The landlord-tenant solar split: structures that actually work

The landlord-tenant split kills more commercial solar projects than any other single factor. Landlord pays the capex, tenant gets the electricity benefit, and the deal-flow stalls because nobody owns the case. Three workable structures break the deadlock — and they're all about lease drafting, not technology.

The economic problem in plain terms

A commercial solar project pays back through reduced electricity import. On a leased commercial property, the tenant generally pays the electricity bill — so the tenant captures the saving. The landlord owns the roof, but their incentive to install solar is limited to the rent uplift they could achieve at lease renewal — typically 0.5–1.5% on annual rent, which is meaningful but rarely enough to justify £200k+ capex.

The default outcome: nothing happens. The tenant won't pay capex on someone else's asset they don't own. The landlord won't pay capex when the saving accrues to a counterparty they don't supply electricity to. Both sides recognise the project value but the structure prevents it being captured.

Structure 1: Tenant-funded with rent abatement

The tenant funds the solar capex; the landlord agrees a rent abatement structured to compensate the tenant for capex outlay should the tenant exit before the system pays back. This is most workable on long-tenure lease arrangements (10+ years remaining) where the tenant has stable strategic occupation of the building.

The lease drafting needs three specific provisions: (1) the tenant's right to install solar without landlord consent for technical conditions, (2) the agreed rent abatement formula at break, and (3) clarity on what happens to the system at end-of-lease — in most cases either the tenant removes it (rare and expensive) or the landlord acquires it at depreciated book value.

Tax treatment: the tenant claims capital allowances on the solar (50% FYA + 6% special-rate pool) provided they have legal title. They retain electricity savings. The arrangement is typically clean for both sides where lease tenure supports it.

Structure 2: Landlord-funded with green-rent uplift

The landlord funds the solar; tenant agrees to a "green-rent" premium reflecting partial capture of the electricity saving. Premium structures vary — fixed pence-per-kWh of generation, percentage of estimated saving, or stepped year-on-year with periodic reset.

This works best where landlord financing is competitive (lower cost of capital than tenant), and the tenant is happy to share saving with the landlord in return for not having to manage the project. We see this structure most commonly in long-let single-tenant industrial portfolios where the landlord has scale to amortise project management and procurement costs across multiple sites.

Lease drafting issues: green rent classification (does it count toward rent review base, does it pass through service charge, how is it stripped out at lease end?). Typically, green rent is structured separately from base rent to keep rent review mechanics clean.

Tax treatment: the landlord captures full capital allowances on the solar. Green rent is treated as additional rental income subject to corporation tax. Where landlord is a property REIT, this introduces qualifying-income considerations that sometimes constrain the structure.

Structure 3: Third-party PPA with split benefit

A specialist PPA developer installs and owns the solar on the landlord's roof. The PPA developer sells electricity to the tenant at a fixed price below grid (typically 14–18p vs prevailing 20–25p). The landlord receives a small ground-rent payment from the PPA developer (typically £500–£1,500/MWp/year).

This is the cleanest structure for multi-let or short-let buildings. The PPA developer deals with the lease complexity, tenant changes, and project management. The landlord and tenant each get a small benefit (ground rent, electricity discount) without absorbing project risk.

The downside: PPA economics deliver 30–50% less lifetime saving than capital-purchased solar, because the PPA developer captures the difference as their return on capital. Where the landlord or tenant has the balance sheet to fund directly, Structure 1 or 2 produces materially better project value. Structure 3 is the right answer for portfolios where direct funding is genuinely impractical.

When the structures break down

Three situations where lease structure won't bridge the split: (1) very short remaining tenure (under 5 years) — neither structure pays back; (2) multi-let buildings with frequent tenant turnover — the administrative complexity exceeds the benefit; (3) tenant-mix changes during lease (e.g. industrial-to-warehouse repurposing) — solar sized for the original tenant becomes inappropriate.

For cases (1) and (3), the answer is to defer until lease renewal and structure the project as part of the renewal commercial terms. For case (2), the answer is structure 3 — third-party PPA — or accept that the project doesn't fit.

The drafting starts at heads of terms

The single most important practical point: structure the solar provisions at heads-of-terms stage of any new commercial lease. Retro-fitting solar provisions into existing leases is expensive and contentious. New leases under negotiation in 2026 should include green-clauses as standard, with explicit landlord/tenant capex allocation and saving distribution mechanisms — even if no solar project is currently planned. The clauses cost nothing to include and remove the structural blocker if the case becomes attractive later.