Solar PV – getting into the generation game
03 May 2016
Landowners hosting large-scale renewable energy developments are the target of a new range of investors looking to access green income. At present, there is real investor frenzy in solar photo voltaic (PV) investment, but companies are typically focusing on three- to four-megawatt (MW) projects producing significant rental incomes in anticipation of planned supports for the solar PV sector. The level of understanding among farmers is little to none and can often lead to panic when they are approached by developers.
Renewable-energy projects such as solar PV and wind will require farmers to enter legal agreements with project developers in order to bring a project to fruition. Legal agreements only work where there is a good relationship between the landowner and the developer. The project is effectively a partnership that has to be worked on by both sides.
The exclusivity agreement is usually a very short-form document that outlines the site with reference to a map and establishes their interest in developing a solar project. Bearing in mind the fact that the developer will have to invest time and money in the investigative element of a project proposal, the developer will want the landowner to sign an exclusivity agreement stating that the landowner will not talk to anybody else for some period of time.
If the landowner is in discussion with other third parties, they are required to cease those discussions and agree to be confidential with any discussions the landowner has with the developer. In some cases, there is no exclusivity agreement at this stage and it is sometimes built into a later-stage heads of terms.
Heads of terms
The exclusivity agreement usually progresses to a heads of terms. If the desktop surveys entered into at the time of the exclusivity agreement yield a positive result, one would expect to see a heads of terms next. This will be a fairly tight form of document that usually sets out bullet points outlining the basis for the project. Some 90% of the time, one sees the developer entering into an option agreement and that option should then lead to a lease.
The heads of terms usually sketches the format of the option and lease agreements and the rights of the developer. The heads of terms will outline the period and term of the option and the lease. Most solar projects are seeing leases between 25 and 30 years and, generally, one sees option periods of anything from one to five years. These option agreements can often be extended, subject to the developer paying a further option fee.
The heads of terms usually set out the fee, which has to be paid upfront and for any renewal rights. It will also set out who is responsible for various aspects, such as insurance. The heads of terms will usually have confidentiality clauses and there may be an exclusivity requirement with it. It is important to note that heads of terms are not designed to be contractually binding.
A formal contract in the form of an option agreement or lease will need to be signed before the parties are bound to proceed with the transaction. Heads of terms are effectively an agreement to conduct business but, other than exclusivity and confidentiality, they are not ordinarily binding and one can pull out, provided the document is headed ‘subject to contract’.
An option agreement usually favours a developer rather than a landowner. It gives the developer the most flexibility in terms of what they are going to do. The reason for that is because of the resources and time that the developer requires to bring a solar project to fruition are enormous. The developer has to be in a position to walk away if required. There are so many moving parts to any solar development project that a developer is going to need that level of flexibility. It really gives all the cards to the developer in terms of deciding whether to proceed with the project or not.
In many wind-farm projects, developers favour option agreements and these can include the right to be granted a lease or to purchase the freehold of a site outright, together with rights of access over the landowners land to the public road. These agreements will include obligations on the developer to pay the landowner stage payments at different stages of the development until the project is fully built.
Many landowners are being asked at pre-option stage to sign a letter of consent to the developer applying to ESB Networks for a grid connection. A number of farmers ask their solicitor to review a one- or two-line consent letter to the developer applying for grid. This is often before the option has been signed because the developer has stressed the urgency with the grid connection etc. There is urgency on developers applying for grid and hence why the short consent letter is often presented to the landowner early in the process.
The types of issues which the developer will explore include:
- Grid connection;
- Power purchase agreements (PPA);
- Solar panel procurement agreements.
All of the above have to be nailed down by the developer and they must feel that they are in a position to achieve all of these moving parts.
The option agreement will see a non-refundable fee paid upfront to the land owner. The landowner is restricting their land use to some extent by signing this option agreement in order to facilitate the proposed development.
During the option-agreement period, the developer will prepare and submit a planning application and will try to progress this reasonably efficiently. It usually obliges the developer to consult with the landowner and show them copies of relevant documents. This will all be at the cost of the developer. It will give the developer access to the site in order to carry out searches and surveys. The developer may also bring machinery and equipment on the site during this time and the landowner should not interfere with the developer in that respect.
The landowner will not be allowed to enter any other agreements, leases or licences of their property without bearing in mind that they have signed up to the option agreement. They must therefore make any third-party lease holder or owner aware of the implications of the agreement they have reached with the solar developer. The option does not usually completely restrict the landowner to assign or transfer the lands subject to the option.
Most solicitors find this to be the number-one concern of landowners at the initial stages of these transactions. Landowners typically say they intend to transfer the lands to their children, but might say something akin to: “I’ll be long gone in 25 years and I don’t want to leave any hassle for my son or daughter.” In the vast majority of option agreements, landowners are allowed assign or transfer their lands subject to them obtaining the consent of the developer and the option usually provides that the consent of the developer ‘shall not be unreasonably withheld’. If it does not, this should be insisted upon.
