Looking more closely at solar leases
by Sally Colby
Many landowners in the Northeast have received letters, postcards and even personal visits from solar developers who are interested in leasing land. Brooke Duer of the Ag Law Center at Penn State said it’s important to understand the big picture when looking at solar development leasing.
A solar development lease includes two parts. The option agreement expresses the developer’s desire to move forward in determining whether a property is suitable and usually includes 10 to 15 pages. The option agreement locks in due diligence on a one- to five-year period, during which the developer decides whether to proceed. The option includes a feasibility study, full land survey, identifying and overcoming legal hurdles and other details.
The lease agreement is attached to option agreement and includes 40 to 60 pages or more. If the developer proceeds, the lease agreement is sent to the landowner to sign within a defined time period, and there is no chance to renegotiate terms.
Duer explained that if a landowner signs the option agreement, the landowner is also agreeing to the terms of the attached lease agreement in its entirety. “The tough part about being the landowner is that if you sign the option agreement and say ‘go ahead, I will grant you the option to investigate whether my property is suitable for solar development, and if you (the developer) determine that it is suitable, you can exercise the option and I will sign the lease,’ you are not only agreeing to grant the option to them, you are also agreeing to terms of the lease,” he said. “The lease is attached, and you’re saying ‘I will agree to the lease in the form attached for this option.’ You should assume there is no room to renegotiate any of the lease terms after you sign the option agreement. It’s a unilateral option – you can’t back away, but the developer can decline.”
A landowner may also receive a preliminary letter of intent with facts and figures designed to make the project appear appealing. Duer said such letters are not an option or lease agreement – you’re just agreeing not to share information.
Duer explained that a solar development lease is a ground lease, which normally means someone leases ground and intends to build something on it. “Most of the time, the default provision in the law is ‘you build something on my ground, I now own it,’” he said. “But that isn’t what goes on with a ground lease. They retain ownership of the structure on top, you own the land under.” This is an unusual legal relationship because the solar company doesn’t own or control what happens with the ground under their $100 million worth of solar panels.
Competing interests must be considered – the company needs to ensure they are insulated from any disturbances to their ability to continue at that site for the entire duration of the lease agreement. The landowner must have encumbered the property in various ways, through avenues such as mortgages, other liens or leases, rights of way and easements, enrollment in various government programs, FSA/NRCS administered programs, federal conservation practices (such as CRP), ag conservation easements, hunting leases or renters. “As a landowner, you need to consider these things,” said Duer. “You may be booted out of a program and owe years of tax savings.”
The landowner has a lot of work to do up front, and Duer suggested landowners do not move ahead with any phase or sign anything without first having an attorney review and explain the documents. Signing an option puts the landowner in the position of becoming a commercial landlord, something most landowners have not experienced.
“Everything is negotiable in these transactions,” said Duer, “but you need to be aware of what the future issues you want to negotiate. If things come up that you weren’t aware of, your backstop is insurance with an indemnity provision. They are fully aware that they need to buy liability insurance on the property, and they need to have you as a named additional insured for the life of the lease, and their policy has to be primary.”
Duer laid out the average timeline for a solar development project, stressing that the various phases can vary in length. The option phase, from a year to several years, is when the developer conducts due diligence regarding the project. During the construction phase, developers are now occupying your land and starting to build. The landowner should have already negotiated for payment during that the construction phase. After the build is complete, the operational phase begins and energy is generated. At this point, the landowner should expect full payment. “Once they build and it’s hooked up, the solar company has a lot of money invested,” said Duer.
The decommissioning phase, a point Duer said he hasn’t seen any projects reach, is when the lease comes to an end and the company may or may not renew the lease. If the developer moves forward with the decommissioning phase, they have already agreed to restore the property to how it existed prior to installation. However, money is still owed to the landowner, which creates leverage to complete decommissioning.
“If you get into this, it’s not going to be like anything you’ve seen before,” said Duer. “The documents being used right now are not battle-tested documents. You’ve got to read every word. They’re being created from scratch, and there’s no experience in the world of people using these documents. Every company has a different form lease, and they’ve usually adapted them from a commercial development ground lease like a shopping center or industrial park.”
Landowners should never sign a document as-is. “I’ve seen them with all kinds of provisions that just cannot be in there for a normal landowner,” Duer said. “There’s a lot that has to be looked over very closely.” He added the fact that solar lease documents are so new means there’s no concrete list of deal-breakers.
“There’s room for creativity,” he said. “You’re not going to be able to negotiate these agreements by yourself. You’re going to need an attorney, period, end of discussion. One of the biggest follies is to think you’ve read it closely enough to know what it says. These are whopping documents that have been adapted from ground leases that have been used in completely different circumstances.”
More information about solar leasing is available at aglaw.psu.edu.