February 12, 2021
Over the past two years, rural landowners in Pennsylvania, New York and other areas have been approached by photovoltaic electricity generators or their agents — some with a track record and some without — to lease acreage upon which to generate electricity for sale to the grid.
What these leases entail is important to understand.
What is a lease?
Solar leases generally do not contemplate sharing of electricity or revenues, but simply the payment of two forms of income to a rural landowner.
First, there a few years of annual option payments in exchange for the solar company’s exclusive rights to perform due diligence on the location. Most times, the cost of delivering power to the grid is best shared over several properties near transmission or other facilities that can accept the power.
After due diligence is performed, and if a decision is made to proceed, the option may be exercised.
The second form of income is a flat monthly rent charge with standard escalator clauses for inflation for a term of anywhere from 20 to 50 years.
What the solar developer is leasing is possession and control of the land for the purpose of constructing, maintaining and operating solar panels and related transmission, battery storage and other associated facilities, all done at the developer’s cost and on land they do not own.
Most option and lease agreements are written so that when a landowner signs it, they also are agreeing to the terms of the lease agreement, which is usually presented at the same time as an attached exhibit.
The right to exercise the option is unilateral, meaning that once the landowner signs an option agreement, there is no opportunity to change one’s mind about it and little to no renegotiation of any lease agreement terms.
Don’t sign blindly
The lease agreements are generally technical, voluminous, repetitive and chocked full of legalese.
They’re very similar to what are traditionally called “ground leases” used in commercial real estate. In fact, the forms being used have many signs of having been lifted from lengthy form leases written by commercial real estate attorneys for use in the development of shopping malls, industrial sites and office parks.
A rural landowner is not generally equipped to become a party to such a sophisticated transaction and become a commercial “landlord.” A landowner also needs to understand the needs of the “tenant” in such a complex, long-term relationship.
Attorneys who have knowledge and experience in commercial real estate are likely the best equipped to represent clients in reviewing and negotiating a solar lease. Many of the documents are not “battle-tested” from years of use. It is not uncommon to see terms that are unrealistic or unworkable for a typical rural landowner.
Additionally, the legal ramifications of the lease and its terms must be fully understood by the landowner, and it will likely take an attorney to do that.
This is particularly so if the landowner lives on the property, farms it, borrows against it, transfers it to heirs, or restricts the land’s present or future permissible uses by actions or conveyances that conflict with the tenant’s right to generate electricity on the site.
For example, the granting of mortgages, easements, rights-of-way, stormwater requirements, participation in government programs for preferential tax assessment, or requiring specified conservation practices can all cause complications for the solar company’s intended operation.
Before the option is exercised, these competing legal interests are thoroughly investigated through due diligence, and one or more may contribute to the option being unexercised.
From the tenant’s perspective, investing in and building permanent structures costing millions of dollars on someone else’s land is risky without protections. While the lease text always ensures the affixed structures remain the tenant’s property, other landowner actions can put those assets and the lease rights in danger.
That is why one very important lease term is non-negotiable from the tenant’s perspective: All outstanding mortgages or monetary liens in existence at the time of signing must be “subordinated” to the lease. That means the creditor must sign a document to be recorded in the chain of title stating the rights of the solar developer under the lease to continue operations uninterrupted are superior to the creditor’s right to foreclose.
That is just one example of protections the tenant needs in this unique relationship. This is an industry in its infancy and the forms being used vary greatly.
There are only a few established “deal-breaker” terms that are off limits in negotiations. Creative terms that fit the individual needs or desires of a landowner may very well be possible. But getting an attorney involved to represent the landowner’s interests should not be bypassed.
Buried in the 75 pages of single-spaced text may very well be terms, or the absence of terms, that would long-ago have been revised to reflect a landowner’s essential needs if this industry were firmly established and the lease forms standardized.
Duer is staff attorney with Penn State’s Center for Agricultural and Shale Law.
You May Also Like
Current Conditions for
New York, NY
Enter a zip code to see the weather conditions for a different location.
Export Report: Corn leads the waySep 21, 2023
7 steps to enter direct-to-consumer meat marketSep 20, 2023
Electric, driver-optional tractor sparks farmer interestSep 20, 2023