Developers of photovoltaic (PV) solar projects are approaching farmers with increasing frequency with proposals to lease agricultural land for solar farm purposes. Farmland is particularly desirable to solar PV developers because there are generally no, or low, clearing costs. The potential for high returns may be desirable to owners of farmland but there are a number of threshold issues and pitfalls to be considered when evaluating these proposals. 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 (800-662-7660) can help locate a lawyer in the landowner’s area.
Do You Have a Good Title?
One preliminary concern that needs to be addressed at the outset when deciding whether to lease farmland to a solar PV development company is whether the landowner can provide good title to the property. Landowners need to consider whether there are existing encumbrances that may restrict conveyance of a leasehold interest in their property. For instance, is the property subject to an existing mortgage or deed of trust? If so, the developer may require a clause in the lease agreement allowing the lease to take priority over the note, and the lease to continue, in the event of a default by the landowner on the mortgage.
Understanding how the property is owned is a key factor in determining whether a landowner can lease property and who is required to be a party to that transaction. There are often multiple owners of a single piece of property and their concurrent interests can take several forms. Landowners must be certain that all parties with an ownership interest in the land consent to and sign the lease when required. Land owned by multiple known parties can be held by the owners as tenants in common, tenants by the entirety in the case of married spouses, life estates and corresponding future interests, and, less commonly, as joint tenants. If multiple people have an ownership interest in the same property, a single landowner may not have the authority to lease the land without the permission of the others. It is very important for landowners to understand how and with whom their property is owned when evaluating any lease proposal from a solar PV developer. An experienced real property lawyer can help determine these issues.
When spouses own property jointly, there are other unique issues that may arise. In the context of a tenancy by the entirety, one spouse cannot lease the property without the signature and consent of the other. A more complicated situation arises when one spouse dies without a will. In that case, the surviving spouse, among other options, may elect to take an interest, for the remainder of his or her life, in a portion of the value of any real property owned by the deceased spouse during the marriage. This could pose a problem if that property includes land the deceased spouse has already leased to a third party as that third party’s use of the land may be interrupted. Prior to considering a lease to a solar PV developer, it is important to consider how property will be handled in the event of the lessor’s death. An estate-planning lawyer can help landowners understand and prepare for such an event. The signature of the non-owner spouse will generally be required to lease land to a PV developer.
“Heir” property may be another concern when deciding whether a landowner has good title to land proposed for solar PV development. Heir property is property that is inherited, rather than purchased, by more than one person after the death of an owner. Property can be passed this way from generation to generation, which is a common occurrence in the case of family-owned farmland. When a property owner dies without a will, or with an improperly drafted will, it may take years to determine and document a new legal owner of that property. Without a will, state intestacy laws control and even if an intestacy proceeding is initiated, it can take a significant amount of time to be resolved. Likewise, even if there is a will, probate proceedings can take years to administer and close, leaving no clear record owner. Heir property can remain unprobated for multiple generations, which means that the number of owners will likely increase over time as the interests in the property are divided among new heirs as each generation passes the property on to the next. There may be many, often unknown, owners and no deed showing current ownership of the property. Transfers of heir property, including long-term leases, require the consent of all the owners and agreement on an appropriate use for the property can be difficult with multiple owners. When all owners are not in agreement, a single owner can force a division or sale of the property, which can interfere with existing or future plans to lease the property. Such lack of clear title makes heir property undesirable to lease.
There may be other parties with an interest in the landowner’s property as well. Landowners must consider whether ownership of the subsurface rights has been severed from ownership of the surface rights. This can be common in areas where mining has been prevalent and may not satisfy a solar developer’s land requirements. If a third party owns the subsurface rights, that party will have the right to freely use the surface to the extent reasonably necessary to access the subsurface minerals. Reasonable access has the potential to include removal of solar installments, in which case the landowner could be liable to the developer for any losses incurred. Additionally, landowners will need to know, or find out, whether there are any other easements, rights of way or encroachments on the subject property.
Other considerations may include whether there are any unique features of the property that would be damaged by installation of solar panels, such as wildlife habitats or endangered species on the land. The NC Biodiversity and Wildlife Habitat Assessment map can help landowners locate high priority habitats and natural resources as well as open space, and conservation land that might have an impact on the decision to develop a solar PV project on their property.
Compatibility with Future Use
Solar leases can occupy a landowner’s property for long periods of time. Typical solar land leases terms can last for as much as thirty years. Landowners will need to consider any future plans they may have for their property and decide whether they can be put off for that long of a timespan. Are there plans to expand the farming operation or to lease part of the property for hunting? Can these plans wait for up to thirty years? Additionally, landowner’s must think about the condition of the property at the end of the solar lease term. Whatever the intended future use plans, landowners will need to determine whether the developer will agree to, or be financially able to restore the site so that the land will still be suitable for the landowner’s anticipated future use. Further, if zoning changes are required prior to development, landowners will need to consider whether those changes will make the land unsuitable for the landowner’s anticipated future uses.
Site Selection and Access to Grid
During the due diligence period prior to signing a solar PV land lease, the developer will inspect the landowner’s property to make sure that its use as a solar farm is feasible. The location of the property, the attributes of the adjacent land, and proximity and access to the power grid will all be considered during this period. As for the property itself, farmland is desirable because developers will incur very low clearing costs as opposed to forested sites. Open farmland can also offer a larger number of already cleared acres than other sites. Solar photovoltaic projects generally require about 5 acres of land for each megawatt of generation capacity. Other physical characteristics of the land will determine its suitability for installation of a solar photovoltaic system as well. The slope and shape of the land can be issues to consider. Ground slope in excess of 10% may render the site undesirable for solar development.
