Leasing valuable farmland to solar energy firms can generate a reliable revenue stream. Landowners should carefully consider the current and future impact of long-term land leases.
Photo: American Public Power Association/Unsplash
by Cari RinckerAttorney at Law
Agreements between solar developers and landowners come in many shapes and forms. In broad strokes, there are two main approaches. On the one hand, a developer may present a farmer or rancher with an option agreement, which will give the developer a period of time to assess the viability of a solar project on the land, and the unilateral right to exercise an option to enter into a solar lease agreement if and when the developer determines that the project will be profitable. The lease agreement should be fully negotiated at the time that the option agreement is executed. Alternatively, the developer may skip the option agreement and instead present the farmer or rancher with a lease agreement to be executed at the onset. Such a lease agreement usually commences with a development phase wherein the developer assesses the viability of the project. The developer is then granted the right to unilaterally terminate the lease at the conclusion of the development phase. Regardless of whether there is a separate option agreement or a development phase incorporated into the lease, solar leases generally are structured pursuant to the same format: There is a construction period which may last roughly one year, followed by an operation period which may last decades, a renewal period which may extend the lease even longer, and ultimately, a cleanup period. As discussed further below, each distinct phase comes with specific rights, obligations, and compensation structures. 2. The Length of the Lease
To understand the extent to which a lease will tie up their land, a farmer or rancher should be sure to calculate the total timeframe of the encumbrance, from the beginning of the option or development phase, to the end of the cleanup period. It is not uncommon for the life of a solar lease agreement to span more than half a century. For this reason, multi-generational family farms and ranches should carefully consider potential uses or plans for their land over the course of the near- and not-so-near-future. Such considerations may include the needs of future generations. The farmer or rancher should further keep in mind that such lease agreements typically run with the land, which means that they will bind any subsequent sale or estate succession of the land. Given the length of the agreement, agriculture producers should also carefully assess the impact of a solar lease on their property, including a thorough evaluation of the potential environmental impact, the effect on overall farming or ranching productivity and economies of scale, and their eligibility for government programs. 3. Due Diligence on the Developer
If a farmer or rancher plans to enter a long-term relationship with a solar developer, they should perform due diligence on the developer to ensure that the developer is legitimate and has a good record with other landowners in the area. Due diligence may include: (i) checking the developer’s online presence, including reviews and BBB complaints, (ii) confirming the developer is a registered entity with the secretary of state for the state that they claim to be organized under, and (iii) paneling neighbors and the community to see if anyone else has negative experiences with the developer.
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Before executing an option or lease agreement, a farmer or rancher must confirm that he or she has the legal authority to enter into such an agreement. In the first instance, the landowner will likely have to warrant in the agreement that he or she is the fee simple owner of the farm or ranch. If there are multiple parties with an interest in the land, all co-owners must approve and be a party to the lease. If the land is owned by a business entity or trust, then the governing documents of such entity or trust must be reviewed to confirm that they permit the execution of such a lease. Finally, if the property is subject to mortgages, pre-existing leases, easements, or other encumbrances on the property, those may need to be addressed before proceeding with a solar lease. 5. Compensation under the Lease
A farmer or rancher should carefully review the compensation he or she will receive under the option and/or lease agreement(s). At both the option/development phase and the construction phase, the landowner may receive either lump-sum payments or periodic per-acre payments. It is advisable to avoid lump-sum arrangements if the timeframe of either phase is highly variable. Construction phase payments should be higher than option or development phase payments. The compensation received during the operation phase should be significantly higher than the earlier phases. It is most often structured as an annual or semi-annual payment tied to the number of acres subject to the lease. If receiving per acre payments, the farmer or rancher must clarify whether all acres will receive the same compensation level, or whether certain unused acres will be compensated at a lower rate (or not at all). Given the length of the operation phase, any lease should also include an escalation factor (typically between 1.5 and 3%) by which payments should rise on an annual basis to compensate for inflationary risk. The farmer or rancher is also encouraged to negotiate other forms of compensation or reimbursement in the lease. For example, a landowner may ask for the reimbursement of professional expenses, such as attorneys’ fees, incurred in reviewing the lease. The farmer or rancher should confirm that the developer will be responsible for any tax increase caused by transforming farmland into a solar energy facility. They may also wish to explore whether the developer will compensate the landowner for any loss of eligibility for government farming programs. Finally, the farmer or rancher should ensure that the lease clearly delineates a compensation structure for damages incurred to crops and the underlying drainage system on or adjacent to the property. 6. The Rights and Obligations of Each Party
The option and lease agreements should clearly lay out the rights granted to the solar developer on the landowner’s land. The farmer or rancher must pay careful attention to how the lease will affect their rights on the land subject to the lease and ensure that any rights or easements granted are carefully tailored for reasonableness. They should also understand whether the lease will interfere with rights on adjacent land owned by them.
Photo: Tornike Jibladze/Pixabay
It is common for leases to have asymmetrical termination provisions, meaning that a developer can often terminate the lease at any time and for any reason, while a landowner can only do so in the event of a breach of a monetary obligation. A farmer or rancher may nevertheless seek to ensure that they may still request damages or specific performance of certain provisions of the lease where they are not permitted to terminate the lease. A lease should contain robust cleanup obligations for the developer, including cleanup of any debris post-construction, as well as restoring the property to its original condition at the end of the lease agreement. Local or state regulations may be of use in this regard. For example, in Illinois, the Department of Agriculture requires that any developer with a solar lease agreement with a landowner must also enter into an Agricultural Impact Mitigation Agreement with the Bureau of Land and Water Resources, which contains standardized construction and cleanup obligations for the project. 8. Disputes
On a final note, farmers and ranchers should always plan for the worst-case scenario. This involves ensuring that any dispute arrangements or requirements contained in the lease favor the landowner. In particular, a farmer or rancher should request that any waiver of a right to a jury trial be removed from a lease. Moreover, if a lease contains provisions waiving any right to appeal an arbitration or other dispute award, that language should also be struck from the agreement. In closing, solar lease agreements are binding contracts of long duration, with potentially significant consequences for the landowner and his or her heirs or assigns. Given the variable and complexities addressed in this article, it is advisable that the landowner hire an attorney to help ensure that the solar lease agreement is carefully tailored to the unique concerns and needs of a farmer or rancher. Whether an attorney is employed, or whether the landowner takes it upon him- or herself to review the agreement, the reviewing party should ensure that they have adequately considered each of the issues discussed herein.
About the author
Cari Rincker is the owner of Rincker Law, PLLC, a national general practice law firm concentrating in food and agriculture law with offices in New York and Illinois. She has her boots planted firmly in agriculture – she presently own a small farm in Shelbyville, Illinois, and enjoys judging livestock shows around the country.
