The Prepaid Solar Contract: Paid Up Front, Sold Years Later

There is a version of a solar arrangement that confuses almost everyone who meets it: the prepaid contract. The homeowner paid a lump sum at the beginning, there is no monthly bill, and years later the house goes on the market described as having solar with nothing owing.

All of that can be true and the system can still belong to somebody else.

A prepaid lease or prepaid power purchase agreement is a contract in which the payments were made up front rather than monthly. Prepaying the payments does not convert the arrangement into ownership. The provider still owns the equipment, the contract still has a term, and the term still ends on a date somebody should know.

Anthony is a real estate licensee, not an attorney, a lender, a contractor or a tax adviser. Solar contract terms, utility tariffs and interconnection rules change constantly; verify every specific here against the actual agreement, the provider and your utility before relying on it.

Why it reads as owned

Because every visible signal points that way. There is no monthly draft on the bank statement. There is no payment coupon in a drawer. A seller asked whether the solar is paid off answers yes, honestly, meaning that they wrote a large check once and have paid nothing since.

The seller is describing their cash position accurately and the property's legal position inaccurately, without intending to mislead anybody. That combination is exactly what makes this worth catching early rather than at the point where a buyer's expectations have already formed. The underlying distinction between the arrangements is laid out in the owned versus leased guide.

The three facts to establish

WHO OWNS THE EQUIPMENT. This is answered by the agreement, not by the payment history. Read the document and find the clause that says whose property the system is.

WHEN THE TERM ENDS. A prepaid contract still runs for a defined period. The prepayment covered that period, and it did not buy the equipment forever. What happens at the end, and what the options are, is the same set of questions a lease reaching its final year raises, treated in the final year guide.

WHAT TRANSFER REQUIRES. Even with nothing owing, most third-party arrangements require the new owner to be approved and to sign something. A contract with no payments still has a party to it, and a sale changes who that party is.

What is actually being sold

Here is the part that catches sellers.

The money was spent once, years ago, to buy a period of use. What remains to be transferred is the REMAINDER of that period, not the original bargain. A contract with a long remaining term is a genuine benefit to a buyer, who receives the use of a working system with nothing to pay. A contract close to the end of its term is a much smaller thing, and it comes with the end-of-term decision attached.

Sellers occasionally expect a prepaid contract to be credited as though the original outlay were sitting in the roof. Buyers, sensibly, look at what they are receiving from today forward. How valuation actually treats a system, and why third-party arrangements are handled differently from owned equipment, is covered in the appraisal guide.

The escrow mechanics do not simplify

Zero balance does not mean zero paperwork. If anything, prepaid arrangements are more likely to be handled casually, because nobody is watching a payment.

The provider still has to confirm the terms in writing, and the transfer still has to be requested, processed and approved on the provider's timetable. The provider may also hold a recorded interest against the parcel protecting its ownership of the equipment, which will appear on the preliminary title report whether or not a dollar is owed. What appears there and why is set out in the title report guide.

None of that is a problem. All of it is a schedule. A transfer identified in the first week of escrow is administration; the same transfer identified in the last week is a delay.

Questions worth putting in writing

• Is the equipment owned by the homeowner or by a provider, according to the agreement itself?
• What is the start date and the end date of the term?
• Is anything at all still payable, including fees, taxes or charges that survive the prepayment?
• What is required to transfer the agreement to a buyer, and how long does the provider say that takes?
• Is there a transfer fee, and does anything else become payable on transfer?
• What happens at the end of the term, and what are the stated options?
• Has anything been recorded against the property in connection with the system?

Ask the provider directly and keep the reply. A written statement from the party that actually holds the contract is worth more than any recollection, and the formal version of that request is the estoppel process described in the estoppel letter guide.

For the seller

Establish the facts before the listing, and describe the arrangement as what it is. A prepaid contract with a long remaining term is a good thing to have, and it is easier to present as a good thing when it is presented accurately. A buyer who is told at the outset that this is a prepaid third-party agreement with a stated remaining term evaluates it. A buyer who works it out during escrow starts wondering what else was described loosely.

For the buyer

Do not treat the absence of a payment as the end of the inquiry. Ask which arrangement this is, get the document, read the term, and find out what transfer requires. Then decide what the remaining term is worth to you, which is a different question from what the seller once paid.

Where to go next

Read the executed agreement, order the title report, and put the transfer question to the provider in writing in the first week. The wider set of transaction issues is collected in the solar homes guide.

Anthony Grynchal has been licensed in California since November 2009.