Who Owns the Solar PV System if the Offtaker Stops Paying?

Power Purchase Agreements (PPAs)

In the South African renewable energy landscape, PPAs are widely used to facilitate solar photovoltaic (PV) projects, enabling offtakers to procure renewable electricity with little or no upfront capital investment. The offtaker agrees to purchase electricity generated by the Independent Power Producer (IPP) at an agreed tariff for a specified term.

This model has facilitated the growth of solar PV across both the commercial and industrial (C&I) and utility-scale markets. But what if the offtaker defaults or enters insolvency – who owns the solar panels, inverters and associated balance-of-system components, and who is legally entitled to remove them?

If accession occurs: The landowner

A potential legal risk arises from the principle of accession, specifically inaedificatio, whereby movable property may become incorporated into immovable property. Where the IPP’s solar PV infrastructure is so permanently attached to the land or buildings that it loses its character as movable property, it may, depending on the circumstances, become part of the landowner’s immovable property.¹ South African courts generally consider factors, including the parties’ intention, the nature and purpose of the item, and the manner and degree of annexation when determining whether accession has occurred.²

In Theatre Investments (Pty) Ltd v Butcher Brothers Ltd,³ the court found that certain theatre fittings and equipment had acceded to the building. The fact that the items could be removed without causing structural damage was not decisive; rather, the court considered the nature and purpose of the items, the manner of their attachment, their use and the duration of the lease in determining whether permanent annexation was intended.⁴

Where the PPA is properly drafted: The IPP

Clauses preventing accession:

The PPA should expressly address the factors relevant to determining whether accession has occurred:

• The parties’ intention: The PPA should expressly record the parties’ intention that the solar PV system remains the property of the IPP and is not intended to accede to the land or buildings, incorporating an appropriate retention-of-title provision.⁵ The PPA should further record that this intention applies notwithstanding the permanence of the installation or its expected operational lifespan.⁶ Any third-party financing or security interests in the solar PV system should also be disclosed and appropriately recognised in the contractual arrangements.⁷
• The nature and purpose of the item: Define a finite contract duration (e.g., 15–25 years) to reinforce that the solar PV system’s purpose is to serve a finite commercial arrangement rather than form a permanent part of the property.⁸
• The manner and degree of annexation: Include clear decommissioning, dismantling, and site-restoration provisions to demonstrate the solar PV system is capable of being physically removed without causing structural damage.⁹

Where the PPA is properly drafted and ownership of the solar PV system remains vested in the IPP, the solar PV system should not form part of the offtaker’s insolvent estate upon liquidation and the IPP may seek to recover the system by means of the rei vindicatio.¹⁰

Clauses dealing with the right to access the property after termination:

The agreement should expressly and sufficiently detail the IPP’s right to enter and access the property for purposes of installing, operating, maintaining, dismantling and removing the solar PV system, including the applicable access routes, gates, times and reasonable procedures. This is particularly important where access depends on specific routes or gates, as illustrated by Mooi Plaats Solar Power (RF) (Pty) Ltd v Bovlei Boerdery Trust and Another,¹¹ where the court considered the scope of the solar project company’s contractual and servitudal access rights and whether the access enjoyed was sufficiently free and unfettered.

If a Special Notarial Bond (SNB) was registered: The lender as secured creditor

Where the acquisition of the solar PV system is financed, the lender may require the registration of an SNB under the Security by Means of Movable Property Act 57 of 1993 over specifically identified movable assets, including the solar panels, inverters, mounting structures and other identifiable components. An SNB strengthens the lender’s security but does not eliminate the risk of accession, as the security depends on the bonded assets retaining their character as movable property.¹²

Upon the debtor’s default or liquidation, a properly registered SNB gives the secured creditor a real right over the bonded assets and a preferential claim against the proceeds realised from those assets over concurrent creditors.¹³

If it is a project finance structure: The lenders can enforce their security rights

