Wind Farm Leases
Ballarat and Western Districts are experiencing a boom in wind farm development, with many farmers being approached with offers to build turbines on their land.
Unfortunately, in the excitement of extra income and a chance to “drought proof” their land, some farmers simply sign on the dotted line. The documents are generally option deeds or agreements for lease which commit the landowner, but not the wind farm company. One signature can tie up the land exclusively to a single tenant for 60 years, cutting across generations to impact on the landowner’s children and even grandchildren.
There are risks and traps involved, but also many opportunities to negotiate a better deal. With only one chance to get it right, it is critical to obtain legal advice. An investment in some legal advice before signing should be seen as a vital insurance policy, and can create huge benefits later. Here are some of the many issues to be taken into account:
• Although rent currently offered is typically between $3,500 and $5,000 per megawatt capacity per annum, it might be many years after signing before the wind farm is completed and the tenant starts paying rent at that rate. When you allow for inflation, this means that in today’s dollars rent might be 10% or 20% less. It is therefore important to ensure that rent will be indexed. Bear in mind that even small differences in payment terms can have a dramatic effect when compounded over the full term of the lease.
• The documents will bind the landowner, but the tenant can often withdraw right up until construction commences. Farmers might spend many hours negotiating a deal, incurring expenses, suffering the inconvenience of wind testing and surveys and angst with their neighbours, for no return whatsoever. We suggest asking the tenant to make an upfront payment so that, even if the lease does not ultimately proceed, the farmer still gets some compensation for their trouble. In our experience, tenants have been prepared to pay quite substantial amounts.
• Although tower bases do not take up a huge area, the loss of productive land caused by new roads that the tenant will build for access to the turbines, initially for construction and later for ongoing maintenance, needs to be taken into account.
• Farmers also need to consider their “opportunity loss”. By granting exclusive rights to one company now, they are cutting off the possibility of dealing with another developer in future, who might have been prepared to pay greater rent. Wind farms are a relatively new and uncertain industry – who knows how high rent levels may rise in future, as suitable sites with good wind and which are close to the power grid become increasingly scarce. As well as this, the right to build new structures or plant new trees near the turbines is often restricted in wind farm leases, limiting future development or forestry potential of the land.
• One issue that concerns many landowners is what will happen to the massive tower and turbine structure at the end of the lease, whether in 25 years’ time or earlier if the lease is terminated prematurely. Leases usually require the tenant to remove everything but the concrete base, and reinstate the land – but what if the tenant refuses, or is unable to comply? The farmer can sue, but if the tenant is a limited liability company set up as a special purpose vehicle for the project, and no longer has assets available, or its assets are mortgaged to lenders, then the farmer will be left with the clean-up job. One option is to require guarantees from the directors of the company, or from the parent company. In my experience, these will be sometimes given, but more commonly they are refused. This is because it is often the case that the original developer of a wind farm intends to on sell it to an operator, and does not wish to have any ongoing liability. Another option is to insist on a decommissioning bond, in the form of a bank guarantee provided by the tenant.
• Wind farm companies will often reserve the right to shift the final position of towers from the original plan, once they have finished their wind testing. Landowners should try to keep as much control as possible over this process, to avoid turbines being placed in unexpected or inconvenient positions – for example, near where the farmer was planning to plant trees or build a new shed, or in the line of the best view from the house. At an extended height of over 180 metres and base diameter of over 10 metres, a tower can somewhat dominate the vista from the kitchen window!
• Landowners should also require a description of the size and characteristics of the towers to be included in the lease itself. Who knows how the technology may change in future – the pattern in the past is that turbines have been increasing in size, and this may well continue. Colours may also change.
• There are many other conditions we recommend, to minimise disruption to the lives of the occupants of the land – such as requiring the tenant and its contractors to leave gates opened or closed as they found them; preventing pests or weeds being brought onto the farm; taking measures to control erosion; and many more.
Happily, Nevett Ford is seeing an increase in the number of our farming clients who seek legal advice first prior to signing. Wind farm companies are often very willing to negotiate, to ensure that their project can proceed. We have been able to dramatically improve the terms of the deal, both legal and commercial, for many clients and give them a clear understanding of the documentation before they commit to it.
Now that many wind farms are under construction or complete, we are receiving feedback from our existing clients about issues of concern. This adds to our experience, and informs our negotiations on future projects.
If you have been approached by a wind farm developer with documents to sign, or know someone who has, we would be pleased to assist.
Author: Kent Mallinson