Farmers and other landowners are increasingly looking at alternative ways to make a living from their land. Historically this might have meant housing or commercial developments. But global uncertainty about energy supplies makes renewable energy developments such as solar power another viable opportunity. Here at CooperBurnett, we have worked closely with landowners since we were founded 45 years ago; we are well placed to advise on the contracts around these arrangements.
Typically, a developer will want to take an option to lease land before it goes to the substantial cost of obtaining the various permissions needed to install and operate plant. Under this arrangement the developer acquires the right to lease the land for a period of time; this justifies them in the investment needed to secure planning permissions over that land as well as agreements to connect to the electricity grid.
Each deal is different of course. But very often the landowner will be paid an option sum at exchange of the option. Legal fees are generally paid by the developer, also.
But care is needed in negotiating an option because the terms of the lease to be granted to the developer may be onerous. A bit like a mining operation, a solar farm is a living, working business which may be operating immediately adjacent to or even within an existing holding. Its core operations can have a significant impact on its neighbours, including business impacts. These need to be thought about carefully by the landowner, by the agents - and by the lawyers involved if the heads of terms allow for further negotiation during the drafting phase.
Very often there is neighbouring land which will be retained across the period of the development which needs accommodating. That is achieved by reserving rights out of the lease to the benefit of the landlord, for example to use an accessway, to maintain hedges or fences or to connect to service media. Even where there is no retained land an owner will want to ensure that no nuisance is caused by its tenant which could give rise to disputes or other legal consequences.
Solar farm leases typically reserve rights to allow optimum irradiation of the solar cells. That may sound innocuous but the consequences of this might be to allow the developer as tenant to remove trees and hedges to maximise the light received by the solar cells. While the landscape impacts of this are taken account of in the regulatory and permitting regimes, the landowner as freeholder or as neighbour may have their own wish to prevent or circumscribe such works; this can only be guaranteed by thought at the outset and careful drafting in the lease.
Much of the lease will follow the usual practices of commercial leasing arrangements with schemes of rent reviews and options both to break the lease at specified intervals as well as to grant further leases - possibly on a different basis at the end of the initial term. Anything adjusting the rent, especially in the context of a longer-term lease, needs specialist commercial advice. Relatedly, we would always recommend that landowners reserve for their own benefit anything valuable from the land which is not attributable to the core activity of solar regeneration. For example, rural land has potential value as a biodiversity site. This could in turn enable the landowner to sell biodiversity net gain credits which are required by other developments to mitigate the environmental damage caused by their developments.
Biodiversity value may exist already - or it may arise over time as a consequence of previously farmed subsoil beneath the solar cells no longer being used for farming and improving in biodiversity value terms as a result. Provided the landlord explicitly reserves out of the lease all rights to quantify and capitalise on such benefits there may be the potential for further income streams across the term of the lease. Any such benefits are, of course, dependent upon site survey and establishment of value which is itself a subject and site-specific question.
Then there’s the structure of payments. Is the landowner to grant the lease for a capital sum or for a yearly rent? A yearly rent is usually much greater than the capital sum but the certainty of being paid an annual rent in full and on time across the term must be more uncertain – especially given the developer is usually little more than a shelf company with no assets of its own.
On a project we advised on recently, the client preferred an annual rent to a capital sum, as this would result in a much larger total payment across the term. But they became increasingly concerned about the strength of covenant of the developer across the term of the lease (41 years extendable to 51 years). The solution we agreed, after heads of terms had been signed off, was to mitigate the risk of the developer failing by negotiating a substantial rent deposit to be held as security by our client across the term of the lease. This was very slightly less than the capital sum the client could have opted for – so it gave the client almost the best of both worlds.
Finally, serious thought should be given to what happens at the end of the term - perhaps half a century away and when all those involved in documenting the arrangement have left the scene. In a leasing arrangement the landlord recovers possession at the end, so what are they taking back? There should be obligations on the tenant to return the site in the same condition it was left in. And going back to the point about the strength of developer covenant, it is usually prudent to require professional and objective site surveys to be undertaken in the years leading up to the end of the term. Such surveys quantify the works of restoration and repair that are needed and feed into a detailed specification for a works obligation or provision of a capital sum.
In a recent example we negotiated a regime of drafting which provided for a soil survey to be undertaken at the start of the lease with obligations on the developer across the final ten years of the term to contribute towards a performance security which would satisfy all the site restoration requirements. This is important not merely as a private obligation between the landowner and the developer but to give the landowner comfort that the requirements of planning conditions enforceable against anyone with an interest in land could be satisfied at the end of the term (and for which it would become liable in default).
Thinking clearly about the land, the likely impacts of renewable energy plant – and the practicalities of enforcing contractual promises - is critical to a successful venture. CooperBurnett brings creative legal thinking to the dialogue between landowners and developers, helping strike a fair balance between their different priorities.
If you wish to discuss this further, please do not hesitate to contact Oliver Bussell by email: opb@cooperburnett.com or telephone 01892 515022
This blog is not intended as legal advice that can be relied upon and CooperBurnett LLP does not accept any responsibility for the accuracy of its contents.
