Solar Leasing

Seven Things to Consider before Signing a Solar Power Lease

When approached by a solar power company for a solar power lease, it is difficult to know where to start. Here are a few things landowners should consider before signing a solar power lease in Ohio:

1.      A Solar Power Lease Creates a Long-Term Relationship with a Solar Power Operator

A solar power lease is a legal contract between the landowner (lessor) and the operator (lessee) that allows the operator to construct and operate a solar power generation and related facilities on the landowner’s property in exchange for a lump-sum or structured payment negotiated under a one-time agreement. These leases usually last for several decades, and in some cases are permanent. Unlike an outright sale of land, a solar power lease creates a long-term relationship between the landowner and the operator, and the terms of the lease define the terms of that relationship. The lease will determine such things as: (1) the amount of money the landowner is to be paid, which usually includes both guaranteed and non-guaranteed portions; (2) the rights of the landowner and operator with regard to their shared use of the property; and (3) the legal rights, responsibilities, and obligations of both parties. If the terms of the lease are not negotiated and drafted properly, the lease can become a disaster for the landowner. It is therefore critical that you have an experienced attorney on your side to analyze and negotiate terms that favor you.

2.      The Company’s Land Agent is NOT on Your Side

A “land agent” (also known as a “landman”) is a person the solar power operator hires to negotiate leases with landowners. The land agent is not on the landowner’s side. They are hired by the operator to obtain leases that favor the operator, not the landowner. Many land agents are effective at gaining the landowner’s trust in order to get them to sign a deal without having it reviewed by an attorney. This is a big mistake. A landowner should never sign a complex real estate agreement without consulting with an experienced attorney. And contrary to what land agents often tell landowners, the operator will almost always agree to pay more money and agree to better lease terms if the landowner is represented by an attorney experienced in this area of the law.

3.      Guaranteed Money vs. Non-Guaranteed Money

Solar power leases usually consist of a: (i) testing or development period; (ii) initial or operation term; and (iii) renewal term. During the testing period, the operator will investigate the suitability of the site before making a long-term legal and financial commitment. If, during the testing period, the operator determines that the site is suitable and proceeds with building its solar facilities on the property, the lease will proceed to the initial term and the operator will begin to make monthly rent payments to the landowner. If, however, during the testing period the operator decides not to build facilities on the property, the operator can terminate the lease and make no further payments to the landowner. Under this scenario, the only money that is guaranteed to the landowner is that which is paid during the testing period. For this reason, it is important to maximize the amount of guaranteed money paid during the testing period. Not only does it guarantee the landowner a financial benefit, the larger upfront investment can provide the operator with an additional incentive to work through any challenges they might encounter and continue with the initial lease term, which is where the vast majority of the landowner’s financial benefits will be realized.

4.      Maximize Monthly Rent and Account for Inflation

Once the lease passes from the testing period to the initial term, the operator will begin to make monthly rent payments to the landowner. This is where the vast majority of the landowner’s financial benefits will be realized. It is therefore critical that the landowner find the limit of what the operator is willing to pay per-month. A slight increase in the monthly rent can be substantial over a decades-long lease term. In addition, given the long duration of a typical solar power lease, it is also critical that the rent payment term contain an escalation clause to account for inflation and other factors. A dollar today is not what it was fifty years ago. And without an escalation clause to increase the monthly rent periodically, a monthly payment that seems lucrative today could become a terrible deal in the future.

5.      Property Tax and CAUV Status

Because solar energy development does not qualify as “commercial agricultural use,” an agricultural property developed for solar power generation under a solar lease may lose CAUV status. Additionally, in losing CAUV status, the property owner may be subject to a “recoupment penalty.” This issue should be addressed in a solar lease so that the landowner’s rights and the operator’s obligations are clearly defined as to property taxes.

6.      Access to Sunlight and a Solar Easement

Solar power leases include a term providing the operator with “access to sunlight” or a “solar easement.” This term prevents the landowner from using the property, even portions of the property that are not subject to the lease, in ways that would impede the operator’s access to sunlight for its solar power generation facilities. It is important for the landowner to be aware of this, and to demand appropriate compensation, as this term can drastically impact the landowner’s ability to develop the property for other uses in the future.

6.      Do NOT Warrant Title

Form solar power leases often contain clauses wherein the landowner provides a warranty of title to the operator. Such clauses are an unfair and unnecessary attempt by the operator to shift the burden of conducting or insuring the title work from themselves to the landowner. Warranting title puts the landowner at risk of future litigation and liability over any title defects or irregularities. Solar power operators have the resources and manpower to conduct their own title investigation and should bear the responsibility for ensuring satisfactory title.

7.      Additional Considerations

Solar power leases are complex legal instruments that contain numerous additional clauses that can be either beneficial or detrimental to the landowner, depending on how they are negotiated and drafted. These clauses deal with numerous issues, including: (i) the solar power operator’s permitted uses of the land and access rights; (ii) automatic lease termination; (iii) liability, and property and casualty insurance; (iv) liability shifting and indemnification protections; (v) environmental issues; (vi) solar power facilities removal and land restoration; (vi) default and cure definitions, periods, and procedures; (vii) assignment and sublease rights and procedures; (viii) additional tax issues; (ix) landlord’s assignment of rights and/or sale of the property; (x) legal jurisdictions; and numerous other issues.

Given the complexity of solar power leases, it is important that landowners consult with an attorney experienced in this area of the law to guide them through these complex issues and negotiate a lease that is favorable to the landowner. For more information on how GBSK can help with your solar power lease, please click below for a free consultation:

Note: This information is intended for general guidance only. This is a list of some of the important issues that a landowner should consider before signing a solar power facilities lease. It does not address the particular issues that a given landowner might face and it is not a substitute for legal advice and guidance that address your specific situation. Call us to discuss your unique circumstances to find out how we can help you.