A solar land lease is a legally binding contract and conveyance of an estate in real property between a landowner(s) and a solar photovoltaic (PV) development company that sets out the rights and responsibilities of the parties to that contract and conveyance. Whether the landowner has the opportunity to negotiate the provisions of the lease or not, it is important to understand the meaning and the legal implication of each provision in the lease. Landowners should consult with a lawyer who handles commercial real estate transactions and has experience in solar photovoltaic projects prior to signing a lease. The North Carolina Bar Association’s Lawyer’s Referral Service can help locate a lawyer in the landowner’s area. The service can be accessed online or by phone at 1-800-662-7660. For more information pertaining to the threshold issues that landowners need to consider prior to entering into a solar land lease with a solar PV developer, refer to the Threshold Issues for Landowner Solar Leasing factsheet.
The following are provisions that commonly appear in leases drafted by solar PV development companies and presented landowners for consideration.
Leasing your land for solar PV development can tie up your land for a considerable length of time. Solar ground leases can last between 15 and 30 years, with most lasting around 20 to 25 years, which coincides with the useful life expectancy of solar PV panels. Most solar PV manufacturers include a 20 to 25 year warranty on their solar PV panels with the expectation that their panels will produce at least 80% of their original power output by the expiration of the warranty period. When reviewing proposed lease terms, be sure that your future plans for the property are compatible with a solar ground lease of up to 30 years.
The most common format for payment of rents is a set dollar amount per leased acre to be paid on an annual basis. Some developers pay once per year and some break it up into semi-annual payments. The events that trigger commencement of rent payments vary from developer to developer and can increase or decrease the amount of rent a landowner will receive over the life of a solar ground lease. Some leases provide that rent payments will begin when construction of the facility begins. Some state that rent payments begin only when the installation is complete to the point of being operational, when electricity from the project is being supplied to the power grid, or when the project is “placed in service” as defined by the IRS.
The manner and timeframe in which rent payments are increased over the life of the project differ from lease to lease as well. Some developers’ leases provide for a rent increase in as little as 5 years and others can be as long as 10 years from the first rent payment. Whenever it does come time for a rent increase, that increase will likely be in the form of a flat dollar amount per acre or a percentage over the initial rent payment amount.
Due Diligence Period
This type of clause may also appear as a Feasibility & Permitting Period, Examination Period, or simply Diligence Period. Due Diligence clauses generally serve to reserve for the tenant/developer, a period of time, prior to the commencement of installation and operation of a solar facility, to conduct various activities in order to determine whether the property is in fact a suitable site for a solar installation. The activities that take place during this period require that the owner allow the tenant/developer access to the property and can include surveying, investigations, inspections, and studies of environmental, zoning, biological, utility, cultural, governmental, boundary, or geotechnical matters. The length of a due diligence period will vary from lease to lease but most commonly run for about one year with the option for extension if the need arises. The tenant/developer generally pays the landowner a flat fee for the right to a due diligence period and most leases provide for an additional flat fee in the case the due diligence period requires extension.
It is important for landowners to determine what their rights are pertaining to use to the property during the due diligence period. Some leases specify that the landowner retains the right to plant crops or to lease the property for the planting of crops during the due diligence period as long as written notice is given to the tenant/developer. When such a clause is included in a lease, it is often accompanied by terms setting out the tenant/developers rights and obligations should the landowner or a lessee plant crops on the property. Such rights and obligations may include the right of the tenant/developer to further extend the due diligence period to account for harvesting of the crops planted or the right of the tenant/developer to proceed and pay the landowner for any portion of the harvested crops that cannot be harvested and sold. Identifying or requesting such a clause is important because, should a landowner cease farming operations voluntarily prior to the commencement of rental payments or termination of the lease, the tenant/developer will not be liable to the landowner for any lost income during the due diligence period.
Not all solar leases contain confidentiality clauses, but when they do, landowners will need to carefully review the clause to determine with whom and under what circumstances he or she is permitted to discuss the contents of the lease. Landowners may want to consider rejecting a confidentiality clause that prohibits them from discussing the lease in a manner that will allow them to renegotiate future lease terms. For example, it may be beneficial for landowners, but not tenant/developers to discuss rental rates with other landowners also leasing farmland for solar to determine whether they are getting the best rate. Most leases that contain confidentiality clauses do permit landowners to discuss information about the lease with financial and legal professionals and when required by law or court order.
The clauses pertaining to use of property range from very short clauses stating that the property will be used for the “intended use” only to very lengthy clauses including language describing precisely what the landowner and the tenant/developer are permitted and not permitted to do in connection with the collection of solar energy. In the case of a succinct use clause, the landowner will want to ensure that the lease clearly defines exactly what the term “intended use” means. For example, once the facility is operational, does intended use include future upgrades or structural changes to the system? Does it preclude the landowner from developing other parts of the property without permission from the tenant/developer? Does it require the landowner to monitor development activities on adjacent properties? Does it allow the landowner to enter the leased property without permission from the tenant/developer?
Use provisions should include protection of the landowner’s use of the remaining property. These include, for example, provisions to minimize the interference of construction and operations upon agricultural activities on the adjoining portions of the property. These provisions may include notice to the landowner of the expected dates and times of certain activities.
