Lease and PPA Disclosure Requirements
CALSEIA receives inquiries from the public regarding leases and power purchase agreements (PPA). CALSEIA does not provide legal or tax advice – people should contact a legal or tax professional. Below are references to federal and state laws that may govern your specific lease or power purchase agreement.
Note that the terms and conditions of leases or power purchase agreements may vary among the providers of these financial arrangements. Customers should become familiar with the terms and conditions of the agreements and ask questions if something is not clear. Any understanding you reach should be made in writing.
It is typical that the leasing or PPA company will retain ownership of the tax credits, depreciation value, rebates (if available), and environmental attributes of the solar system.
Remember to check the contractors’ license for all companies offering to perform work on your home: www.cslb.ca.gov.
Consumer Disclosure Requirements Affecting Solar Leases and Power Purchase Agreements
The Consumer Leasing Act requires meaningful and accurate disclosures of costs and terms to consumers so they may compare proposals to lease or finance personal property for their household use. The State of California does not have its own Consumer Leasing Act , but California Public Utilities Code 2869 specifies consumer disclosures regarding solar leases and power purchase agreements (PPAs).
Federal Consumer Leasing Act and Regulation M
Regulation M, issued by the Board of Governors of the Federal Reserve System, implements the Consumer Leasing Act (Act). The Act and Regulation M apply to consumer (residential) leases if the leasing period is longer than four months and the lessee’s total contractual obligation (defined below) does not exceed $25,000, regardless of whether the lessee has the option of purchasing the personal property at the end of the lease term.
The total contractual obligation is not based on the value of the leased property. Instead, it is the sum of all lease payments plus all nonrefundable amounts the contract obligates the lessee to pay to the lessor. Residual value amounts, purchase-option prices, and amounts collected by the lessor but paid to a third party (such as taxes) are not included in the calculation.
On July 21, 2011, the dollar amount specified as the exemption threshold from the Consumer Leasing Act increases from $25,000 to $50,000. In addition, the exemption threshold will increase annually based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). For example, if the CPI-W increases by $1,000 (as reported every June 1) the exemption threshold would increase by $1,000 on January 1 of the next year.
The Act and Regulation M do not apply to power purchase agreements or leases with non-residential customers (such as, agricultural, commercial, governmental, or industrial lessees). They also do not apply to credit sales, in which the consumer will own the leased property at the end of the contract term after paying a nominal sum.
Regulation M Disclosure Requirements
When Regulation M applies, companies are required disclose all of the terms and costs of the deal they are offering. Before signing a lease, the consumer must be given a written, dated statement disclosing what they would pay or may have to pay. Customers must also be told about any upfront money they have to pay, such as a first monthly payment, a refundable security deposit, a last-month’s payment, a capitalized cost reduction (like a down payment), freight or destination charges, or state or local taxes.
Lessors must also inform their customers about how many lease payments would be made, how much each payment would be, when the payments would be due (including grace periods), and whether penalties would be imposed for late payment or default. The written statement must show the total costs (that is, what the upfront, closeout, and during-the-lease-term payments would add up to). The Consumer Leasing Act also limits the amount of “balloon” payments owed by the customer at the end of the lease.
The leasing company must also disclose other requirements, such as whether the consumer must take out a certain type or amount of insurance. If the personal property has a warranty, the leasing company must inform the consumer what the warranty covers and for how long. In addition, the consumer must be told who is responsible for providing warranty service.
At the end of the lease, the customer may have the option of returning the used equipment to the lessor or purchasing it. Before signing the lease agreement, the customer must be told whether and how the leasing company will assess wear and tear and whether the customer might have to pay extra for excessive wear and tear. (Wear-and-tear standards must be “reasonable.”). There is no provision specifying which party pays for building repairs when equipment is removed.
If the customer has a lease that allows the used property to be purchased at the end of the contract, the leasing company must provide in writing under what circumstances the customer may buy the property and what the cost will be. “Lessors must disclose the purchase-option price as a sum certain or as a sum certain to be determined at a future date by reference to a readily available independent source. The reference should provide sufficient information so that the lessee will be able to determine the actual price when the option becomes available. Statements of a purchase price as the “negotiated price” or the “fair market value” do not comply with [Regulation M’s disclosure] requirements.” Leasing companies must disclose whether they will charge an additional purchase-option fee to cover their costs of selling the leased equipment to the original lessee.
