Just say you have an idea for a wind farm and you know just the place to put it. Do you have to buy the land outright or are there other options you can take?
If someone wants to build, say, a wind farm to generate power, he doesn't need to buy the land outright (to acquire an 'absolute freehold interest'). Planning permission for wind farms normally provides that the wind farm should cease operations and the site be reinstated to its former condition within, perhaps, 20 to 25 years. So there's no need for a developer to acquire a freehold interest: a leasehold interest of 20 to 25 years could well be enough.
Once an appropriate site has been identified, the key thing is to acquire a sufficient 'property interest'. This property interest will allow for feasibility studies by the developer's technical experts and so forth. An efficient method of obtaining such an interest from the relevant land owner is an option agreement (the option).
As well as providing the developer with a potential property right (if the option is exercised), it will allow him and his experts onto the site to complete a technical evaluation as to the site's full potential. In addition, it should contain a mechanism whereby, in the event of the evaluation proving satisfactory, the developer can acquire a formal property right by serving a formal notice exercising the option. This property right will allow the developer to ground his planning application and is essential in providing security to a bank.
A prudent developer should try to agree the format of this lease in advance and have this draft lease appended to the option document. Once the option is exercised in writing by the developer, the party on whom the notice is served will be required to grant the developer a lease in the agreed format for the period required.
It would also be prudent to incorporate a special purchase vehicle (SPV) to take the lease. Ultimately, it will be the SPV and not the developer which will have the landlord and tenant relationship with the property owner, and which will complete the required security documents with the bank. The option should therefore be drafted to facilitate the SPV taking the lease.
The option will also set out what is to be paid by the developer (or SPV) on exercising the option. A small consideration might be discharged on the signing of the option itself, with a greater consideration discharged on the exercise of the option. On signing the lease, a lump sum or premium may well be paid by the SPV to the land owner. The lease itself may also provide for the payment of an additional rent.
In many cases, the developer will have to deal with not just one but a number of land owners and will have to complete a separate option with each. The negotiation of such option arrangements may vary from project to project, but in the majority of cases it might be prudent to negotiate firstly, and to sign off an option, with the land owner who owns the majority of the required site. Pending exercise of the option, it is worth registering the option in either the Property Registration Authority or the Registry of Deeds, as appropriate.
A prudent developer would be wise to make a thorough title enquiry before the option is signed. After all, he does not want to find out at a later date that the land owner does not own all the land or that third parties have not or will not provide appropriate consents.
A bank will also require that the developer or SPV have a sufficient property interest in the site to secure the draw-down of development funds. Invariably, a bank will require the option to have been exercised and a lease or other sufficient interest actually granted to the developer before sanctioning the draw-down of development funds. Care should be taken to include appropriate rights of access and egress to/from the site, as well as any additional land strips adjacent to access roads necessary to ensure the safe delivery to the site of large turbines.
As you can see, if carefully drafted, the option is a most useful and flexible tool.