Negotiating Land Lease Agreements for Community Solar Projects: A Guide for Lawyers

Community solar projects offer landowners a unique opportunity to monetize their land while contributing to the renewable energy movement. For lawyers representing landowners, negotiating a land lease agreement for a community solar lease involves a complex interplay of legal, financial, and environmental considerations. This guide aims to provide comprehensive advice for lawyers to effectively advocate for their clients in these negotiations.

Understanding Community Solar Projects

Community solar projects allow multiple individuals or businesses to invest in or subscribe to a portion of a larger solar installation located off-site from their properties. This setup benefits those who cannot install solar panels on their own property due to space, shading, or financial constraints. Landowners can also lease their land to developers who build and operate these solar farms.

Key Considerations in Negotiating a Land Lease Agreement

There are several things to consider when a landowner walks into your office with a proposed lease agreement from a developer. To start, you need to understand the landowner’s motivations in bringing the agreement to you for review. For example, a landowner may walk in and say, “I have this lease from a developer, and I want to know if this is a good idea or not.” You may also have a landowner who tells you, “I want to use my farm for renewable energy, and I have this lease from a developer. Can you help me make sure nothing in it will come back to bite me?”

Understanding your client’s motivations is key to providing the best advice. If the landowner is looking to determine whether leasing is a good idea, you will need to evaluate the terms of the agreement, the financial benefits, and any potential risks involved. You should also consider how this lease aligns with the landowner’s long-term goals for the property.

If, instead, the primary concern is to ensure that the lease won’t have any negative repercussions, you will need to conduct a thorough review of the agreement’s clauses, focusing on areas such as liability, insurance, default provisions, and termination rights. You will also want to discuss the developer’s obligations and any performance guarantees they have provided. In either case, you want to help landowners understand the legal implications, negotiate terms that protect their interests, and consider the broader impact on their property and the community. This approach ensures that landowners’ intentions are at the forefront of the lease review process, and they are fully informed about the implications of the agreement.

Initial Assessment and Due Diligence

Before entering negotiations with the developer, conduct thorough due diligence on the land, the developer, and the proposed project. Assess the property’s suitability for a solar project, including factors such as proximity to the substation, access to three-phase power lines, and environment and terrain implications. The closer you are to the substation, the better your negotiating position will be. You should also consider the developer’s credibility, including track record, financial stability, and reputation in the industry. It is also a good idea to consider whether a project complies with local, state, and federal regulations, including zoning laws and environmental requirements, although the developer you are working with may have done some of this research already.

Lease Term and Renewal Options

Most of these projects start with an initial term (sometimes called a development term or option period). The initial term can range from six months to five years or more, depending on how advanced the market is. During this period, the developer is working on the permitting, interconnect application, studies, and construction of the facility. The lease operation term for solar projects typically ranges from 20 to 40 years, reflecting the lifespan of solar panels. It can be a set period or a combination of a primary term and extensions. The extensions will be at the developer’s option because the developer will need to show they have site control to finance the project. Below are tips for negotiating lease terms:

• Establish a clear initial lease term. Make sure it is clear when and how each term starts, what payments occur during each term, what notice the developer provides as the project progresses, etc.
• Take care when negotiating term lengths. You have a better chance of modifying the initial term length than the operations term. Developers must remain firm on operations term lengths because changing them could throw the project’s finances out of whack. Most of the money goes into setting things up at the start. Then, they make it back bit by bit over time. If, for example, a 5 MW (megawatt) solar facility costs $7 million to install, and you reduced the lease from 20 years to ten years, the project would go from costing $350,000 per year to $700,000 per year. If financers are looking at supporting a project that will cost the standard $350,000 per year versus a project that would cost $700,000 per year due to a shortened lease term, they will choose the one with the standard term to optimize their investment.

Rent Structure

Determine a rent structure that reflects the land’s value and the project’s financial viability:

• Rent structure. Today, the most common rent structure in community solar lease agreements is a fixed base rent based on a price per acre used by the energy company. This rent is typically adjusted as the lease term progresses. This structure provides predictability and stability for both the landowner and the developer, ensuring a consistent revenue stream over the duration of the lease. Alternatively, some developers may base rent on a price per MW_dc (megawatt direct current, the form of electricity generated by solar panels). The MW_dc fee structure was more common in the early days of solar. This method ties the rent to the energy-producing capacity of the land, aligning the landowner’s revenues with the project’s success. This means that landowners are compensated based on the productivity of their land rather than just on its size. On the other hand, revenue may fluctuate with changes in technology or system efficiency, leading to unpredictability. Putting rent in terms of price per acre is easy to understand and calculate, offering a stable and predictable income stream, but it doesn’t account for the varying potential of different lands to generate solar.
• Escalation clauses. Always include a rent escalation clause to account for inflation and market changes. In an ideal world, the escalation would be tied to the consumer price index (CPI). Unfortunately, doing so would introduce uncertainty to the equation when a developer seeks financing due to fluctuating inflation rates. This can make budgeting and forecasting more challenging for both parties involved in the lease. In contrast, a set annual escalator allows for a straightforward approach where both parties agree on a fixed percentage increase, providing a clear understanding of how the rent will evolve over time.

Up-front Payments and Incentives

You should negotiate for up-front payments or incentives to secure the landowner’s commitment. This can be in the form of a signing bonus that is paid upon execution of the lease agreement. Usually, you can get attorney’s fees included in the signing bonus, so make sure to include that in the request. Consider negotiating for a commercial mobilization bonus, which is an additional payment made to the landowner by the developer at the start of construction on the project. The purpose of this bonus is to compensate the landowner for any inconvenience or costs associated with preparing the land for the solar project.

Land Use and Restoration

This is the landowner’s opportunity to home in on the permissible uses of the land during and after the lease term.

• Permitted activities. Clearly outline what activities the developer can conduct on the land, including construction, maintenance, and access, and when the developer’s right to conduct such activities begins and ends.
• Restoration obligations. Specify the developer’s obligations for land restoration at the end of the lease term. This includes removing equipment and restoring the land to its original condition or a mutually agreed-upon state.

Liability and Insurance

Explain the ramifications of the indemnification provisions, including the clauses that hold the developer responsible for any damages, injuries, or environmental impacts caused by the project. You should also require the developer to maintain comprehensive insurance coverage, including general liability, property damage, and environmental liability insurance. Consider proposing that any such assignment on the assignee be conditioned on the assignee (1) assuming all the developer’s obligations under the lease, including the payment of any past-due rent, (2) having adequate experience operating solar facilities, and (3) posting a new decommissioning bond to ensure the facilities are removed at the end of the term.

Navigating an Evolving Landscape

Negotiating a land lease agreement for a community solar project requires a strategic and informed approach. While the suggestions above represent a good starting point, they are by no means exhaustive. By understanding the complexities of these projects and prioritizing the landowner’s interests, lawyers can secure favorable terms that provide long-term benefits. Through thoughtful and informed advocacy, lawyers can help landowners navigate the evolving landscape of renewable energy, ensuring that their participation in community solar projects is both profitable and sustainable.