Landowners and operators of wind projects for energy production will typically enter into some form of wind energy agreement before the construction of a wind project occurs. Such agreements can take the form of a lease, easement, option or other type of contractual arrangement. Regardless of the form of agreement that is used, there are a number of significant issues within each agreement that both the landowner and operator should review prior to execution of the agreement.
One of the most significant, and obvious issues the landowner should consider is the issue of payment. The landowner must be certain that the proposed payments it receives from the operator are adequate based upon the amount of land being given up, the rights to the land that are being conveyed to the operator and the length or term of the agreement. Not only should landowners negotiate for an escalation in payment over the term of the agreement, but the landowner should also consider the operator’s credit-worthiness and ability to make such payments.
Landowners should also make certain that uses of their land other than development for wind energy will not be adversely affected by a wind project. The landowner may consider having provisions that protect the landowner’s right to conduct other activities (i.e., exploration of oil and gas, hunting) on the land. Additionally, which party will be responsible for an increase in the ad valorem taxes (i.e., real property taxes) charged to the land as a result of the wind energy improvements? The landowner should negotiate a provision that provides for the operator to be responsible for any such annual increase in ad valorem taxes that is caused by the wind energy improvements.
What happens to the wind turbines and other structures upon a termination of the agreement? Who is responsible for removing such structures, and how soon will they be removed? The landowner may wish to negotiate a provision that provides that, within a specific period of time after termination of the agreement, the operator shall remove all of the operator’s improvements from the land and return the land to its previous condition. If the operator fails to remove the improvements, then the landowner should have the right to remove the improvements at the operator’s expense.
Significant issues for the operator may include the operator’s right to enter onto the land and monitor the land for wind potential before an agreement is executed with the landowner. This right is typically set forth in an option granted to the operator for a period lasting anywhere from two to ten years, in exchange for a fee paid to the landowner, allowing the operator adequate time to carry out a wind study to ascertain whether the land is a good candidate for a wind project. During the option period, other due diligence issues that the operator should undertake include, but are not limited to:
- Determining whether the party in possession of the land has the legal right to execute an agreement affecting that land. Perhaps there are parties that have rights in the land other than those that are in physical possession of the land. Just as if the operator were going to purchase the land, the operator must conduct the proper amount of due diligence to determine who the actual owner of the land is so that the operator negotiates with the correct party.
- The operator must also determine if there are any landowner’s lenders with rights in the land. Such rights might permit the lender to terminate the agreement in a foreclosure action.
- Managing local governmental issues. Local governments may be difficult to deal with during the permitting process for wind projects. The operator should conduct proper site and permitting analysis by communicating with the applicable local authorities to determine how difficult or expensive permitting will be for a particular wind project.
Additionally, in order to prevent competition from third-parties, the operator may request a provision from the landowner that the landowner will not contract with other third-parties to generate electricity on the landowner’s land.
Furthermore, some operators may not intend on being the long-term operator of a wind project. Therefore, such operators entering into an agreement with a landowner should attempt to negotiate for the right to assign the agreement without the landowner’s consent.
Although not a comprehensive review of wind energy agreements, this article should at least indicate to both the landowner and the operator that there are a number of significant issues to be considered before executing a wind energy agreement. As the laws of states may vary, local counsel should be consulted before either party enters into such an agreement.
Brett Slobin is an attorney with the Houston law firm of Slobin & Slobin, P.C., and his practice focuses on business and commercial real estate law. The information contained in this article is not intended as legal advice but to provide a general understanding of the law. Readers with legal problems, including those whose questions are addressed here, should consult attorneys for advice on their particular circumstances.