Project finance structures backed by long-term PPAs are commonly used in South Africa for Renewable Energy Independent Power Producer Procurement Programme (REIPPPP)¹⁴ projects and for large C&I developments.¹⁵ In a limited-recourse project finance structure, the project is generally undertaken through a Special Purpose Vehicle (SPV), also referred to as the project company, which is established as a separate legal entity to ring-fence the project’s assets, liabilities, cash flows and contractual arrangements from those of its sponsors. The SPV holds the project assets, including the solar PV system, and enters into the principal project agreements. The project debt is generally serviced primarily from the cash flows generated by the project, with the lenders’ recourse to the sponsors limited in accordance with the financing arrangements.¹⁶

In REIPPPP projects, Eskom is generally the offtaker under the PPA. Where applicable, government guarantees contribute to the project’s bankability. By contrast, a private C&I project would not generally benefit from equivalent public-sector support, and a material default by the corporate offtaker may result in reduced project cash flows and potentially trigger a default under the SPV’s financing arrangements.

This may enable the lenders to enforce elements of their security package to preserve the value of the project and its underlying cash flows, including:

• Security over project assets: Enforcement of an SNB registered over specifically identified movable assets¹⁷ of the solar PV system may enable the secured creditor, subject to applicable enforcement requirements, to realise those assets and claim preferential payment from the proceeds.¹⁸
• Pledge of the SPV’s shares: Enforcement of a pledge over the SPV’s shares¹⁹ may enable the lenders to acquire or cause the transfer of the pledged shares in accordance with the security arrangements and applicable law, thereby obtaining control of the SPV, which remains the owner of the solar PV system.²⁰
• Direct agreements: Tripartite Direct Agreements among lenders, the SPV and key counterparties, including offtakers and contractors, may provide lenders with step-in and substitution rights. Step-in rights may allow lenders to appoint a temporary manager to assume direct operational control over the project's physical assets and contracts. In contrast, substitution rights enable the lenders to replace the defaulting SPV with a substitute project company by ceding and assigning the relevant contractual rights or novating the relevant project agreements, thereby allowing the project and its underlying assets to continue operating under the substitute entity.²¹

If the IPP defaults in paying the rent: The landowner via the landlord’s tacit hypothec

To secure long-term site rights, the IPP or its project SPV and the landowner will frequently enter into a lease agreement whose term corresponds, or is substantially aligned, with that of the PPA. The landlord’s tacit hypothec arises by operation of common law in respect of movable property brought onto leased premises as security for unpaid rent.²²

The existence of the hypothec therefore creates an additional consideration for an IPP whose solar PV equipment is installed on leased property. Where the Electricity Regulation Act 4 of 2006 applies, however, the statutory protection discussed below may materially alter the position.

If section 23 of the Electricity Regulation Act 4 of 2006 (ERA) applies: The licensee

Where the IPP is a licensee under the ERA, section 23(1) provides specific protection for assets belonging to the licensee that are lawfully constructed, erected, used, placed, installed or affixed to land or premises not belonging to the licensee. Such assets remain the property of the licensee notwithstanding their fixed or permanent nature.

Section 23(2)(a)–(b) provides that such assets may not be attached or taken in execution, or be the subject of insolvency or liquidation proceedings instituted against the owner of the land, landlord or occupier, and may not be subjected to a landlord’s hypothec for rent. Accordingly, where section 23 applies, it provides an important statutory protection against the consequences that might otherwise arise from the permanent attachment of a solar PV plant to another person’s property.

Ownership ultimately turns on the contractual arrangements

Who owns the solar PV system after an offtaker defaults or becomes insolvent cannot be answered simply by looking at who has physical possession of the panels. The outcome depends on whether accession has occurred, the precise terms of the PPA and any lease, whether the IPP is a licensee protected by section 23 of the Electricity Regulation Act, and the security package put in place by the lenders.

Parties should therefore draft the PPA, lease and financing documents so that they expressly deal with ownership, accession, access rights, dismantling, removal, site restoration and enforcement. Clear contractual provisions, structured in line with South African property, insolvency and secured-transactions law, materially reduce the risk of disputes.

This article is for general information only and does not constitute legal advice. No liability is accepted for any loss arising from reliance on the information contained in this article. Specific legal advice should be obtained in relation to particular circumstances.