Contracts

With all the rain and delayed planting that Ohio farmers have experienced this spring, signing a solar lease has been a very appealing prospect for many farmland owners.  While this may be the right decision for a farm, it is very important that the farmland owner understand exactly what he or she is signing.  Once an energy developer offers to pay you to enter into an agreement, and you sign that agreement, its terms will be legally binding.

In our recent blog post on solar leasing, we discussed some of the early documents that a farmland owner is likely to receive from an interested solar energy developer.  Further, we gave some general advice on what farmland owners should do if an energy developer wants to discuss leasing his or her land.  One of our main suggestions was to take the time to fully understand what the farmland owner is getting into, and that is where this post comes in.

In this blog post, we highlight some of the important provisions of a solar lease that you as a farmland owner should look for in your solar lease, and understand what they mean.  A good solar lease will be very thorough, and include a lot of legalese.  Our upcoming Ohio Farmland Owner’s Guide to Solar Leasing, due out in the next month, will go more in depth than this blog post on the terms below and more.  It would also be a wise decision to consult with an attorney to ensure that your understanding of your solar lease reflects what the documents say.

For now, here are a few provisions to be on the lookout for in your solar lease:

The term.  How long does this lease last?  Most solar leases last for 20 to 30 years.  This is the time during which solar energy is being collected and sold.  Solar energy developers like this multi-decade duration because it allows them to use of the solar panels for their expected productive lifespan.

Thirty years is a long time.  Many careers are retirement-eligible after that period, and many farms will transition to the next generation in that amount of time.  This long of a term is not necessarily a bad thing.  It just means that a farmland owner should look back and look ahead.  Think back 30 years to 1989.  What all has changed on your farm?  What would it have looked like to not be able to use this ground for the past 30 years?  Now look ahead.  What do you expect your needs and those of your family to look like when this lease ends in 2049?  Only you can determine if not being able to use your land for that long is a good thing.

Phases.  How is this lease broken up?  We just explained that most solar leases will last for 20 to 30 years, but that clock usually starts ticking once construction has started on the project.  Solar energy developers will often reserve a year or two during which they can conduct their final feasibility studies and obtain necessary permits.  Some leases structure this pre-construction phase as merely an option phase, meaning that the energy developer will pay a small amount of rent to keep its option alive for that one or two-year period, but it does not necessarily have to commence construction.

Further, toward the end of the term, the energy developer may have written in an option to renew for another 5 or 10 years.  These renewals are often structured as a right that the energy developer may exercise merely by giving notice to the landowner.  Additionally, in the middle, if there is a natural disaster that puts the operation out of service for any period of time, a solar lease may stop the clock from ticking until the project is operational again and solar energy is being collected.

The important take-away for the phases is being able to know when each phase begins and ends.  When all of the different phases are combined, instead of just a 30-year lease, you could be looking at a 42-year agreement.  The only way to know how long it could last is to thoroughly read the entire lease.

A description of the premises.  Every solar lease will contain a description of the premises.  If an entire parcel is being leased, then this part is fairly easy.  However, if only a portion of the parcel is being lease, the farmland owner will want to make sure that the lease provides an adequate description so that the leased portion can be easily determined on the ground.  Often, this will include a survey and maps.  Knowing the boundaries is important because these leases are often exclusive, such that the farmland owner has little or no use or access of the leased land throughout the term.

Easements.  What rights are being granted to the solar energy developer?  Solar leases include a series of easements that give the solar energy developer the right to use your land.  Some of the common easements include a:

• Construction easement: a right to cross over portions of the farmland owner’s property in order to construct the solar facility
• Access easement: a right to cross over portions of the farmland owner’s property to reach the solar facility
• Transmission easement: a right to install power lines, poles, and other equipment to transmit the energy produced by the solar panels to the grid
• Solar easement: a right to unobstructed access to the sun without interference from structures or other improvements
• Catch-all easement: a general right to do whatever is necessary for the benefit of the project

Solar energy developers want their easements to be as broad and generous as possible in order to maximize their flexibility with the project.  This is not always to the advantage of the farmland owner.  If the lease is general enough to allow the solar energy developer to sub-lease to another entity such as a telecommunications company, the landowner will have a difficult time preventing the solar energy developer from doing so.  The farmland owner wants to make sure that the easements being granted are specific enough to not result in any surprises.

Landowner obligations and rights.  What does the lease require of you as the farmland owner?  Usually private solar energy developers include a non-interference provision, a quiet enjoyment provision, and an exclusivity provision.  All combined, these provisions are a promise by the farmland owner to not enter the solar facilities without prior permission, not interfere with the solar facilities, and not allow anyone else to do so for the duration of the term.

