The drum beat toward renewable energy continues. Recently, Minnesota enacted new legislation requiring that 100% of the State’s energy be produced from carbon-free sources by 2040. This is not a distant, far-off goal. Though some new technologies might fill the gap, the obvious sources to meet this goal are wind and solar, which are expected to grow considerably in the next decades.
This new wind and solar development will happen almost exclusively on rural land in greater Minnesota. Though their governments might not be insisting on it with the same legal force as Minnesota, surrounding states including Iowa, South Dakota, and Wisconsin are likely to see similar investments in wind and solar in the coming years. Though these renewable energy projects are often encouraged by government, in most cases, they are private, commercial projects. The developers that are pursuing renewable projects must obtain the rights to construct these projects by negotiating with private landowners.
Generally, a renewable developer will look to obtain a lease or easement agreement with a landowner. These leases or easements will typically provide the renewable developers the following rights: to review and study the property to determine whether to construct the project in the first place; to construct and install turbines or solar panels as the case may, together with transmission lines and other necessary infrastructure; to restrict the landowners from engaging in activities on the property that would interfere with the renewable project; and to generate effects that the landowner agrees to tolerate such as glare, noise, flicker, shadows, etc; In short, the developer seeks to obtain the right to build and operate a wind farm or solar farm on the landowner’s property. Particularly in the case of wind farms which could encompass dozens or hundreds of wind turbines over thousands of acres, these projects requires that many landowners in the same area sign these agreements to allow construction. These agreements (or notices of the agreement) will be recorded in the land records like a mortgage or deed and can bind the property for many years.
If approached by a wind or solar developer to sign an agreement to allow development of a renewable project, a landowner should carefully review the proposed lease or easement terms and consider having legal counsel review the often-byzantine and complex agreements. The following are some provisions to pay particular attention to.
Length of Time
It should be no surprise that these types of agreements are not short term. Instead, agreements to allow the construction of a wind or solar farm are usually better measured in decades than in months or years. Landowners should carefully review all the provisions relating to the length of the easement or lease terms and recognize that it may encumber the land for several generations and limit how the property is used going forward.
Generally, agreements are split into several periods or phases, starting with a development or construction period. Usually ranging between 3-7 years, the development period is the time frame during which the developer will finalize its plans, obtain permits and other government approvals and construct and install the equipment necessary to put the renewable project into operation. Because the developer is often looking to sign up many landowners for a project, it may be that if it is unable to secure agreements with enough landowners during this initial period, it may abandon the project all together without doing any work.
The length of the development or construction period should be explicitly set out in the agreement; it should not be an open-ended timeframe during which the developer can indefinitely decide whether and when to construct the project. Development periods are often allowed under the agreement to be renewed or extended beyond the initial development term. For example, an agreement might provide for a five-year development term which the developer can extend for an additional two-year period. While this concept is fine and gives the developer flexibility depending on how quickly the project is progressing, the agreement should not allow unlimited extensions of the development period which would effectively turn a short timeframe into an unlimited duration. The agreement should be clear that if no project is constructed during the development period, the agreement will terminate.
Generally, there will be an operations period following the development period. The operation period may be for an initial term of 20-30 years, and will typically start once the wind farm or solar project begins producing electricity and selling it commercially. Again, many agreements allow for this operation period to be extended or renewed for additional periods. Adding all of the potential terms together can result in agreement lengths spanning a half century or more.
Some agreements may provide that this period can essentially be reset at zero if the equipment is replaced. For example, if a wind turbine is removed and replaced 20 years into the agreement, some agreements allow the operations period to restart when the new turbine is activated. Landowners should consider negotiating to limit or eliminate this provision, which would allow a potentially indefinite term.
Following the operation of the wind farm, most agreements allow the developer 1-2 years to remove the equipment and restore the property. Landowners should carefully review whether they are entitled to be compensated during that time.
Land Encumbered by the Agreement
The scope and amount of land that may be subject to the agreement can vary wildly. Ideally a landowner would know at the front end exactly where all structures, roads, and utilities would be installed and limit the easement or lease to cover only that land. However, this is usually not ideal from the developer’s perspective.
Particularly for large wind farms, developers typically want to secure large swaths of land from many landowners—sometimes totaling in the tens of thousands of acres—where the wind farm will ultimately be built. This will allow the developer to analyze the best placement of the turbines to make them more efficient and make the construction perhaps less costly by optimizing the utilities and other infrastructure running between the turbines. While a landowner may sign an agreement covering two hundred acres, ultimately this land may end up with just one or no turbines actually placed on the property.
