Thinking of leasing your land to a wind developer?
The University of Iowa helps you read the fine print--
SOURCE: "Wind Energy Production: Legal Issues and Related Liability Concerns for Landowners in Iowa and Across the Nation"
University of Iowa, Center for Agricultural Taxation, November 2009
Legal Issues for Landowners to Consider in Negotiating Wind Energy Easements
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?
Note: The legal description of the covered property is critical.
• 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.)
Estate Planning Issues
• Is it planned that the farming operation will expand in the future?
If so, how will the placement of wind turbines on the property impact the farm’s potential development
• Has the issue of wind turbines development been discussed with the on-farm heirs?
• Is the landowner entitled to any or all energy credits related to the project?
• If the agreement offers an up-front lumpsum payment, is the payment representative of a fair amount of the rights involved?
• What are the tax consequences of 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 – an area which is in an almost constant state of flux.)
• 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?
• If the wind energy company puts additional equipment on the towers and collects compensation for such placement is the landowner entitled to some of the additional compensation?
• 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?
What are the developer’s rights?
• Does the developer want to develop the land or simply use a portion of the surface for a term of years?
• 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?
• Will any portions of the property require gating, fencing or limiting of access in any manner? If so, who pays for the cost or building and/or repairing such measures for restricting access?
• Is there any potential for environmental contamination or the release of hazardous materials onto the premises because of the presence of wind turbines on the property?
If so, how are associated costs to be borne?
• Are any additional costs associated with compliance with governmental regulations of wind turbines, present and in the future, the responsibility of the landowner, developer or wind energy company?
• What is the cost of the landowner becoming an additional insured on the insurance policy of the wind energy company?
• Are there any potential costs of construction liens that might be placed on the property?
• If the agreement limits the ability of the landowner to expand the farm or make improvements (such as installing irrigation equipment, field tile, or additional structures), what are the economic costs to
the overall operation of such limitations?
• The development of the property will require the construction of roads. Does the agreement provide compensation for any damage to existing drainage tile and/or additional costs associated with the change
in the flow of surface water that could negatively impact adjacent property?
• If the development of the property with wind turbines increases the ad valorem real property valuation of the property, must the landowner pay the additional taxes?
• If an adjacent landowner files a lawsuit against the landowner based on nuisance or other tort theories, will the wind energy company pay the landowner's legal costs and any resulting judgment rendered against the landowner directly tied to the presence of the wind turbines?
• When the agreement ends or is otherwise terminated, does the landowner bear the cost of removing wind energy structures? What are the landowner’s rights?
• What termination rights does the landowner have? How does the landowner exercise those rights?
Note: Wind energy agreements often contain termination clauses designed to minimize the risk of termination to the developer so as to aid the developer in receiving financing. Accordingly, wind energy agreements typically prevent a landowner from terminating (or taking action against the wind energy company) an agreement due to noise, flicker, vibrations, air turbulence, electromagnetic interference with global positioning systems, and other effects caused by the wind turbines.
• If the agreement is terminated, whether by consent 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?
Crafting an Equitable Agreement
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.
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 are the setback requirements and fees to neighboring landowners?
• 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? For example, will the landowner be able to lease the property for hunting or other recreational activities?
Will the landowner be able to mortgage or insure the property? Can the landowner develop any other potential mineral or renewable energy exploration?
• 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 (eastern Kansas), include a provision specifying which party gets the rock that gets excavated to build the wind energy structures.
Note: Regardless of whether termination is voluntary or involuntary, it is critical to set-forth timing and costs
associated with decommissioning.
• Require the agreement to be recorded (not just a “memorandum of 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.
In addition, consideration should be made as to whether a bonding should be required. Similarly, a landowner should consider being a payee on the developer’s insurance policy.
• Will the agreement violate any USDA landuse 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.
• Will the wind farm development be designed so as to minimize interference with aerial crop dusting activities?
• Can the landowner sell the property, or can portions of the property be sold?
• Evaluate the agreement with an eye toward the risk faced by the landowner. This 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.