The clean energy sector is entering a new phase of development, with recent government announcements setting the UK on a clear path to a carbon neutral future.
For landowners, this presents a continued opportunity to maximise returns from their land by leasing land for the development of clean energy projects (particularly subsidy-free wind, solar and battery storage projects, whether on a standalone or co-located/behind-the-meter basis).
There are a number of legal issues to consider when leasing land for these purposes.
Developers will expect a landowner to enter into an exclusivity agreement while the contract is being negotiated. While this is market standard, it would not be unreasonable for the landowner to want to exercise some control by asking the developer to commit to progress certain pre-development steps and negotiating an appropriate length for the exclusivity period.
Most projects are structured by way of an option agreement, which will append the form of lease or transfer. These documents set out the basis upon which both parties agree to proceed with the project. They capture the commercial terms agreed in relation to payment, rent, indemnities, reinstatement and the rights of the developer to dispose of the project in the future with the landowner's consent.
The landowner should also ensure that all reasonable costs incurred during the project are met by the developer. In addition, the option and lease documentation should include provisions that indemnify the landowner in case additional involvement is required in relation to any planning agreements, funder step-in agreements or third party wayleaves.
When a development secures funding, the landowner may be obliged to enter into a direct or step-in agreement with a funder. This is standard for capital investment projects where the funder will be looking to preserve its interest in the project in the event that there is a default by the developer. As the form of these agreements will vary from lender to lender, the landowner may wish to ensure that the terms of any step-in agreement do not vary some of the key commercial terms such as rent, length of term, permitted use and indemnities.
Landowners leasing or selling their land for energy projects should pay particular attention to environmental liability, and ensure there are clear provisions in the lease setting out the division of liability between the parties. The general position will be that the landowner will remain responsible for any pre-existing environmental liability and the developer is liable for any contamination that occurs during the term of the lease.
The parties should consider the developer's obligations in relation to re-instatement of the land at the end of the term, ensuring that the land is returned to the landowner free from equipment and apparatus. Whether there should be a reinstatement fund that the landowner can access in the event of any failure to reinstate will depend on the commercial terms agreed and the nature of the technology and project. A landowner may be able to agree with the developer to retain all or part of the equipment at the very end of the lease term, so that they can benefit from its remaining operational years. The lease should contain relevant provisions to allow for this, however the landowner should carefully consider the cost of operating the project and the skills required to do so, as well as the ultimate liability in relation to reinstatement and decommissioning.
When negotiating option and lease documents, landowners should be mindful that not every site will become an operational project. This may be due to planning or grid issues or the complex financial modelling that is required. However, this means that landowners should carefully consider the length of the option period and any option payments that are agreed in return for giving a developer the rights to pursue the development.
The landowner should also consider the extent of the land required for the project, bearing in mind that the developer will require an element of flexibility for grid routes and access. However, it should be possible for the parties to agree a sensible area at the outset so that the parties have certainty as to the likely development area and to ensure the landowner's land is not unduly restricted for other purposes.
Lastly, the landowner needs to ensure that the lease contains sensible provisions around competing developments. While it is normal for a lease to include provisions that restrict the development of other commercial projects, they should not preclude the landowner from installing their own clean technology to generate or store power for their own consumption, provided this wouldn't impact the viability of the developer's project.
For landowners, this is an exciting time and one, with the right documentation to protect their interests, that they should be ready to take advantage of.
This article first appeared in the December issue of Energy Now.