The option may request the landowner to assist with adjoining landowners to help ensure that the project sits into a community without any trouble. The landowner may be asked to help sell the project to the neighbours to some degree and to help deal with any of the potential planning difficulties that may arise. There is, of course, a limitation as to what a landowner can do in this regard.
At any time during the option agreement, the developer can decide when they are ready to progress the option to a lease – provided they comply with the terms of the option agreement with regard to the payment of any option fee. The developer is required to provide the landowner with sufficient notice that the developer intends to enter into the lease. This notice period will be agreed in the option agreement and is typically between one and two months. So, if the developer wishes to enter into a lease in July, the landowner will be given notice of same in May/June, depending on what is agreed in the option.
Cost recovery and lease
Developers usually pay a contribution or, indeed, all of the landowner’s legal and any other professional costs (e.g. tax advisers, surveyors) associated with the landowner entering into the option.
The lease will generally have a term from 25-30 years. This will be a comprehensive legal document that will contain a map which will not only identify the site, but also the access routes and any way leaves required for both underground and overground cables. The lease will deal with rights of entry on the land to construct the panels, ancillary infrastructure and deployment of on-site security fencing.
It may also provide for access to or way leaves on other land owned or leased by the developer which could include access roads which may also be linking up with third-party lands. There is a right for the landowner to retain the right to use the lands. This will be fairly restricted use such as the grazing of sheep by the landowner. A tricky part of these leases from a farmer’s perspective is that they can contain fairly strong clauses whereby he cannot interfere with the solar project in terms of letting livestock onto the project area or creating a shadow by planting trees or erecting buildings in proximity to the solar panel footprint. These clauses can extend to all the farmers retained land as defined in the lease. There may be an option in some leases for an extension for a period of time even at the end of the 25- to 30-year lease period.
There will have to be a fairly serious due diligence completed on the property. The landowner will have to satisfy the developer that they own the property outright and has not entered into long-term lease agreements with third parties or that fishing rights or other rights of way exist on the property. They must also certify to the developer that no other restrictions exist on the land. If there is a bank charge on the property, the farmer will have to get the bank’s consent before signing the lease.
Generally, the rent is agreed upfront. One option is to index it to inflation. Usually, the landowner is asked at the point of lease entry whether they opt for indexed or turnover version rental agreements. It is worth noting that with some solar leases, the rent is the greater of the index-linked ‘flat sum’ per acre and the gross percentage turnover of the solar project.
In this case, the developer would be required to provide the landowner with meter readings of the electrical output of the project and the turnover in respect of same at the end of each term (as defined in the lease). If that is higher than the sum per acre agreed, then the landowner receives the higher figure. The rent schedules in leases provide for this. It really means that if the project does well, then the landowner receives some reward in respect of same.
Obligation to insure and site maintenance
The developer will undertake to insure the site for employer’s liability and public liability. The landowner would be encouraged to speak to their own insurance company to make sure their own insurances are in place. The developer will maintain and renew the plant and equipment on the solar PV site and the lease will have to specify that the developer, in most cases, will be required to restore the land back to its original condition at the end of the lease period.
The landowner may be able to raise further money by maintaining the site, which would include grass cutting, weed control, monitoring, moving livestock and maybe upkeep of access to the site. These would be separate agreements to the lease agreement. Landowners would be aware that maintenance payments should be a separate payment to the rent paid. Landowners should always seek tax advice in respect of both the rental payments and the maintenance payments.
While option and lease agreements are the most common agreements, there are two other ways of doing this. One is a conditional contract subject to specific conditions in that the landowner knows they have a deal if these have been fulfilled. The final one is an option that we are unlikely to see: an unconditional contract whereby the landowner has a deal and it is going to happen one way or the other.
It is important for landowners to familiarise themselves with previous work completed by the developer and investigate their track record. It is important that the developer knows what they are talking about and can handle the complexities of such transactions. Farmers must enter into agreements carefully and seek expert advice to negotiate the best possible outcome.
Authors: Barry Caslin, Teagasc; Edel Traynor, Barry Healy & Co. Solicitors*; and Adam Hogg, Mason Hayes & Curran**
*Barry Healy & Co Solicitors is a general practice law firm specialising in court litigation, property transactions and commercial law. Edel Traynor has experience in acting for landowners in relation to wind and solar projects. The company has two locations: in Monaghan and in Phibsboro, Dublin.
** Mason Hayes & Curran is an award-winning business law firm providing strategic and commercial legal advice. Adam Hogg has extensive experience representing developers, funders and investors in a wide variety of energy projects in Ireland and abroad. The company is based in Barrow Street, Dublin 4.