In addition to precisely identifying the specific property to be used for the collection, generation, and distribution of solar power, solar leases generally include clauses outlining additional easements that a landlord will be required to grant to the tenant/developer for the purposes of construction, operation, maintenance, and removal of a solar facility. An easement is a nonpossessory interest in the property of another that gives the easement holder the right to use the property for some specific and limited purpose. Easements commonly seen in solar leases include the right to install utility transmission and communication cables or the right to use or create access roads for vehicles or pedestrians over portions of the property or adjacent property not being used for the solar facility.
Where the landowner intends to continue farming the portion of a parcel not devoted to SV panels, there are additional terms that should be included in any infrastructure easements granted. First, easements should be sited in a way that minimizes the impact upon the farming potential of the land. Locations of easements as well as the solar arrays themselves should be memorialized in a plat that is recorded in the county office of the register of deeds with the lease. Second, all overhead infrastructure such as electric lines should be of sufficient height to avoid interference with the passage of farm equipment. Underground infrastructure such as water pipes should be below plow depth and the installation of underground infrastructure should employ the double ditching technique. This technique separates topsoil from subsoil and ensures that each is returned to its proper depth when the ditch is filled.
Almost all leases contain an indemnification clause. Indemnification allows one party to seek reimbursement from the other party for money paid to a third party as a result or an injury, physical or monetary, caused by the party from whom reimbursement is sought. For example, if someone is injured on a landowner’s property as a result of a piece of equipment left unattended by the tenant/developer and sues the landowner because the injury happened on his or her property, the landowner could seek reimbursement from the developer for any money paid to the injured person if the lease contains an indemnification clause. There are several things to keep an eye out for when reviewing indemnification clauses. First, landowner’s should make sure the provision is reciprocal. If the landowner is obligated to indemnify the developer, then the developer should also be obligated to indemnify the landowner should an event triggering indemnification arise. Second, landowners should make sure the clause is drafted in a way that any indemnification obligation relates only to negligence on the part of the landowner. Landowners don’t want to find themselves liable to pay for the negligence of someone else because the indemnification clause was drafted too broadly.
All solar leases will include a clause addressing insurance. Tenant/developers typically agree to maintain a commercial general liability (CGL) policy for the duration of the lease term. A CGL policy covers a tenant/developer’s liability arising from bodily injury and/or property damage. One important aspect of an insurance clause is whether the landowner will be named as an additional insured on the CGL policy. In the event that an indemnification clause turns out to be unenforceable, an additional insured may be able to obtain coverage for its liability by making a claim directly under the CGL policy. In that respect, an additional insured provision in a CGL policy serves as a backup to an indemnification clause. An additional insured will also generally be entitled to a legal defense paid by the insurer.
The payment of taxes is an important consideration for landowners when deciding whether a solar PV installation on their property will be financially viable. Solar PV developers handle the payment of taxes in a variety of ways and it is important to understand exactly what the language of the tax provisions in a solar ground lease mean before entering into the lease. Some developers require the landowner to pay real property tax bills when received, minus the personal property portion of the bill that is attributable to the solar PV installation, and then forward the bill to the developer to pay the remainder. Others require landowners to provide all tax bills and notices, real property and ad valorem, directly to the developer for payment.
A big concern for landowners should be how participation in the Present Use Value Program (PUV program) will be affected by the presence of a solar PV installation on their property. There are minimum acreage and income requirements that a landowner participating in the PUV program are required to maintain in order for land falling under a qualifying designation of agricultural, horticultural, or forestry land to remain part of the program. If land becomes disqualified for the program, the present year’s deferred taxes, along with the last three year’s deferred taxes and interest become due immediately upon disqualification. How a developer intends to address this situation can have a significant impact on whether leasing land for a solar PV installation makes financial sense to a landowner or not.
Some leases do not address the PUV program concerns at all and those that do address it do so in various ways. Some developers agree simply to make a reasonable effort to insure that the subject property continues to realize tax benefits received by virtue of its designation as agricultural, horticultural, or forestry land, so long as it doesn’t require the developer to change its use of the land or its business practices to do so. This is vague language and doesn’t address the tax implications and liability on the landowner upon disqualification from the PUV program. Under a lease containing language such as this, the landowner will still be personally responsible for the entire amount of the deferred taxes and accrued interest should the property be disqualified by the change in use created by installation of a solar PV facility. Other leases obligate tenant developers to pay their portion of any rollback taxes and interest if the tenant/developer’s use of the property disqualifies it from participation in the PUV program. Landowners will need to ensure that they understand exactly what the developer means by “its portion” of the potential rollback tax liability.
