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3/17/08 What should you know before you sign a contract with a wind developer? Why use the term, "substantial peril"?

Before%20you%20sign%20%20copy.jpgNote from the BPRC Research Nerd: We had heard the contracts wind developers are asking folks to sign were pretty bad, but nothing prepared us for the one we were sent.

The farmer who made it available did so at considerable risk. The contract forbids him to share it or speak about it for the next 40 years or face a lawsuit he will never win. 

He didn't know he was not just signing away the right to use of the land he agreed to lease, but he also the easement rights to every inch of the rest of his property. He didn't know this 30 year contract will actually be binding for the next 40 years.

What happens if this farmer wants to sell his land someday? The easement agreement remains in place. Would you buy property that you don't have the easement rights to? Would you buy property that requires you to get permission from a corporation before you could plant a tree or put in bushes or build any structure?

The easement gives the wind farm company the right to drive onto your property any time they want, it means they can haul big equipment over your property any time they want, and it also means if you aren't happy about it, too bad. You can't say you a word. Why? Because the other thing this contract included was a gag-order. Any future buyer of your property has to agree all the terms of the contract too, including the gag-order. And you can't tell the buyer what these terms of this contract are until after he has made you an offer. Who would make an offer on a piece of property without knowing what the terms are?

Would you? Or would you just keep on driving down the road and to find a place that would really and truly be yours?

The BPRC Research Nerd is happy to help you understand what your contract really means. If there is a contract you'd like to share with us, we will be happy to research the terms of it, run it by qualified legal council, and return it to you with our comments. We can't offer you any legal advice, but the BPRC Research Nerd likes reading contracts to find the questions you'll need your lawyer to answer. Unfortunately for the farmer who made his contract available for review, it's too late. He already signed it. He signed it without knowing what it really said and has found out the hard way that it's iron-clad. What looked like easy money has become a source of misery.

 What kinds of contract questions should you ask your lawyer to help you answer? Here is the what the Univerisity of Iowa's Center for Agricultural Law and Taxation tells us in an article called

"Wind Energy Production: Legal Issues and Related Concerns for Landowners"

(Click here for source) 

Clearly, wind farming has the potential to provide significant economic benefits for rural landowners. However, sub­stantial peril exists that landowners who don’t carefully evaluate proposed agreements with developers can be taken advantage of significantly.  Landowners should have any proposed agreement evaluated by legal counsel and attempt to negotiate any unfavorable terms.  Failure to do so could result in many years of dissatisfaction for landowners.

Legal Issues for Landowners

A wind energy agreement should never be negotiated without first having the agreement reviewed by legal counsel. Wind energy agreements are long-term agreements that will impact the land subject to the agreement for many years, likely beyond the lifetime of the landowner who executes the agreement. The following is a list of questions that landown­ers should ask when analyzing any wind energy agreement:

  • How much of the land will be subject to the agreement?
  • How long will the land subject to the agreement be affected?
  • Based on the property rights that are given up, are the proposed payments adequate for the present time and for the life of the agreement? (Note: The answer to this question requires an understanding of the mechanics and economics of wind energy production.)
  •  If the agreement offers an up-front lump-sum payment, is the payment representative of a fair amount for the rights involved?
  • What are the tax consequences of the wind energy payments that will be paid under the agreement? (Note: The answer to this question depends on tax changes at the federal and state levels; the area is in an almost constant state of flux.)
  •  Does the developer want to develop the land or simply use a portion of the surface for a term of years?
  •  Does the agreement guarantee that a set number of wind energy turbines will be constructed on the land by a specific date and, if not, is the developer willing to guarantee a minimum amount of payments?
  • Are payments under the agreement based on revenues generated by the wind turbines?  Can the landowner get infor­mation as to how the owner’s revenue will be calculated?
  •  Is the developer able to sell or transfer without the landowner’s consent any of the land use rights obtained under the agreement? If so, will the original developer remain liable if the new developer or holder of the easement right does not pay the landowner or otherwise defaults?
  • What events trigger the developer’s right to terminate the contract? Can the developer terminate the contract at any time without cause? If so, how are payments due under the agreement to be handled?
  • What termination rights does the landowner have? How does the landowner exercise those rights?
  •  If the agreement is terminated, whether by agreement of the parties or otherwise, what happens to the wind energy structures and located facilities erected on the property? What is the developer required to remove? How soon must structures be removed? Who pays for their removal?

