In the previous edition of the Real Estate Gazette (see Joanna Marciniak, “Documenting wind turbine projects—risks for land-owners” (Issue 15,Winter/ Spring 2014), page 26 ff), the recent ruling of the Polish Supreme Court and its potential impact on the current market practice of securing the title to land by entering into tenancy agreements were discussed.
As a quick recap: the Polish Supreme Court held that the receipt and passing on of wind and electrical energy are not rights over real property in themselves and therefore there is a risk that a current tenancy agreement entered into with a person who is not operating in the course of a business for the purpose of wind farm development may qualify as a lease.
Therefore its term may not be effectively fixed for a term longer than 10 years because after this time, the agreement will be treated as having been concluded for an indefinite period and may be terminated by either party giving the statutory notice period without specifying any reason for termination.
This outcome definitely poses a threat to the continued operation of wind farms. This article discusses the advantages and disadvantages of other possible ways of securing the title to land.
Acquisition of ownership or right of perpetual usufruct of the land
The most “certain” way of securing the title to land is by acquiring the right of ownership of the land or the right of perpetual usufruct (RPU).
RPU is a type of right over a property owned either by the Polish State Treasury or by local government authorities or associated bodies. Any buildings or other structures erected by the perpetual usufructuary on the land it holds in perpetual usufruct are owned by the perpetual usufructuary. It should be noted that the RPU can also be found in other legal systems—it is similar to the French bail emphytéotique and bail à construction, the German Erdbaurecht and the Spanish derecho de superficie.
The major advantage of acquiring ownership or the RPU is that in both cases the owner/the perpetual usufructuary is entitled to use the land to the exclusion of third parties, as well as to dispose of this right. However, the right of perpetual usufructuary has its limits (it is usually granted for 99 years, however, in certain cases it can be granted for a shorter period of at least 40 years) and it must be exercised in accordance with the purpose set out in the agreement establishing the right of perpetual usufruct.
The obvious disadvantage of these two forms is the price of acquisition (in the case of the perpetual usufruct, the perpetual usufructuary is obliged to pay a fee for granting this right amounting to 15 to 25 per cent of the value of the land and thereafter an annual fee for its continuation, usually set at 1 per cent of the land’s value).
Another possibility is to enter into a usufruct agreement (comprising both the use of land and collection of any profits from the land). It cannot be terminated and expires if not claimed for more than 10 years.
The disadvantage of usufruct is its non-transferability (ie the rights and obligations stemming from usufruct cannot be transferred to another party acquiring the business).
The most effective way of securing the title to land for the purpose of siting transmission infrastructure (ie overhead power lines, optical fibre lines and sub-stations) constituting part of a wind farm project, is by establishing a transmission easement by entering into an agreement with the owner of the land. A transmission easement (introduced into the Polish legal system in 2008) is granted either for a limited or an unlimited period to the owner of the transmission infrastructure at a cost (to be paid either immediately or in instalments) or for no remuneration.
A transmission easement expires at the latest on the liquidation of the business for which the easement was granted.
Moreover, under statutory regulations, if the owner refuses to enter into a transmission easement agreement, and this agreement is necessary for using the transmission infrastructure, the owner of the energy business may take legal action to secure it. In this case, the cost is estimated by a court expert, but market practice has shown that it will still be less than the cost of acquiring the piece of land itself.
An interesting innovation is the introduction of a direct lease agreement. In terms of this agreement, the owner of the land enables the investor to use (and collect profits from) a given real estate asset in return for payment (equal to the value of the land as at the day of execution of the agreement), which is payable in monthly instalments. Unlike in other financing agreements (such as finance or operational leases), a direct lease agreement does not provide for an obligation of acquisition of the subject covered by the agreement. Neither of the parties is bound to undertake a leasing business, which is fortunate, since most farmers in Poland are not likely to undertake such a business. In short, a direct lease has all the benefits of a tenancy agreement (in particular, the continuity of a contractual relationship), but is more flexible—the term can be fixed freely and there are few formalities to be complied with beyond the written form of the contract (although, for the direct lease to be disclosed in the respective land and mortgage register, it should be executed with notarially certified signatures).
Statute provides that the direct lease agreement may be terminated in the following cases: (i) if the land is used in a way that does not comply with the terms of the direct lease agreement and (ii) failure to pay the due remuneration in a timely manner.
Perspectives for the future
Having examined the various ways of securing title to wind farm sites, it seems that as a result of the recent Supreme Court ruling, market practice will tend to favour the use of direct leases for securing the title to land for wind turbine generators and transmission easements for securing the title to land for transmission infrastructure.
The reclassification risk of tenancy agreements has been raised by legal professionals before now, but in view of the Supreme Court’s ruling, the risk of reclassification seems more real than ever. However, direct leases and transmission easements offer very useful alternative ways of securing the title to land designated for the purpose of development of wind farms.
The content of this article is also applicable to the development of photovoltaic farms.