By Michael B. Childers
Published in Arkansas Business (March 19, 2018)
Many Arkansas landowners have been approached recently with offers to lease substantial tracts of land for the development of solar power generating facilities. The target land is often Delta farmland, and solar companies promise lease rates substantially higher than typical farm rents. These deals always sound great – no effort on the landowner’s part, more money and no fluctuations in yields or prices to worry about. Much like natural gas leases in the Fayetteville Shale last decade, few landowners are familiar with solar leases and the unanticipated impact those leases can have on their land.
One of the first things to understand about solar leases is that few proposed projects ever make it off the drawing board. The typical solar lease is therefore structured like an option. The solar company will pay the landowner nominal rent for an initial development term of 2 to 4 years. During this period, the company will propose its project to a utility provider and conduct all kinds of due diligence to determine whether the project is feasible, which may include environmental assessments, geotechnical studies and other invasive testing of the land. The company must also enter into agreements to sell power to the utility provider and access the provider’s grid before construction can begin. It’s important for the landowner to reserve the right to continue farming during this period and to hold the company responsible for any damage to the land and crops.
Because of the possibility that the project may not happen, the company will always reserve the right to terminate all or any part of the leased land from the lease. This is fair, but the right of termination needs to be carefully tailored to protect the landowner’s use of any land that doesn’t end up in the project. The landowner does not want part of its land to be isolated within the solar array, or have part of its land cut off from a road or irrigation. The landowner should also be compensated for any out of pocket expenses incurred during negotiations and the development term should the company walk away from the lease.
Since it will have broad termination rights, the solar company typically leases a tract of several hundred acres. By controlling a large tract, the company will have multiple options for designing the project, and can release the unnecessary acreage at any time. But, the lease will often impose transmission easements and access easements over the entire tract which will survive the termination of the lease. In addition, the lease usually imposes restrictions and easements on the landowner’s adjoining land. These provisions should be carefully examined to ensure that the terms are fair and that the landowner will be compensated for any land taken out of agricultural production.
Another consideration is how to allocate responsibility for property taxes and government contracts. The typical solar lease limits the company’s property tax liability to taxes assessed on the solar facilities and any increase in taxes assessed on the underlying land that is directly attributable to the project. If the landowner agrees to this provision, the lease should also clearly stipulate that the company pays the taxes directly to the county and the landowner reimburses its significantly smaller share to the company, rather than vice versa. The better approach is to have the company pay all real estate taxes once the construction phase begins and for the remainder of the lease term. If the project will disturb any land enrolled in the Conservation Reserve Program or violate other government contracts, the landlord should insist that the company pay all costs and penalties assessed with breaking those contracts before construction begins.
Finally, a solar lease should be very clear regarding removal of the solar facilities at the end of the lease term (a process called decommissioning). Some leases allow the company to abandon the facilities in place, while others impose varying degrees of removal and restoration obligations. If the landowner (or, more likely, the landowner’s heir) is not interested in decommissioning a project, then the landowner should require the company to complete decommissioning and return the land to its prior condition. The landowner should also insist that the company post a bond or other security sufficient to complete decommissioning if the company defaults.
The typical solar lease is a sophisticated agreement, carefully drafted to protect the solar company’s investment, and a potential trap for the unwary landowner. Thoughtful review and negotiation of the lease can help the landowner realize many of the benefits promised at the beginning of the leasing process if the project succeeds, and minimize the landowner’s expenses if it doesn’t.
The information provided above is created by Attorney Mike Childers of Friday, Eldredge & Clark, LLP. Mike is a partner at Little Rock-based law firm Friday, Eldredge & Clark. His practice focuses on commercial real estate, commercial lending and natural resources matters.
This is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our Mergers and Acquisitions Attorneys.