State-Required Disclosures from Independent Solar Energy Producers
Sections 2868 and 2869 of the Public Utilities Code mandate specific disclosures to residential customers, who lease solar equipment or purchase electricity from independent solar energy providers. The law applies to all solar leasing companies, regardless of the lease term or total cost of the lease. It also applies to solar energy companies installing equipment on residential property through power purchase agreements (PPAs). The following is a list of the required disclosures:
- Good faith estimates of the kilowatt-hours (kWh) to be delivered by the solar energy system and the price per kWh of that delivered solar electricity.
- “Plain language” explanations of:
- Terms under which the pricing would be calculated over the life of the contract,
- Operation and maintenance responsibilities of the contract parties,
- Contract provisions regulating disposition or transfer of the contract if ownership in the residence transfers,
- Costs or potential costs associated with the disposition or transfer of the contract, and
- Disposition of the solar energy system at the end of the contract term.
The California Public Utilities Commission (CPUC) may require independent solar energy producers to disclose other information to consumers or to the CPUC, itself, as a condition of receiving ratepayer-funded incentives. In addition, the CPUC can compel companies to provide copies of “all contracts for the sale of electricity … for use in a residential dwelling…”
This State law also requires independent solar energy producers to disclose existence of the residential lease or PPA to the County Recorder. Specifically, a “Notice of an Independent Solar Energy Producer Contract” must be filed within 30 days of signing the agreement against the title of the real property on which the electricity is generated and against the title of any adjacent real property on which the electricity will be used. At a minimum, the filed notice must state:
“This real property is receiving part of its electric service from an independent solar energy producer that has retained ownership of a solar electric generation system that is located on the real property. The independent solar energy producer provides electric service to the current owner of this real property through a long-term contract for electric service.
The independent solar energy producer is required to provide a copy of the contract to a prospective buyer of the real property within ten (10) days of the receipt of a written request from the current owner of this real property.”
If the solar energy system is located on adjacent property, the notice must state instead:
“This real property is receiving part of its electric service from an independent solar energy producer that has retained ownership of a solar electric generation system that is located on an adjacent real property. The independent solar energy producer provides electric service to the current owner of this real property through a long-term contract for electric service. The independent solar energy producer is required to provide a copy of the contract to a prospective buyer of this real property within ten (10) days of the receipt of a written request from the current owner of this real property.”
Other information that must be disclosed to the County Recorder includes:
The address and assessor’s parcel number of the real property against which the notice is recorded.
- The name, address, and telephone number of the independent solar energy producer, and any other contact information deemed necessary by the independent solar energy producer.
- A statement identifying whether the contract is a contract for the sale of electricity or for the lease of a solar energy system, and providing the dates on which the contract commences and terminates.
- A plain language summary of the potential costs, consequences, and assignment of responsibilities, if any, that could result in the event the contract is terminated.
The independent solar energy producer must also file another notice when the contract is voided, terminated, sold, assigned, or transferred or when it transfers its obligation under the contract or changes its contact information.
Once the contract is terminated, the independent solar energy producer must record a subsequent document with the County Recorder “extinguishing the Notice of an Independent Solar Energy Producer Contract from the title to the real property on which the electricity is generated, and from the title to any adjacent real property on which the electricity was used.”
Lastly, if the solar lessee or PPA customer is attempting to sell his or her house while the contract is still in effect, the independent solar energy producer must provide a copy of the existing contract to the prospective buyer upon written request by the lessee or customer.
i 15 U.S.C. 1667-1667f, see http://www.law.cornell.edu/uscode/15/1667.shtml et seq.
ii California Civil Code Section 2985.7 resembles Regulation M, but it only applies to vehicle leasing.
iii See definition of “total contractual obligation” at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=035fd7cea3f1594d3df0888bd5e6ec25&rgn=div9&view=text&node=12:188.8.131.52.184.108.40.206.27&idno=12.
iv The date when the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which amended this provision of the Consumer Leasing Act, becomes effective.
v Amendments to Regulation M, implementing the Dodd-Frank Act, are underway now. See http://edocket.access.gpo.gov/2010/pdf/2010-31530.pdf.
vi See definition of “credit sale” at http://www.law.cornell.edu/uscode/html/uscode15/usc_sec_15_00001602—-000-.html. These types of financial transactions are subject to disclosure requirements in Regulation Z, which implements other provisions of the federal Truth in Lending Act. See disclosure requirements under Section 226.18(j) at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=c9973866e7ab6aad1df3878281241496&rgn=div8&view=text&node=12:220.127.116.11.18.104.22.168&idno=12.
vii For more compliance details, see Supplement I to Part 213—Official Staff Commentary to Regulation M at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=035fd7cea3f1594d3df0888bd5e6ec25&rgn=div9&view=text&node=12:22.214.171.124.126.96.36.199.27&idno=12.