Both the energy transition and scarcity of raw materials require the re-invention of real estate (development). Part of this re-invention includes the sector embracing the product-as-a-service or ‘PAAS’ concept. Buildings are being equipped with renewable energy installations, such as solar panels or heat-cold exchange systems. Pushing suppliers to increase the technical lifetime and circularity of their product, building installations such as elevators are being leased by the property owner or tenant instead of purchased. This may even concern building materials such as facades, preventing raw materials going to waste.
Background
This re-invention of real estate (development) results in more parties with an interest in the building besides the property owner. The classic legal concepts of Dutch property law, however, do not always cater for this new attitude towards property ownership. For example, when a property owner or tenant outsources the installation and operation of solar panels by way of lease, the supplier/operator ‘loses’ its ownership of the panels to the property owner upon installation due to accession. To avoid such accession, a right of superficies is generally established for the benefit of the supplier/operator. A right of superficies offers various advantages. The establishment of a right of superficies, however, also implies several complications and added costs, causing it to become an insurmountable obstacle for some buildings and renewable energy projects.
The circular lease agreement
An alternative to a right of superficies is the ‘circular lease agreement’; a contractual approach saving costs and increasing flexibility for both the operator and the property owner. The circular lease agreement provides the operator the exclusive right to use a part of the building for the relevant installation and contains the standard elements of a lease agreement (such as a clear description of the leased (part of the) property, the term and the rent). To serve as an adequate alternative, it is crucial that the circular lease agreement also includes (i) the right of quiet enjoyment of the operator, (ii) the right of removal of installations or materials as installed by the operator and (iii) the step-in and repair rights for a possible third party debt provider. To ensure that the circular lease agreement is not affected by the insolvency of the property owner, it is of particular importance that all obligations of the property owner (the lessor) are formulated as an obligation to tolerate or to refrain from activities that would adversely affect the activities of the operator and subsequently its debt provider. Compared to a right of superficies, parties to the circular lease agreement are more flexible in giving substance to and amending the terms and conditions of their agreement.
Flexibility, time saving and cost reduction
Although the legal basis and implications of both concepts differ, the circular lease agreements offers the operator a comparable result as the establishment of a right of superficies from a practical point of view. Both legal routes ensure that the activities of the operator are protected for the agreed term, also in the event of the sale of the building or the insolvency of the property owner. The step-in rights for the benefit of the potential debt provider – especially in case of a real estate portfolio – can be considered an adequate alternative to the right of mortgage that would otherwise be established on the right of superficies. This step-in right therefore improves the ability for the operator to raise external funding.
The advantages of flexibility, time saving and cost reduction make the circular lease agreement a valuable instrument for shaping, and accelerating the re-invention of real estate (development).
Further information
A more detailed explanation on the circular lease agreement is available, in Dutch, in M.D. Bezooijen & W.F.L. Runge, ‘Verduurzaming van vastgoed’, WPNR 2023/7241, p. 573-581.
For further information on the circular lease agreement and the possibilities for product-as-a-service concepts, please contact Marjet van Bezooijen, Julia Damsteeg, Werner Runge or any of our A&O Renewable Energy experts.
