Ohio Ag Law Blog--Here comes the sun: considerations for leasing farmland for solar development
We haven’t seen much sun in Ohio lately, but that hasn’t stopped the growth of solar energy development. In the past two years, the Ohio Power Siting Board has approved six large scale solar projects with generating capacities of 50MW or more, and three more projects are pending approval. These “solar farms” require a large land base, and in Ohio that land base is predominantly farmland. The nine solar energy facilities noted on this map will cover about 16,500 acres in Brown, Clermont, Hardin, Highland and Vinton counties. About 12,300 of those acres were previously used for agriculture.
We’re hearing that solar energy developers are on the lookout for more land in these and several other counties across the state. As the markets fluctuate and weather continues to prevent planting, leasing farmland to a solar energy developer might look pretty appealing. But we always urge caution and due diligence for any leasing situation, and solar energy is no exception.
What should you do if an energy developer wants to discuss leasing your farmland for a large scale solar energy facility? Our best advice is not to jump too quickly. Instead, take the time to fully understand what you’re getting into. A typical solar lease can last for 30 years and thus can have long term legal, financial and social implications for a farmland owner. An important initial question is how does this type of land use fit into your future vision for your land, your farm operation, and your family? If you don’t yet know much about large scale solar development and what it means for your land, give a listen to this webinar from our partner, the National Agricultural Law Center.
In this post, we’ll focus on the beginning of the solar leasing legal process. The large scale solar projects in Ohio range from 600 to 3,300 acres of land, so a developer first has to assemble the land base once it identifies an area for a solar development project. Leasing the land is the typical mechanism used for the solar projects in Ohio. If a developer is interested in leasing your land, the first documents you may receive from the developer are a letter of intent and/or an option to lease. These documents are the precursors to a solar lease but, like a lease, are written in favor of the developer and establish legal rights for the developer. Careful review is critical, as these documents can tie up the land and the landowner for several years or more.
The letter of intent. Some developers use a written letter of intent to notify a landowner of the developer’s interest in a parcel of land. The purpose of the letter is to begin the process of considering the land for a long term solar lease. Note, however, that a letter of intent might also contain a confidentiality clause that would prevent the landowner from talking with other developers about the land or sharing details of the developer’s interest with anyone. Be aware that courts will generally enforce a signed letter of intent as a legally binding contract if the developer has offered the landowner a payment or similar benefit for signing the letter. By signing confidentiality provisions in a letter of intent, a landowner can be foreclosed from considering other solar leasing opportunities.
The option to lease. More commonly, the first document a solar developer will ask a landowner to sign is an option to lease. Don’t be fooled by the name of this document and think that it’s not a legally binding agreement. While an option is not the same as a lease, it can have the same legal effect of tying up the land for a certain period of time and might also dictate many of the terms of the lease if the developer decides to move forward on the project.
An option to lease grants the solar developer rights to explore the possibility of using the land for a solar project, but the developer may choose not to lease the land or develop the project. The option period, typically up to five years, gives the developer time to conduct due diligence on the property, assemble other land parcels, secure financing, and obtain government approval for the project. At the end of the option period, the developer should decide whether or not to proceed with the project. An option also can give the developer the right to terminate and back out of the option at any time prior to the end of the option period.
On the other hand, a landowner doesn’t have an option to back out once he or she signs an option to lease. The landowner is bound for the entire option period. Like a letter of intent, an option can contain confidentiality and “exclusive dealing” provisions that prevent the landowner from sharing details or entering into leasing opportunities with other developers during the option period. The option might also require the landowner to cooperate with the developer’s due diligence and help the developer obtain approvals and permits. Many options also include language that allows the developer to assign the option to another solar developer.
Be aware that an option can also contain significant leasing terms that carry over if the developer proceeds with the project. For example, in addition to allowing the developer to consider the land for a project, the option to lease could also include provisions for the period of the actual long term solar lease, the lease payment amount, easement rights, and landowner obligations. Landowners might think that such terms could be negotiable later if the parties sign an “official” solar lease, but the option language may bind the landowner to the leasing terms that are presented in the option. Sometimes, the option itself becomes the lease. The net effect: a landowner who thinks he or she is just signing a five year option agreement might also be committing to a 30 year solar lease and a predetermined lease payment.
What about crop production during the option period? An option might contain language stating that the landowner may continue managing and operating the property in the same way after agreeing to the option. But the option might also allow the developer to enter the property and proceed with the project at any time, including when crops are in the ground, although the option might not provide the landowner payment for the lost production. In that case, the landowner simply loses out on the crop if the option doesn’t contain provisions for lost production.
As for payment for the option, a landowner usually receives an initial payment for signing the option, perhaps several thousand dollars or more. During the option period, the landowner also typically receives an annual payment that is based on number of acres, perhaps $20 dollars per acre or more.
Should you have an attorney review an option to lease? Yes. Option language can vary and we surely haven’t addressed all potential issues in this post. A close examination by an attorney shouldn’t take much time or cost a lot and will ensure that you fully understand the legal implications of entering into the option to lease.
Are the terms of an option negotiable? That’s up to the landowner and the developer, but don’t assume that the developer won’t negotiate. If you’re faced with an option to lease and don’t like the terms, try negotiating. An attorney can be helpful here, also.
In our next solar leasing post, we’ll review the terms of a solar lease and consider how the lease can impact agricultural landowners over the typical 30 year lease period. Watch also for our upcoming Ohio Farmland Owner’s Guide to Solar Leasing, due out in the next month, which will provide a detailed examination of the solar leasing process.