Additionally, excess shading may mean that the site is not viable. Although many states recognize the right to receive sunlight across the property of another for the purpose of solar energy collection, North Carolina is not one of them. This is important because landowners have little recourse in the event that future development on adjacent land creates shade or blocks access the sunlight in a quantity adequate to satisfy a solar developer’s requirements.
Another key concern in evaluating a solar lease proposal is the proximity of the landowner’s usable property to power lines. Developer profitability depends on being able to connect solar systems to the power grid quickly and easily. Specifically, developers will require that the property be in close proximity to three-phase power lines. Three-phase power lines are the most common type of power lines and are the ones generally seen running alongside roads and highways. Three-phase power lines can be identified by their four lines. Three of the lines are power lines and a fourth, usually lower on the pole, is a ground wire. Some solar development companies will only consider leasing property that is within specific distances, often one mile, of specified power substations.
Landowners must consider whether the property is subject to any conservation easements. Conservation easements are legal agreements that limit the uses of the property to those consistent with the landowner's and the easement holder's conservation objectives. Conservation easements allow landowner’s to preserve and protect their property while retaining ownership. However, conservation easements often require landowners to give up certain property rights, frequently including the right to future development of the property, which could limit or prohibit a landowner’s ability to lease the property for solar development. Landowners with property subject to a conservation easement will need to confirm that easement conditions are compatible with solar development.
If a landowner is considering leasing only a portion of their land for solar development, issues pertaining to access to the solar site may arise if the leased land does not connect to an existing access road. In this case landowners may need to consider granting the developer an easement for proper access to and maintenance of the property.
Zoning Ordinances and Permits
Zoning ordinance considerations are very important in evaluating solar site leasing proposals. Landowners should review state laws and city and county zoning ordinances to determine what they say, if anything, about the development of solar farms. Zoning ordinances can address various aspects of solar farm development but most often they include some type of height restrictions, setback requirements, screening and/or buffering requirements, and decommissioning requirements that may impose limitations on the installation of ground-mounted solar energy system. Also, while an operational farm may be exempt from most county zoning restrictions, farmland used for solar energy production may not be. State law determines the scope of city and county zoning authority. Landowners and/or PV developers may also be required to apply for a number of different permits, which can include special use permits, electrical permits, or building permits prior to development. Zoning and/or permit approval periods may delay production and may involve public hearing depending upon what is requested and the requirements of the city or county zoning ordinances.
In addition to the zoning and permit considerations, landowners should familiarize themselves with any applicable environmental rules governing solar farm development. Often there are impervious surface coverage limitations, landscaping requirements, erosion and sediment control regulations and storm water provisions to abide by.
North Carolina law does prohibit adoption of ordinances by cities and counties that prohibit installation of solar collectors for residential use, but no comparable statue yet exist for commercial purposes.
Just as solar developers will conduct due diligence on potential solar farm sites, landowners should do their own due diligence on the development company proposing the solar land lease. Landowners will want to confirm that the developer presenting the proposal is registered to do business in the state of North Carolina. Landowners can search for the developer’s name on the North Carolina Secretary of State’s website for information on whether the company is operating legally in the state. Landowners may also want to know whether the developer is operating a for-profit or a non-profit business. Most developers function as for profit businesses. Very few developers are non-profit organizations and those that are generally deal with rooftop systems rather than the ground-mounted systems found on solar farms.
Also important is the financial situation of the development company. A developer’s contractual obligation to pay rent quickly becomes irrelevant if the company is no longer around and solvent when rents become due. Landowners can request a financial statement and references from the development company to get a better picture of its financial standing. Services such as the Better Business Bureau and Dun & Bradstreet, a fee-based service, can also offer relevant information about the developer.
Another major consideration for landowners is whether they will face significant changes in property tax obligations. Property being taxed under a present use value (PUV) program as agricultural, horticultural, and forest land may become ineligible for this type of valuation if the property is converted to commercial use as a solar farm. Taking land out of agricultural designation may result in additional taxes owed. Landowners need to consider whether, after converting from agricultural land to a solar site, the property will still meet the minimum size and income requirements for PUV assessment. Rental payments to the landowner are not considered qualifying income for purposes of the PUV program. The big concern for landowners is that, should they become ineligible for the PUV program, deferred taxes for the current year and the three preceding tax years become due and payable with interest. It may be possible for landowners to overcome ineligibility by conducting some type of qualifying agricultural activity on the same land they have converted to commercial use such as grazing non-destructive animals or growing shade crops under the solar panels. This will be dependent on whether the local rules and regulations allow for such a bifurcation of activities on the land. For an overview of the North Carolina present use value program, refer to the North Carolina Department of Agriculture and Consumer Service’s factsheet on Present Use Value. For a more in depth explanation, refer to the North Carolina Department of Revenue’s Present-Use Value Program Guide. A visit to the local county tax assessor’s office can give landowners information on property the tax implications of converting their property from farmland to commercial use as a solar farm. For more information on this topic, refer to Solar and Wind Energy Development Opportunities: Tax Implications.
Sometimes a landowner has property that isn’t generating enough income from farming or property is already vacant and hasn’t produced crops in years. Whatever they reason a landowner is evaluating a solar development company’s lease proposal, there are quite a number of issues to consider including whether their land is suitable for a solar farm, whether a solar farm is compatible with future plans for the land, and whether they want to do business with the particular developer. Before signing a lease with a solar photovoltaic development company, landowners should consult with an attorney who handles commercial leasing and solar development.
North Carolina Bar Association (800-662-7660)
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: Feb. 2, 2016
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