A Whistle-Stop Guide to Matters Landowners Should Consider When Approached by Renewables Companies for Land Leases

When approached by a developer, you will likely be provided with draft Heads of Terms (“HOT”) for an “Option to Lease” and a “Lease”. An Option to Lease is a contractual obligation between the landowner and the developer which obligates the Landowner to grant a lease to the Developer once a specific event takes place,  usually the grant of planning permission, energisation of the project or occupation for works commencing.

HOT are generally not legally binding and are intended to create the foundation upon which the Agreement between Landowner and Developer is based.  There may be an element with the HOT, or ancillary to it, however which will create a legal contract.  These clauses usually relate to non-disclosure of the HOT, and/or a probation of entering into discussions for similar projects by the Landowner on the property (or elsewhere) for a set time period.  

1. Who is entering into the Agreement? 

The grant of planning permission for a renewables project will affect the value of the land.  Upon construction, the rent paid under the lease will be an income stream.  It is, therefore, always recommended that the structure of land ownership accurately reflects the landowner's wishes, especially as most renewable lease agreements can run from 25 to 40 years, normally with associated options to renew.  Entering into an agreement with a renewables developer should therefore be considered as part of an overall financial and/or succession planning project. 

As a matter of housekeeping, it is not unusual for land ownership with farming families to be misunderstood, especially in multi-generational farming and/or businesses with multiple structures.  Be sure to clarify who should be named in the agreement and who legally has the right to enter into the HOT.

2. What area are you granting an Option Agreement and subsequent Lease over? 

Developers will identify an area of interest for the project.  However, it is not always agreed on which acreage within that area they aim to obtain planning for.  Be aware of any land that may be "left out" of a planning application and the subsequent lease; you may end up with a land parcel that you cannot properly use and for which you receive no rent. 

3. How long is the option period? 

Developers are usually keen to apply for planning permission as quickly as possible, with longer option periods possibly reserved for larger projects that require consent from the Secretary of State for Energy Security and Net Zero.  Option agreements can commonly range from as little as one to two years, stretching to six to eight years.  

4. Is there an extension period?  Can I negotiate additional rent? 

Developers typically include a term that allows them to apply for an extension of the option period beyond the initial term if the project becomes "stuck" in the planning and/or implementation process.  For example, this may occur if the developer encounters issues connecting the renewables project to the electricity grid.  An experienced chartered surveyor can assist with negotiations on additional payment for this situation at HOT stage. 

5. Payment: How much and when? 

We always recommend having an experienced chartered land surveyor to negotiate the rent.  They are far more familiar with market rates and may be able to negotiate a higher rent than initially offered. 

Developers typically pay an Option fee upfront upon completion of the Option, with an additional fee being payable for any extension.  However, the matter of rent within the lease can be complex.  A landowner might find themselves in a situation where a renewables development on their land with a lease granted, but no payment has been made because the project was unable to become energised.  A landowner would want to maximise rental opportunities, and it may be that a percentage of the income stream for energy generated can be negotiated in addition to the flat-rate rent payment.  

6. What rights are you granting, and what rights do you need to reserve? 

While a Developer may have direct road access, in many cases, they will need a right of access to the chosen area, along with the right to lay and maintain cables.  They may also require rights to protect the installed equipment, such as lopping trees.  Be clear about what the developer is requesting, and ensure that any access tracks can accommodate both heavy and regular traffic during the construction phase.  If they cannot, you may need to determine who will be responsible for any necessary upgrades to facilitate construction.   

You should also consider what rights you need to reserve.  For example,  you may want the developer to take rights over the minimum amount of land possible so as not to burden the remaining holding.  These should be addressed early in the negotiations. 

Access will be required throughout the Option phase to allow the Developer to conduct investigations and secure planning permissions.  The extent of this access needs to be discussed.

What rights do you need concerning the project?  Consider your broader plans for your holding; for example, you may need the right to alter the access in the future.  These should be noted, even if they are generic. 

7. What are the Developer's obligations?

A Developer will have many obligations within an Option and subsequent lease; however, the key elements must be detailed in the HOT.  Their obligation should cover how they will treat the landholding, their obligations for payment of costs over and above rent and the works they will carry out.  It is important that HOT also covers what the Developer's planning obligations are, namely over what timeframe must they explore and take action on these?  What do you expect from the developer in terms of planning?

8. Non-Disclosure and Exclusivity Period

This part is important and should not be overlooked.  It is usually part of the HOT, which is legally binding, so you need to understand how long the exclusivity period lasts.  Additionally, besides your own professional advisors, you are likely unable to discuss the matter with any other party, even informally.  Additionally, developers need to ensure that their project will not be in completion with another.  For this reason, it is a standard obligation not to enter into discussions with any other developer for a renewables project during the exclusivity period.  

Note that if you have a secured lender, you will be obligated to obtain their consent in the granting of the option and lease.  We strongly recommend involving your lender as early as possible when exploring the grant of the Option, as failing to do so could leave you in a difficult and costly position if your lender refuses to grant consent later.