The inception of the Feed-In Tariff in 2010 had a major impact on the South West. Recognised as the region offering the most potential to developers, the initial trickle of developers looking for sites has turned into a raging torrent.
The phrases “gold rush” and “wild west” have been bandied around a lot and landowners have been encouraged by a seemingly never ending “landlords’ market”. Like all economic bubbles, however, there will be winners and losers and the biggest challenge to any landowner is to ensure that they not only maximize their potential returns but also “back the right horse”.
They say history repeats itself and the renewable energy market does not differ in this respect. It is not so long since the inception of the Renewable Obligations gave rise to a rush to secure sites within Scotland and the north of England. Developers convinced landowners to grant them land options with the promise of rents far in excess of agricultural use. There are no formal statistics for the number of wind farms ultimately built out following this time, but percentages below 10% are regularly quoted. In other words, it is not unreasonable to reckon on less than 1 in 5 of those land options ever ended up in a rent producing lease.
So how do landowners equip themselves to review the offers put to them by developers? Set out below is a brief outline of what you are being offer and what you need to look for.
Three initial documents will be relevant in the preliminary stages of any project and you will be presented with a combination of these. This first of this is an exclusivity agreement. They are designed to offer limited protection to a development company against “gazumping” by competitor whilst carrying out preliminary review of a site. The landowner will agree to “lock out” other developers for a period of time. This agreement may be accompanied by a fee but, more often than not, is a mutual point of trust for a relatively short period of time. Exclusivity agreements can take a myriad of forms and the most prudent will always ask their solicitor to cast their eye over it before signing. Where a landowner should be particularly careful are agreements that:
Lock you in for a long period of time. Most agreements are drafted for 3 to 6 months. Some may have good reason for more than 6 months (there may be specific delays relating to specific sites). Anything over a year is beginning to be unreasonable unless a fee has been paid.
What’s your potential liability? If you breach the terms and enter into negotiations with another developer then expect to be sued for breach of contract. What you don’t want to see, however, is complicated additional obligations that could trigger you picking up a developers’ costs on a technicality. The agreement is meant to offer them a breathing space to review, not a back stop to protect the riskiest stage of their investment.
Do they create an obligation to enter into a lease? Normally no as, again, this is not the point. If a developer is looking for a binding obligation to grant a lease, then they should be looking for you to grant them an option with the form of lease attached.
A developer may ask you to grant them an option over an agreed piece of land. This may be in additional to or as an alternative to an exclusivity arrangement. Their lawyers should contact yours, normally sending them bespoke documentation comprising a land option with a form of lease attached; once agreed this form of lease will be what you will be obliged to enter into if the developer exercises the option. The work surrounding an option and lease does not rest solely with the documents. Any developer intent on building out, should want to have a good understanding of the site from the outset. Their lawyers should be carrying out investigations of the site and should raise a series of enquiries to be answered by your solicitor. All this obviously costs money and any developer with a credible project should have calculated in picking up all or a proportion of the costs you incur. If they’re not keen or are not interested in reviewing your site properly, then you should be seeking more information on their intentions.
The period the option binds your land will depend on what you agree but three years is common and five years not unheard of. This allows the developer time to secure planning and a connection agreement, but effectively takes your land out of the site market for that time. Whilst the developer will have the right to require you to enter into the lease at any time during that period, it doesn’t guarantee they ever will; so that lucrative rent you’ve been promised may never be forthcoming. You might be able to negotiate a significant option fee up front, but don’t assume so as many developers will often argue that they are already paying out significant sums in pursuing the planning application and negotiating the connection agreement, all of which is at (or should be at) their risk.
Equally, if a developer secures planning permission and a connection agreement they may want to start developing as soon as possible. Never allow them to do this without entering into the lease (and thus, starting to pay rent and take up responsibilities for the site) first.