Even if a wind or solar developer does not want to commit to the exact placement of the turbines or other equipment when signing the agreement on the front end, landowners may be able to limit the coverage of the lease from portions of the property. For example, perhaps if a landowner owns a quarter section with a homestead on it, the landowner would agree to put 120 acres under an agreement but carve out the homestead and the surrounding 40-acres to ensure no turbine or solar array is built too close to the residence and provide additional flexibility with the use of that property.
Use of Remaining Property
The terms of the easement or lease will often limit the ability of the landowner to use their property in certain ways, even for the areas that are not occupied by some improvement by the developer. For example, a wind lease may provide that a landowner may not erect a structure or plant trees within a certain distance of a wind turbine over concerns that such structures might disrupt the wind flow. Some agreements may restrict all construction except with the developer’s consent.
Landowners should carefully review what restrictions are placed on their use of remaining property and negotiate carve outs that allow the most flexibility going forward without impacting the operation of the energy development.
Crop Damage Payments
The construction of the wind or solar farm and associated infrastructure is almost certain to impact growing crops. Landowners should ensure that any proposed agreement provides for reimbursement for crops damaged by construction or other operations relating to the renewable development. These terms should be clear about how the damage is measured and what pricing mechanism is used to value the crops. These terms should also provide a simple solution for resolving any disputes, such as by referring the matter to an independent crop insurance adjuster. Some agreements appear to limit this reimbursement for crop damage to the landowner’s crops, but this language should be revised to make clear that a renter is entitled to be compensated for their lost crops as well, because even if the landowner is the only farmer now, given the length of the agreements, it is likely that at some point the land will be farmed by a tenant.
Compensation and the Most-Favored Nation
The compensations that a landowner may receive under a wind or solar lease can be complex and confusing. Many developers offer sign-up bonuses simply for agreeing to any lease or easement for their land. Beyond that, the agreements may provide for one amount of per-acre payment during the initial development period and a different rate during the operation period. Landowners may be entitled to one-time or annual payments for infrastructure such as roads and utility lines. The agreement may provide for additional annual payments if a turbine or solar panel is actually installed on the landowner’s property. Various progress payments may be due as the developer reaches milestones on the project. Because of the variety of ways an agreement may compensate a landowner, it is nearly impossible to compare as between different developers which is providing a better payment stream, and the answer may depend on items that are unknown when entering the agreement, such as whether a turbine will actually be installed on a particular parcel. Landowners should carefully review these payment terms to determine whether they believe they provide a fair tradeoff for giving up rights to their property.
One way a landowner may feel more comfortable with signing onto an agreement is if the agreement provides for adjustments for inflation and includes a “most-favored nation” clause. Inflation adjustments will raise the annual payments due under the agreement to correspond with rising inflation, often tying the raises to the consumer-price index or similar inflation measurement. A most-favor nation clause will generally provide that a landowner is entitled to have their payment amounts adjusted up to the highest amount the developer agrees to pay to any other landowner in the development; thus, a landowner who signs up early need not worry as much that a neighbor might get a better deal by holding out longer because that first landowner will be entitled to receive the higher payment amounts anyhow.
Mortgages and Assignments
Financing concerns—both for the landowner and developer—are important provisions that must be addressed in any agreement. Landowners will often have existing mortgages on their property or may wish to have the option of mortgaging their property in the future. For existing landowner mortgages, developers will typically insist that the landowner’s lender sign a subordination, non-disturbance, and attornment agreement (SNDA) as a condition of the landowner signing up. These SNDAs provide protection to the developer in the event the landowner defaults on the mortgage and the lender forecloses.
However, future mortgages that a landowner may enter into do not pose the same risks to a developer as a pre-existing mortgage and a landowner should be entitled to freely mortgage or otherwise sell or convey his or her property without further consent of the developer. If the developer insists on some sort of consent, the agreement should provide that the developer’s consent may not be unreasonably withheld.
On the other hand, the developer themselves may, as part of financing the project, wish to mortgage or assign their rights under the lease or easement agreement and will typically want significant latitude to be able to do this without needing consent of the dozens of landowners on the project. Generally this is tolerable from a landowners perspective, so long as new owner of the project remains fully obligated under the agreement, but the devil will be in the details.
Payment of Landowner’s Legal Fees
Given the complexity of wind or solar agreements and the serious impact that they can have on a landowner’s interest in their property over the life of the agreement, it may be wise to have an attorney review the agreement, suggest edits, or explain complicated terms. Developers may agree to reimburse a landowner for their costs incurred in hiring an attorney to review the agreement on the landowner’s behalf.
Signing an easement or lease for a renewable energy development is a significant decision. The payments owed will range in the tens of thousands of dollars, and the encumbrance on the land may last for generations. The terms proposed from the developer will invariably be one-sided to primarily suit the developer’s needs. It is imperative that before signing on to one of these agreements, binding heirs and encumbering land, that landowners carefully review the terms to ensure it is a fair deal for all parties.