In recent times some of our agricultural and pastoral land owners have been approached by proponents for solar or wind farms wanting to take options to lease part of their property for a green energy project.
Here are some tips and observations that we have learned through assisting our clients deal with these proposals.
What Solar Farm proponents are looking for:
- A site that is within a 2-5km radius of substations as there is too much loss of the produced electricity if the site is located further than 5km.
- An area where there is spare local grid capacity, at the moment in Queensland this means:
- the Darling Downs – there is excellent spare capacity (3,000MW) with a strong existing network and proximity to SEQ load centre and the NSW 330kV interconnector;
- the Fitzroy Region – there is also good spare capacity (2,000MW) and a strong network and good access to load centres in Central and Southern Queensland with scope for additional space capacity when coal generated power is retired; and
- to a lesser degree, Northern Queensland (including Townsville) and the Isaac Region – both of these areas have good spare capacity but have some issues with effective interconnection/ sharing of capacity with areas outside their regions.
- Minimal shading – you are not going to get a proponent to put their site on that pesky piece of protected vegetation that you would like removed.
7 factors you should consider if you are approached to sign an option to lease your property to a green energy proponent
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- You are probably not the only one being invited to the dance, so:
- beware of tying up your land under long term options:
- Spare capacity in the grid is finite. It is a race by proponents to get their project approved and take up the spare capacity before competitors do.
- There will most likely be competing proponents interested in getting a foothold in the area.
- A proponent wanting to sign you up to an option to lease does not necessarily mean the proponent is keen to develop on your property. The proponent may just be taking a blocking position on your land to keep other proponents out of the area while the proponent works on its preferred site.
- You should ask for up-front money for the grant of the lease option to at least cover your legal costs. There is no certainty that your land will ultimately be the parcel that gets an approval to construct but you will certainly incur costs reviewing and negotiating the proposed terms.
- Up-front money for the grant of a lease option also recognises the opportunity cost to you. The opportunity cost is a way of describing the risk you take in dealing with this particular proponent as you cannot deal with more than one proponent at a time, and there is no saying which, if any, proponent will be successful.
- The nature of these situations seems to be “all or nothing” – it is unlikely that two competing proponents both proceed in an area that has suitable substation access to an area of the grid with spare capacity.
- beware of tying up your land under long term options:
- While the power generated may be “green” there will be a lot of hard infrastructure built on your property that may impact operations on other parts of your property. Proponents will want the opportunity to store power on-site so that it can be supplied to the grid at times of peak demand. You also need to consider the possible impact of having large storage batteries on your land in addition to the solar panels or wind turbines, storage depots and access roadways.
- Projects are often optioned by an enterprising entrepreneur to be eventually on-sold to a larger aggregator or operator who actually has the financial capacity to build the project. The company you are negotiating with is quite possibly not going to be the one that builds and operates the power plant on your property.
- Negotiating a green power lease option is very different from CSG or mining compensation.
- Unlike having CSG or mining leases on your land, because there is no element of you being forced to give over use of part of your land for the development, there is no statute or court based means of deciding what equals fair compensation. Put simply, there is no umpire to decide if the deal you are offered is fair or in your long term interests.
- You need to approach the option and the lease proposed by the green energy operator like you would a commercial property deal.
- All green energy proponents that we at Murdoch Lawyers have dealt with have a number of fixed terms that they feel they are not negotiable. These are issues that will impact the ability of the company that eventually undertakes the proposed project to secure funding for the project. These issues are known in the industry as “bankability” issues.
- In the UK, deals with land owners are sometimes linked to a share of electricity profits generated above a minimum base output from the project, so the owner shares in the upside of technological advances. We have not seen any enthusiasm for this so far from proponents and most seem to regard this as a bankability issue.
- The lease term, rent reviews and contributions to rates and land tax, need to be considered carefully before being agreed upon.
- Proponents typically want a 30 year lease with fixed rent increases or increases in rent only in line with CPI rises throughout the 30 year period. This seems to be a key “bankability” requirement.
- While the starting rent usually seems attractive initially, history tells us that property values have generally increased at much greater rates than the cost of living. If this happens and the lease does not allow a review for the rent to catch up, then the value of your property investment may decrease because it is likely the property will be valued as a commercial investment (not a farm) and most commercial leases provide for some sort of rent review to fair market every 5 to 10 years.
- Having the tenant pay for rates and land tax is important because the change in nature of use from rural to power generation will likely change the rating and land tax treatment of the property, significantly increasing these charges.
- Proponents don’t usually raise this, but most (if not all) deals contain a “termination for convenience” clause that allows the operator to break the lease, without penalty, if it feels it is impacted by changes in its circumstances. The effect of this is to change your 30 year lease to a lease that binds the land owner for up to 30 years but can be ended by the tenant on 6 months’ notice without penalty for early termination.
- If your property is used as security for bank loans you need to be careful not to commit to a deal until the bank has approved it because:
- your bank may not agree to the lease if it feels the deal may reduce the value of the property in the long term; and
- due to the bankability issues, generally leases to green energy operators are only suitable if the land owner has no debt or the property is owned in a superannuation fund.
- The green energy operator usually does not want to give any form of guarantee for payment of the rent or for end of lease clean up obligations. Unlike mining or CSG leases, there is no reserve security amount paid to the government for the grant of the right to operate to your tenant, so there is no pool of money available to remove the solar panels or turbines if the operator fails to do so at the lease end. The clearing off of infrastructure to return the land to pastoral or agricultural use has been estimated as a significant expense.
- You are probably not the only one being invited to the dance, so:
If you have been approached with a proposal for a solar farm or wind farm to be established on your property you should get expert advice before signing any documents.
Our Toowoomba lawyers team at Murdoch Lawyers have the experience and expertise to help ensure your green energy lease works for you and does not unintentionally damage your property’s value. Contact us today on 1300 068 736.
This publication has been carefully prepared, but it has been written in general terms and should be viewed as broad guidance only. It does not purport to be comprehensive or to render advice. No one should rely on the information contained in this publication without first obtaining professional advice relevant to their own specific situation.
