Harvest Real Estate Law
Firm Insights

Battery Storage Tenants: Key Considerations for Landlords

By Michael Rivera, Partner

Commercial landlords are seeing an increase in tenants storing lithium batteries and other types of batteries in their premises and buildings.  This is even more prevalent in states – like California – that have lofty ambitions to reduce their dependency on fossil fuels and to transition from electricity to alternative sources of power. 

This creates an ever-growing risk in leased premises – including fires or even explosions as a result of battery storage.  Fire risks are increased in lithium batteries because of “thermal runaway”: excessive heat inside a battery leads to a chemical reaction that spreads to other batteries in a chain reaction. Lithium batteries can also enter an uncontrollable, self-heating state that can result in the release of gas, causing a possible explosion.

Why the Increase in Battery Storage?

Energy storage by commercial tenants has taken on a higher profile in recent years as more renewable sources of power have come onto California’s electric grid. Many jurisdictions are gradually requiring energy storage to be integrated into all future commercial structures via updates to their building codes.

Alternative power production is abundant during sunny days but disappears during the night. Energy storage, particularly from batteries, is seen as a way to fill that gap. Storage systems take solar power generated during the day and discharge the electricity later, primarily during the evening hours when California’s grid is under the most stress.

As a result, more landlords and tenants are turning to energy storage, particularly in California where there is a target of deriving 100% of electricity from carbon-free sources by 2045. For this reason, it is expected that there will be an increase of landlords and tenants storing lithium batteries in leased premises and buildings, whether for production purposes or use purposes.

How to Manage Risk

With the increase in battery storage, landlords should consider how to effectively manage the increased risk of fire within a premises or building.  It is important for landlords to discuss battery storage with their building insurance providers, and they should also require tenants to follow subscribed guidelines for storage – which may lead to insurance carriers offering an endorsement for the storage of batteries.  Guidelines should consider including the following topics:

  • Construction and Tenant Improvements –Where indoor storage areas for lithium-ion and lithium metal batteries are located in a building premises with other uses, battery storage areas should be separated from the remainder of the building by two-hour-rated fire barriers or horizontal assembliesFire barriers should be constructed in accordance with local building codes (in California, see Section 707 of the California Building Code), and horizontal assemblies should be constructed in accordance with local building codes (in California, see Section 711 of the California Building Code).
  • Fire Protection SystemsIndoor storage areas for lithium-ion and lithium metal batteries should be protected by an automatic sprinkler system complying with local building codes or an approved alternative fire suppression system. The system design should take into consideration the current practices and insurance requirements for lithium batteries.
  • Fire Alarm SystemsIndoor storage areas for lithium-ion and lithium metal batteries should be provided with an approved automatic fire detection and alarm system complying with local building codes. The fire detection system should use air-aspirating smoke detection, radiant energy-sensing fire detection, or both.
  • Insurance Protections in the Lease – Since battery storage is a specific use, a landlord lease to a tenant who is contemplating storing batteries in the premises should ensure that the lease clearly states the tenant’s responsibility to the insurance company regarding all insurance requirements pertaining to the battery storage. In addition, landlords should consider requiring tenants to comply, at the tenant’s expense, with the rules and regulations required by the American Insurance Association (formerly known as the National Board of Fire Underwriters) and any similar body.  Landlords should also consider inserting language to the effect that a waiver of subrogation endorsement will not apply in the event the tenant’s use or storage of batteries causes a loss or damage. Additionally, if the loss or damage is caused by the tenant’s storage of batteries, the landlord should consider shifting the responsibility of deductibles required under the landlord’s insurance coverage to the tenant.  When it is not practical to require that a tenant to maintain the policy in a multi-tenant building, the landlord may consider allocating a portion of the overall deductible and premium increase to each tenant as part of common area expenses based on their proportionate share of the total building area. 

As the push toward alternative energy sources continues to grow in California and beyond, it is important for landlords to ensure that they properly manage the risk of a tenant’s battery storage in their commercial leases.