A solar lease may include a clause addressing resolution of disputes related to the lease. Such clause can include a mediation clause, an arbitration clause, or both. Mediation is a process that involves a neutral third party to help facilitate negotiation of a resolution. This process is not binding and leaves the parties free to pursue further action if no acceptable resolution is reached. Arbitration is a process that is similar to litigation in that the parties present evidence and argue their case before a neutral third party who issues a ruling based on the evidence and arguments presented. Arbitration is often presented as a quicker, less expensive alternative to litigation, but can have its pitfalls, especially arbitration that is made mandatory in a contract drafted by a business-savvy developer prior to the occurrence of any dispute. Landowners encountering an arbitration clause should look carefully to make sure that they are not obligated to use an arbitrator selected by the developer, travel extensively for hearings, and pay the arbitrator’s travel fees or other expenses. Arbitration clauses can be very one-sided, and not in favor of the landowner. Arbitration can be a great alternative to litigation if a legal dispute arises as long as the benefits of arbitration are not skewed in favor of the developer.
Choice of Law/Venue
Not all solar developers offering to lease land in North Carolina are North Carolina based businesses. Landowners need to make sure that their lease clearly states that North Carolina law will govern any legal disputes and that the venue, or the place where a legal claim is filed, is the county in which the leased property is located.
Absent a contract provision addressing attorney’s fees, each side of a legal dispute pays its own legal fees. If a solar lease contains an attorney’s fee clause, however, it generally requires that in the event of a legal dispute, the prevailing party is entitled to attorney’s fees from the unsuccessful party. Landowners need to make sure that if there is such a clause in their lease, it is reciprocal. It is not uncommon to find an attorney’s fee clause that provides for the tenant/developer to be awarded attorney’s fees if successful, but omits the same provision should the landowner be the prevailing party.
Taking or Condemnation
In the event of a taking, whereby the government seizes private property for public use, the priorities of the parties to a solar lease can vary drastically from developer to developer when the issue of disbursement of compensation for the taking comes into play. Landowners need to be very careful when reviewing this section of a lease as some developers will give themselves priority in distribution of any compensation, rather than the landowner.
Generally, decommissioning provisions pertain to the removal of equipment and restoration of the land at the end of the solar ground lease. Several North Carolina counties require a decommissioning plan to be submitted as part of the permitting process for new solar PV ground installation projects. Some counties also require such decommissioning plans to include the method to be used for ensuring that funding will be available for decommissioning. Some counties go even one step further by requiring solar PV developers applying for permits to provide some sort of performance guarantee in the form of a surety or decommissioning bond. In most cases, whether a decommissioning plan is a prerequisite to a permit, a decommissioning provision is likely to be included as part of a solar PV ground lease. Decommissioning provisions can appear under various titles, including decommissioning, end of term, surrender of possession, and removal of improvements. These provisions can take as many forms as there are names, but most include language obligating the tenant/developer to remove its property and equipment from the land, restore the land to its condition prior to the start of the project, and the landlord’s remedies in the event that the tenant/developer fails vacate and/or restore the land.
The language of decommissioning provisions varies greatly in specificity from developer to developer. Some clauses include great detail about the depth to which equipment, structures, and foundations will be removed, the specific types of vegetation to be used in restoration, and precise amount to be charged in holdover rent if the tenant fails to properly perform its duties. Others simply note that all of the tenant’s property must be removed from the premises and the land must be restored to condition reasonably similar to its original condition.
In the event that the landowner and tenant/developer agree not to include a decommissioning clause in the lease and the developer fails to remove the equipment leaving the landowner responsible for removal and restoration, it is important to note that in many cases the salvage value of the project may well exceed the cost the decommissioning costs, sometimes by a large amount.
Such clauses provide information to federal bankruptcy judges about the intent of the parties as to how various issues are to be resolved in the event of the tenant/developer’s bankruptcy filing. Such a clause may allow the landowner to take possession of equipment on the property and sell or otherwise dispose of it, Bankruptcy is a complex area of law and a bankruptcy clause is best drafted by a bankruptcy attorney.
Letters of Intent
Some developers are approaching North Carolina farmland owners in writing with letters of intent to lease and develop solar projects on their land. These letters generally set out some or all of the terms to be included in a subsequent lease, but with much more generalized language. The developer will request that the landowner sign and return the letter, potentially creating a binding agreement based on very vague and sometimes misleading information. The purpose of such letters can vary greatly with some intended to be a fully binding contract with all terms included and some merely intended to establish a framework for negotiation of a land lease to be made formal further down the line. Regardless of the intended purpose of a letter of intent, a landowner receiving one should make sure to fully understand exactly to what they are agreeing should they decide to sign the letter.
The informality of some letters of intent may lead a landowner receiving and signing one to believe that they will not be legally bound by the terms in the signed letter, which is why it is very important to have the letter reviewed by an attorney prior to entering into the requested agreement, no matter how informal it may seem.
The terms in each solar ground lease will differ significantly from developer to developer, but with the help of an attorney and the explanations above, a landowner considering leasing their farmland for solar development in North Carolina should have a clearer picture of exactly the rights and obligations of the parties to the lease.
This information is not intended to constitute legal advice. While every effort has been made to ensure the accuracy of this information, its accuracy cannot be guaranteed. Readers are encouraged to consult a private attorney for their individual legal questions. Since this information is changing rapidly, readers should note the publication date. This factsheet is a working paper and represents research in progress. For any comments, please contact Ted Feitshans, firstname.lastname@example.org.
Publication date: May 11, 2016
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