Avoid pitfalls with renewables lease agreements

For many farmers and landowners, renting out a site to a renewables developer is a more appropriate option than developing a scheme themselves, writes Cath Anthony from Bidwells’ renewables team

There are a variety of business models available from a typical landlord and tenant arrangement to a DIY owner-operated system and everything else in between, including joint ventures.

The model that suits a particular individual is dependent on their appetite for risk and reward as well as energy demand, investment strategy and budgetary constraints.

Unfortunately along with the reputable firms, there have also been “cowboys” jumping on the bandwagon who have little understanding of the industry and property deals, and who offer badly written contracts.

Many landowners and farmers have been offered agreements that include too little incentive for too little reward and place inappropriate obligations on the landowner. These agreements tend to be for at least 25 years, tying up the land long-term and should be scrutinised carefully.

Good professional advice is essential and typically a developer will pay for all reasonable agent and legal fees incurred. This should be agreed as early as possible to avoid later disputes.

Exclusivity agreements, options and leases

Often an option will be granted that will enable the developer to undertake preliminary surveys and gain planning permission before signing up to a long-term lease.

Initially a relatively short (typically one- to two-year) exclusivity agreement may be put in place, for a small fee, while negotiations over the terms of the option and lease agreements are taking place to show the intention of the parties to agree the terms of a deal. Although not typically legally binding, they will restrict the landowner from entering into any other agreements for the duration of that term.

Heads of terms are usually negotiated between the parties and their agents, and provide the basis for the terms set out in the option and lease, which will then be drafted by solicitors.

An option agreement will bind the two parties for a specified period of time. If certain conditions of the options are satisfied (say where planning consent is obtained) the landowner may be compelled to enter into a lease.

It is extremely important to carefully consider terms before agreeing to the developer’s proposal. This is a finely balanced act, as an onerous scheme with terms that are too restrictive will probably lower the payment a developer is willing to pay and may make a scheme less likely to succeed. But it is equally important to protect yourself and gain sufficient reward.

Consider all terms, including:

• The price of the option or any premiums to be paid
  
• The extent of land bound by the option – often large areas, perhaps even whole estates, are proposed. It is important to encourage a developer to narrow this down in order not to tie up the land in the long term
  
• The amount of land to be entered into the lease
  
• The duration of the option, by which time the option must be exercised; ensure there are obligations on the developer to progress the project. It is not unknown for developers to tie up sites to reduce competition with other sites that they are involved with locally
  
• The trigger point where the option is exercised
  
• The value of the lease if the option is exercised – for instance, the rental level – and when the rent will start to be paid; will there be a rent-free period when the scheme is being constructed?
  
• A requirement that the landowner must consent to and have the option for input into any planning application and designs before they are submitted. Planning costs – and potentially a contribution to time/fees associated with the landowners involvement – will normally be covered by the developer
  
• Insurance and indemnities
  
• End of tenancy/decommissioning provisions. This may require the developer to restore the land back to agriculture with a specific bond or parent company guarantee to fund this
  
• Ability to grant rights over the land – are there existing restrictions, is permission required from a mortgage lender? What is the current tenure of the land and do you require permission from the landlord or if you are a landlord do you have the ability to resume possession?
  
• Will the development require easements/wayleaves across other land, or does someone else need to cross your land to connect their scheme to the grid – these rights are difficult to value but can be worth considerable sums
  
• Rights and repairing obligations over any access roads
  
• Tax implications, potential impact on SPS qualification and, very importantly, how will it affect the existing business?
  
• Ensure the developer has the capacity and ability to deliver the project; check its reputation and whether it is able to demonstrate a track record. A strong relationship with the developer will benefit the project hugely, especially if there is more involvement than simply providing a site, for example, if feedstocks are also included
  
• Who is responsible for operation/monitoring of the scheme?
  
• Are other agreements such as feedstock supply tied in? Security of supply is essential to the developer and so the farmer will have a good negotiating position. Would a simple property deal on the land rented for the site be preferable with separate agreements for the operation, supply of feedstock and use of digestate and so on?

Consider pricing structure of feedstocks carefully – for AD, while a guaranteed price and the opportunity to introduce additional break crops into the rotation may reduce the impact of the volatility of crop prices, a long-term commitment at a fixed price will look less attractive in some years (such as last) compared with others. A 1MW AD plant will require approximately 20,000-22,000t of maize, equating to approximately 1,200 acres of land and roughly the same amount of land is required for digestate utilisation.

Waste AD plants, which command higher rents, may not require feedstock agreements but need substantial areas for digestate.

Rent

Although rents often look attractive, being far in excess of agricultural return, it is important to benchmark these against others to check they are actually reasonable and at market level.

Each site will vary hugely and the site attributes (including location, size, opportunity for local energy export, grid connection costs and constraints) will determine the type of technology that is suitable and the level of rents that can be achieved.

Often the rent can be structured to include a minimum rent that is topped up by a variable portion, which may be based on turnover or income.

Alternatively rent may be based on capacity or amount of energy generated – this will ensure that the landowner, as well as the developer, benefits from any future improvements in technology which will result in more output per hectare.

A minimum rent will ensure that the landowner is still receiving an income if for some reason the site is not generating – for example, due to technical problems. It may also be possible to acquire free or cheap electricity/heat as part of the deal.

In addition, consider the best rent review provisions so that rents remain rewarding throughout the term.

More on this topic

For more information on renewables, visit our dedicated Farm Energy section