Further, solar leases often include a confidentiality provision that courts will enforce as legally binding.  These provisions allow the solar energy developer to control the flow of its proprietary information, and also prevent landowners from talking with one another about topics such as rent rates.  It is important to understand:

• What information is protected
• If there are any exceptions
• When consent might be granted
• If specific penalties apply
• How long confidentiality lasts

The solar lease may also include a provision about farmland owner improvements.  These explain if and when the landowner needs to obtain prior approval of the solar energy developer in order to build a structure or plant something that may interfere with the solar project.

Property maintenance.  Who is going to mow?  Ohio landowners have a legal duty to cut noxious weeds, and a well drafted lease will cover which party to the lease bears responsibility for keeping the leased land clear.  Usually, the solar energy developer will take this responsibility, but it helps to have this in writing.

Cleanup terms.  Cleanup involves a lot of questions.  Does the solar lease require the solar energy developer to restore the land to its previous state?  If so, how is this measured?  Will all stakes and foundations be removed?  Will all improvements, like roadways, be removed?  How will the solar energy developer guarantee that it will be able to pay for this cleanup in 30 years?  Does it post a security, and if so, when?  A thorough lease will answer these questions.

Tax and conservation penalties.  Tax and conservation also involves a lot of questions because constructing and operating a solar facility will make the property ineligible for the full benefits of CAUV and most conservation programs.  Does the lease require the solar energy developer to cover real estate taxes?  Does the lease require the solar energy developer to cover the three-year lookback penalty for removing land from CAUV?  What will the solar energy developer do toward the end of the lease so that the land can be put back into production and made CAUV eligible again?  Similar questions must be asked for conservation programs.

Compensation.  It’s not that we saved the fun and best part for last.  We just wanted to make sure that compensation is not the first and only thing considered when deciding whether or not to enter into a solar lease.  While it certainly is important, some of the issues discussed above must be just as carefully understood.

The solar leases that we have seen involve cash rent that increases over time based upon a fixed escalator.  The escalator is a percent increase.  If the escalator increases at a rate greater than inflation, then the farmland owner will receive more bang for his or her land.  However, if the escalator increases at a rate lower than long-term inflation, then the solar energy developer will have to pay less over time.

Another point of compensation to consider is how damages will be calculated for harm to property and crops.  When the solar energy developer decides it is time to start construction, its option and easements grant it the right to begin construction even if there is a crop already in the ground.  This makes it in a farmland owner’s best interest to have this issue addressed up front.  These damages will often be calculated my multiplying the number of acres by the average county yield for that crop by that crop’s commodity future price with the Chicago Board of Trade for a given date.  This provides an objective calculation for damages.

Verbal promises.  A note of caution: if the solar energy developer makes you a verbal promise, ask for that promise to be included in the written lease.  If there is a conflict between what a representative of the solar energy developer tells you and what is written in the lease, the terms in the written lease are likely to prevail.

The activity we are seeing across Ohio right now with solar reminds us of the early stages of the recent wind and shale energy booms.  Some of the biggest regrets that we hear about are from landowners who thought they were getting a better deal than they actually did.  Reading through, understanding, and thinking about the lease is an essential part of calculating whether or not the lease being offered is actually a good deal for a farmland owner and his or her family.  Don’t be afraid to reach out to your team of professionals in this process.  Your attorney, tax professional, extension educator, and others can be a great resource.

Since our last legislative update in March, Ohio’s legislators and staffers have been busy introducing more legislation.  As of this morning, there are 332 bills that have been introduced by members of the Ohio General Assembly since January.  Some have already passed both the Ohio House and Senate, but most are still pending.  While we cannot write about every pending bill, the following bills relate to agricultural, local government, or natural resource law.  In addition to these bills that we have not yet covered, see the end of this post for an update about bills we mentioned in our last blog post.

Tax

• Senate Bill 183, titled “Allow tax credits to assist beginning farmers.”  Many agricultural news outlets quickly picked up on this bill.  The bill would authorize two nonrefundable tax credits.  One is for beginning farmers who attend a financial management program, while the other is for individuals or businesses that sell or rent farmland, livestock, buildings, or equipment to beginning farmers.  The Ohio Department of Agriculture would be responsible for certifying individuals as beginning farmers and for approving eligible financial management programs.  Click HERE for more information about the bill, and HERE for the current official bill analysis.
• House Bill 109, titled “Grant tax exemption for land used for commercial maple syruping.”  The bill would exempt “maple forest land” from having to pay property taxes.  The landowner would have to apply for the designation with the Ohio Department of Taxation.  Eligible lands are those lands bearing a stand of maple trees where 1) an average of at least thirty taps are drilled each year into at least fifteen different maple trees per acre of land, 2) the harvested sap is incorporated into a maple product for commercial sale, 3) the land is managed under a forest land maintenance plan, and 4) the property has ten or more acres or the sap harvest produces an average yearly gross income of more than $2,500.  Note that all four requirements must be met in order to qualify as an exempt maple forest land.  Click HERE for more information about the bill.