When a wind energy agreement is being negotiated, certain issues are critical to the creation of an equitable agreement. Unfortunately, a common problem with many wind energy agreements is that once they are proposed and submitted to a landowner, the company wanting to execute an agreement tends to refuse to negotiate changes to the terms of the agree­ment.  The company’s ability to refuse to negotiate terms of the proposed agreement will depend largely on whether a landowner has meaningful options and competent legal representation.6  Key provisions to a wind energy agreement that require careful attention by legal counsel for landowners contemplating a wind farm include the following:

  • Is the proposed contract a lease or an easement?  If a lease is involved, it should be long enough for the developer to recoup its investment (probably at least 20 years).  Does the developer have a right of renewal?  If so, does the landowner have the right to renegotiate any of the lease terms?  Any lease should not be perpetual — a violation of the rule against perpetuities might be involved (at least in those states that have retained the rule).
  • If an easement is involved, does the easement include turbine sites, substations, air space, buffer areas, vegetation restrictions, building restrictions, transmissions, and associated rights of way?
  • Is a sale of the land contemplated? If so, how is the selling price computed?  Any sale price should consist of the fair market value of the land plus the wind energy value.
  • What is the amount of compensation to be paid?  Take care to ensure that the definition of “gross revenue” is done properly. Is it defined as the sale of electrons or the sale of green credits, or is it calculated in some other manner?
  • Is the revenue to be a flat amount annually, an annual payment per tower, a percentage of gross proceeds, a payment of a certain amount of kilowatt hours generated annually, or an amount based on the selling price of megawatts per year, whichever amount is greater?
  • Is an inflationary factor built into the contract payment provisions? To protect the landowner’s interest, there should be.
  • Does the agreement cover land that will not be needed for the wind farm and related structures?  From the landowner’s perspective, there shouldn’t be such coverage.
  • An up-front lump-sum payment has tax consequences — make sure they are understood.
  • What are the intentions of the developer concerning the use of the land?  That makes understanding the use provisions of the agreement of primary importance.  The construction clause should limit the construction of wind energy structures to not more than 3 or 4 years with adequate compensation paid to the landowner for restricting the use of the land during that time.
  • Can the developer assign the agreement?  If so, a clause should be inserted that ensures the original developer’s liability if the assignee defaults under the terms of the agreement. (Note: Developers want the ability to assign the agreement and subordination language.)
  • Is the landowner willing to consent to a mortgagee of the developer?  If so, a clause should be included that limits the landowner’s obligations to the mortgagee.
  • Consider including an indemnification clause that indemnifies the landowner for any liability incurred as a result of permissive activities (such as crop tenants, custom harvesters, and subsurface tenants) on the property subject to the wind energy agreement.
  • What are the landowner’s rights concerning usage of the property?
  • Consider the use of a clause that requires the landowner to be treated as favorably as neighbors (consider how to define “neighbor”) executing similar agreements.
  • Include a clause requiring the removal of all improvements the developer makes upon termination (whether voluntary or otherwise) of the agreement.  Relatedly, for developments in the Flint Hills, include a provision specifying which party gets the rock that gets excavated to build the wind energy structures.
  • Require the agreement to be recorded (not just a memorandum of the agreement) to eliminate the necessity of having to locate a copy of the lease in the event of sale or mortgage of the property. 
  • Never agree to confidentiality clauses concerning the terms and conditions of the agreement.
  • Have the contract reviewed by the landowner’s insurance agent for analysis of any additional risks created by the wind energy project.
  • Will the agreement violate any USDA land-use restrictions if the subject land is enrolled in a USDA program?  If such a possibility exists, consider including in the agreement a clause requiring the developer to indemnify the landowner for any lost government payments or the imposition of any penalties.
  • Evaluate the agreement with an eye toward the risk faced by the landowner.  That includes environmental concerns, issues that could be raised by neighbors (i.e., nuisance-related concerns), and potential violation of applicable zon­ing and set-back requirements.

Clearly, wind farming has the potential to provide significant economic benefits for rural landowners. However, sub­stantial peril exists that landowners who don’t carefully evaluate proposed agreements with developers can be taken advantage of significantly.  Landowners should have any proposed agreement evaluated by legal counsel and attempt to negotiate any unfavorable terms.  Failure to do so could result in many years of dissatisfaction for landowners.


Posted on Monday, March 17, 2008 at 07:00AM by Registered CommenterThe BPRC Research Nerd | Comments Off

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