity cost approach favourable to consumer (see above) – is viable.
 

 

Conclusion: Common area electricity generated from PV installations is gaining ground

In view of all this, it is not surprising that the complexity of the law on service charges has deterred many landlords and managers of condominiums' associations from investing in in-house PV systems to cover demand for common area electricity. The art of drafting contracts is now about incorporating the complex legal framework into tenancy agreements, partition deeds or community regulations in the form of a simple apportionment clause. With that being done, the apportionment of costs for common area electricity generated from solar installations under the law regulating service charges can look quite simple. And, as always in contract-drafting practice, the following principle applies: entrepreneurial aspects should be carefully considered when balancing between drafting simple, practical clauses and safeguarding all legal risks.

 

Therefore, anyone who ventures onto the new path of using the model of landlord-to-tenant electricity supply to cover the demand for common area electricity and apportion the costs under the law on service charges will always bear some residual legal risk. But this has always distinguished solar pioneers. Good ideas have always won in the long term. And common area electricity generated from solar installations can be considered such a good idea as it's a win-win for both landlords and tenants, because solar self-supply concepts offer advantages in terms of energy management and grid technology and because it is necessary to expand solar energy for environmental reasons.


Rödl & Partner regularly advises clients on aspects of law regulating service charges, the formulation of clauses on common area electricity generated from solar installations and the development of PV projects. If you still have any questions, please contact us. Our experts will be happy to help you!

 

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