Real property

• House Bill 103, titled “Change law relating to land installment contracts.”  Ohio’s Land Installment Contract Law, which applies to contracts involving properties with a residence but not contracts involving only open farmland, would see some significant changes under this proposed legislation.  The bill would shift the burden of paying property taxes and homeowner’s insurance from the buyer to the seller.  The seller would also be prohibited from holding a mortgage on the property.  The contract would have to include provisions stating that the seller is responsible for all repairs and maintenance on the property.  Interest rates would also be capped so that the rate cannot exceed the Treasury bill rate for loans of the same length of time by 2%.  For example, if a 5-year land installment contract is entered into on September 7th and the 5-year Treasury bill rate on that day is 2.64%, the interest rate for the land installment contract would not be able to exceed 4.64% under this bill.  Click HERE for more information about the bill, and HERE for the current official bill analysis.

Estate planning

• House Bill 209, titled “Abolish estate by dower.”  Dower provides a surviving spouse with rights in any real property owned by a decedent spouse.  This bill would end dower estates moving forward, but any interests that vest before the change would take effect would still be valid.  Click HERE for more information about the bill.

Local government

• Senate Bill 114, titled “Expand township authority-regulate noise in unincorporated area.”  A board of township trustees is currently limited to regulate noise coming from either areas zoned as residential or premises where a D liquor permit has been issued.  The bill would expand the township’s authority to regulate noise anywhere within the unincorporated territory of the township.  However, the bill does not affect another section of the law that exempts agriculture from noise ordinances, so agricultural activities would not be subject to any new noise ordinances, should this law pass.  Click HERE for more information about the bill, and HERE for the current official bill analysis.
• Senate Bill 12, titled “Change laws governing traffic law enforcement.”  Notably for townships, this bill would prohibit township law enforcement officers or representatives from using a traffic camera on an interstate highway.  Click HERE for more information about the bill, and HERE for the current official bill analysis.

Regulation of Alcohol

• House Bill 181, titled “Promote use of Ohio agricultural goods in alcoholic beverages.”  The bill would authorize the Ohio Department of Agriculture to create promotional logos that producers of Ohio craft beer and spirits may display on their products.  Specifically, the bill would authorize an “Ohio Proud Craft Beer” and an “Ohio Proud Craft Spirits promotion.  Click HERE for more information about the bill.
• House Bill 160, titled “Revised alcoholic ice cream law.”  Under current Ohio law, those wishing to sell ice cream containing alcohol must obtain an A-5 liquor permit and can only sell the ice cream at the site of manufacture, and that site must be in an election precinct that allows for on- and off-premises consumption of alcohol.  This bill would allow the ice cream maker to sell to consumers for off-premises enjoyment and to retailers that are authorized to sell alcohol.  Click HERE for more information about the bill.
• House Bill 179, titled “Exempt small wineries from retail food establishment licensing.”  The bill would exempt small wineries that produce less than 10,000 gallons of wine annually from having to obtain a retail food establishment license in order to sell commercially prepackaged foods.  The sales of the prepackaged foods cannot exceed more than 5% of the winery’s gross annual receipts.  The winery would have to notify the permitting authority that it is exempt, and also notify its customers about its exemption.  Click HERE for more information about the bill.

Energy

• House Bill 20, titled “Prohibit homeowner associations placing limits on solar panels.”  The bill would prohibit homeowners and neighborhood associations, along with civic and other associations, from imposing unreasonable restrictions on the installation of solar collector systems on roofs or exterior walls under the ownership or exclusive use of a property owner.  Condominium properties would similar be prohibited from imposing unreasonable restrictions where there are no competing uses for the roof or wall space where a solar collector system would be located.  According to the bill analysis, an unreasonable limitation is one that significantly increases the cost or significantly decreases the efficiency of a solar collector system.  Individual unit owners would also have the right to negotiate a solar access easement.  Click HERE or more information about the bill, and HERE for the current official bill analysis.
• Senate Bill 119, titled “Exempt Ohio from daylight savings time.”  The bill would require Ohio to observe Daylight Savings Time on a permanent basis effective March 8, 2020.  The state’s clocks would spring forward in March, but there would be no falling back in the fall.  Click HERE for more information about the bill, and HERE for the current official bill analysis.

As for the bills that we previously covered in our March legislative update, the following chart explains where those bills stand.  Those that have passed at least one chamber have their passage status underlined in the column on the right.  Those that have had at least one committee hearing list the number of hearings, while those that have not had any activity in committee state only the committee that the bill has been referred to from the floor.