The lease itself should be for a term of 25 – 30 years to mirror the life of the solar panels and to maximize the benefit of the Feed-In Tariff. It is important to remember that may solar project developers are new to the business and either start up organizations or, if more mature, would probably look to develop the project within a corporate entity newly formed for the purpose. The latter approach is not unreasonable and “ringfences” risk from one project contaminating another. It does mean, however, that the party you would ultimately be dealing with will be neither long established nor have huge resources. It is important that your solicitor, therefore, is clear that your risks and obligations arising from entering into the documents are managed by appropriate protections “embedded” in the documentation via insurance and other forms of tangible security. They should also be clear with you what liability you could face and which cannot be legislated for.
So what else should you be looking out for? The legal framework of initial stage documents secures the land for the project but you will want to see those promised rents materialize. This means some understanding of how a developer proposes to build and operate the project. If you’re not involved in the development, then your access to this information is likely to be limited. Nevertheless, it is not unreasonable for a developer to provide some clear answers to a number of pertinent questions you raise. Some suggestions are set out below but what you’re trying to determine are:
- Is it their intention to build out and run the project? As odd as this question may seem, many developers are seeking sites not to develop them but to bundle them into a portfolio of options to sell on to third parties with deeper pockets. The danger here is that you lose control of who you are contracting with and will also enter the lottery of whether or not your site is ever developed.
- Do they have any idea what’s involved with developing a project? Again, strange as it may seem, this needs answering. In particular, a developer needs to have a clear understanding of the time scales involved. The Government has made it clear that it will review the Feed-In Tariff in 2012 with a move to reduce it in 2013. This reduction or “degression” (as it is called) has already been built into the system but could be accelerated if there is too much uptake. Projects need to be accredited for the tariff if they are to lock into the existing fixed tariff. Grid connection companies often advise that connection could take years rather than months (Western Power have indicated any up to a two year wait for the South West, depending on the site). Equally, a planning application could taken anywhere between 3 and 9 months. Add to this, sourcing the funding and equipment as well as construction and accreditation, and it does not take a lot to realise that developers who are not already “on the ball” will be left behind.
So what questions do you ask? Well, set out below are a few suggestions:
- Can I see your business plan? Any credible developer will already have some idea of the financial model they are working towards. Of course, it will be refined during the course of the project and of course, unexpected costs will arise, but if the model does not stack up or provides for unrealistic returns, then optimism rather than economics may be driving the developer. If you’re not sure of your figures, as your solicitor or accountant to help you.
- What’s your track record? It is fair to say that many companies are new start ups but that doesn’t mean to say that they are all new to the industry. Explore why the developer has got involved in solar power. Have they existing experience in this area, say, abroad, or, if not in solar power, have they got experience in another area of renewable energy, such as onshore wind? Those who are simply motivated by the potential returns of the Feed-In Tariff without an good understanding of and/or expertise in the industry, may not fully understand what’s involved in building such an installation.
- What preliminary work have you already done? Any developer intent on building out will not simply pluck sites from the air. They should have carried out some generalized studies of solar potential, geographic positioning and grid connection of a site, before making an approach. Grid connection is always a thorny issue, so ask the developer what contact they’ve made with the grid connection company and find out how much preliminary work they’ve already done on grid connections. Remember too, that several developers will be looking at sites in a similar area, so there may be a lack of capacity for all sites to be connected.
- The all important money question. Development costs of a 5MW site are somewhere in the region of £12 to £18 million so funding will often be complex and take time to structure. In the current economic climate, securing this funding can be even harder. You should get some idea from a financial model of the source and type of funding, but try and get some clear indication from a developer of where they are with securing this funding. Vague responses and generalized comments may mean they are not as far on with this as they should be. Their ability to build out may, therefore, be prejudiced.
Finally, remember the old adage that “if it looks too good to be true, it probably is” still holds firm!
If you wish to discuss any of the issues raised in this article, please contact Jenny Harbord.
28 January 2011
The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 28 January 2011. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates January 2011.