Green Energy Can Complicate Real Estate Foreclosures

A quick drive through almost any newer residential community in the Southwest will show that a lot of residents are embracing “Green Energy” or renewable energy by placing solar panels on their properties. While most people would agree that increasing the use of alternative energy is socially responsible, there are a number of real estate investors that may view it as an opportunity to make additional profits by purchasing distressed properties with solar panels and then reselling those properties for more than they would be worth without solar panels. The theory is relatively straight forward as many believe that foreclosure of a deed of trust that was recorded before the solar panels were installed would extinguish any liens in favor of the vendor that sold or financed the sale of the solar panels.  After all, it is generally held that “a valid foreclosure of a mortgage terminates all interest in the foreclosed real estate that are junior to the mortgage being foreclosed.” See SFR Investments Pool 1, LLC v. U.S. Bank, N.A., 130 Nev. Adv. Op. 75, 334 P.3d 408, 412 (2014) (quoting Restatement (Third) of Property, Mortgages §7.1 (1997)).

NOT SO FAST!  While the general rule is that foreclosure of a senior lien terminates junior liens, most purveyors of solar panels do not encumber the property with mortgages or deeds of trust to secure payment of amounts they are owed.  Rather, they typically either lease the solar panels to the property owner or secure repayment of the purchase price of the solar panels with a fixture filing under the Uniform Commercial Code (the “UCC”).    In cases where the solar panels are leased, the purchaser of the property at a foreclosure sale would not obtain legal title to the solar panels because the lessor owns them. In cases where a fixture filing is recorded to secure payment of the purchase price of the solar panels, a purchaser of the property at a foreclosure may take title subject to the lien securing payment of the purchase price of the solar panels if the lien was perfected before or within 20 days after the day the solar panels became fixtures.  See UCC 9-332.  Any purchaser of real estate should consider these issues before purchasing property with solar panels.

An additional complication may arise upon the resale of property with solar panels. Ordinarily, if the purchase price for the solar panels is secured by a fixture filing, most title companies will require payment and a release of the lien in order to insure title to the property.  The case is different when the solar panels are leased, especially if the lessor did not record the lease or a protective UCC financing statement.  In such cases the sale of the property may not be sufficient to transfer title to the solar panels to the purchaser.   Under Nevada’s real estate disclosure statutes, this may rise to the level of a “defect” which, if undisclosed, would expose the seller to damages equal to treble the amount necessary to repair or replace the defective part of the property, together with court costs and reasonable attorney’s fees.