Peggy Kirk Hall, Asst. Professor, OSU Extension Agricultural & Resource Law Program

A written lease is a valuable tool to use in a farm lease situation, but many farm lease arrangements never progress beyond a conversation and a handshake.    A written lease brings certainty to the farming arrangement by laying out important terms such as lease duration, notice of termination, payment provisions and conservation practices. Verbal farm leases are risky; problems can arise with legal enforceability and disputes over rights and obligations.  For those dealing with a verbal lease agreement, here are a few strategies for protecting interests in the verbal farm lease situation.

Put the verbal lease in writing.  The first recommendation is no surprise; attorneys have long encouraged farmers to use written farmland leases rather than relying on verbal agreements.  But many landowners and tenants are uncomfortable using a written lease, for a variety of reasons.  Consider the following concerns and recommendations for addressing them:

• “We’ve always operated on a verbal agreement and a handshake.”  Transitioning from a long-time verbal agreement to a written lease can be awkward and uncomfortable, and the landowner or tenant farmer who wishes to make the change may be uncertain about how to introduce the change.  To address an awkward transition, consider using a third party to “intervene” and facilitate the process of converting to a written agreement.  Have a farm manager, attorney or accountant explain the reasons for moving to a written agreement and begin the process of discussing lease terms.  Provide the other party with ample time to respond and to consider its own concerns and suggested lease terms.
• “We don’t want everyone to know the terms of our lease.”  Landowners and tenants often express concern that a written farm lease must be recorded in the county recorder’s office, thus revealing private terms such as the price paid for the lease.  In this case, the parties may utilize a provision under Ohio law referred to as the “memorandum of lease.”  Ohio Revised Code section 5301.251 allows the parties to record a shortened form of the farmland lease.  The only provisions the parties must include in a recorded memorandum of lease are the names and addresses of the landowner and tenant, the date of executing the agreement, a description of the leased property, the starting date and duration of the lease and any rights of renewal or extension.   With the recorded memorandum of lease, there is public notice that the lease exists but key terms remain confidential between the landowner and tenant.  The parties can include a term in the written lease verifying their agreement to execute and record a memorandum of lease rather than recording the entire lease.
• “A written lease is overwhelming or too much detail.”  It is true that farmland leases can be lengthy and detailed, although attorneys usually have sound reasons for drafting detailed leases.   Note that the parties can make a gradual transition.  Even a simple lease or a checklist can bring certainty to the relationship by outlining key obligations or providing resolutions if problems arise in the future.  Additionally, there are many good resources that simplify and explain farm lease provisions, and a few good “model” leases for reference.  For helpful resources, visit the website http://aglease101.org .

Pay attention to lease payments and possession.  If the parties can’t convert a verbal lease to a written lease, be aware that one problem with a verbal lease is that it’s not clear when the lease agreement actually begins.  In the event of a dispute, Ohio courts often look to factors such as possession and lease payments to determine the term of the lease.  Two indicators that a farm lease agreement is in place are possession of the property by the tenant coupled with acquiescence by the landowner, or a lease payment made by the tenant and accepted by the landowner.  Both parties should be mindful of these important actions and should maintain records to document these occurrences.

Address financial fairness.  Determining the payment amount for a farm lease is a challenging task, particularly when the farm economy is in flux.  Disagreement over the lease price can quickly end a verbal farm lease relationship.   Thorough research and equitable approaches can maintain the lease relationship by ensuring a financial arrangement that is responsive to the market and fair to both parties.   OSU’s Farm Management website at http://aede.osu.edu/programs-and-research/osu-farm-management contains data on farmland values and cash rental rates.  Consider a flexible cash lease to accommodate economic changes; information on flexible cash leases is also available through OSU’s Farm Management website and at http://www.aglease101.org.

Maintain records of the lease relationship.  Good records that document the leasing history can help establish a “course of dealing” between the parties.  While a written farm lease is preferable, a record of how the parties managed the lease or handled issues in the past can be a useful point of reference for ensuring consistency in the relationship.  If there is litigation over the lease, a court might rely on proof of the parties’ course of dealing to help resolve an issue.  Both parties should maintain thorough records of payments, agreements, farm management practices, soil sampling, nutrient applications, improvements and any other facts or data that establish the details of the leasing relationship.

Maintain communication.   Don’t underestimate the power of good communication between the leasing parties.  A landowner can provide a tenant with valuable certainty by keeping the tenant informed on potential changes with land ownership or financial management.  Tenants can keep a landowner apprised of the condition of the farm property by providing reports on a regular basis, especially in the case of an absentee landowner or a crop share lease.  A report that includes pictures and a brief summary of improvements made,  management practices adopted or crop share calculations may go a long way toward ensuring a solid leasing relationship.

A written and comprehensive farm lease is a valuable tool for farmland owners and tenant farmers alike; those who still rely on verbal farm leases should carefully consider making a transition to a written lease.  Parties that continue to use a verbal farm lease face legal and financial risks, but can adopt some practices to help protect the verbal farm lease situation.  For resources and examples of written farm leases, see http://aglease101.org.