Solar farms and Lease – what farmers need to know

More farmers and landowners are been approached by developers looking to enter into Options and Leases for Solar farms.Issues to consider before you decide to proceed:-

1. The development may never happen. There are lots of hurdles in place. Planning permission, grid connection, power supply agreements and finance need to be put in place before a penny rent will flow.

2. Entitlements/single farm payment (SFP). The Minister for Agriculture has indicated that the actual lands covered by solar panels (rather than the lands in the Lease) will not be eligible for single farm payment. This has yet to be formally approved.

3. Taxation issues to include issues of agricultural relief on farm transfer or farm succession also need to be considered. Revenue have said that where less 50% of all your lands is occupied by solar panels and associated equipment agricultural relief will still be available. You will need to take specialist tax advise on this before any decisions are made.

4. Estate Planning – now is a good time to look at the farm business succession and farm inheritance plans. How will the next generation of the family feel about land being put under solar and what are their hopes and aspirations for continuing on or being involved in the farm business? If you enter into a 25 year lease or more this may prove difficult for the next generation to come into farming if this is what they want to do

5. Rent – if you are on the higher tax band the rent income will be subject to an effective rate of 49% tax to include PRSI etc. The rental income from the solar farm is treated as class 5 income and a farmer cannot offset the usual expenditure that they can for class 1 farm income. For many people this means that the rental income will be cut in half due to tax.

6. Potential Issues with neighbours.

7. The lease agreement will allow cables and access roads over your lands that are not part of the lease.

8. Restrictions – there will be certain restrictions put on your retained lands and what you can do with it around the land in the solar lease. This is required by the solar companies so that they can protect the equipment from being overshadowed or damaged by other activities carried out on your own lands.

9. Are you comfortable looking out at lands covered by solar panels?

10. What will you do? If you have put substantial portion of your land into solar you may never be able to continue your current farm enterprise what will you do. Whilst many of the leases may allow you to enter into a maintenance contract and/or graze sheep/geese if you have been a full time active farmer this may not be sufficient to keep you occupied and you will need to decide what you will be doing into the future.

11. Nearly all the solar leases that we have looked at allow the tenant to terminate the agreement on a minimum six months notice. Accordingly there is no guarantee they will be there for the full 25 years or more as set out in most leases. Given the potential changes in technology, refit tariffs and demand it is possible that in 12 or 15 years it will be most cost effective to generate solar electricity in other means and the solar farms may become redundant. However you as land owner cannot terminate the lease save where the tenant has breached its obligations under the lease i.e. to pay rent etc.

All the above need to be considered by any farmer and their family. Yes the
returns from solar are certainly better than the returns you will get from agricultural use of the lands. This can be improved even more significantly if payment can be obtained for allowing electricity generated elsewhere to cross the leased lands unto the grid, additional electricity generated through the battery storage and additional payments arising for any increase in efficiencies. However a solar lease does not come without a price and the farmer and the family need to look very carefully at these before signing any documentation to include exclusivity agreement, grid connection, option and lease agreements.

Process

If you proceed you will be asked to sign an option agreement and lease.

1. Option Agreement

The Option Agreement locks you into an agreement for 3/5 years subject to payment of an option fee. This allows the developer time to carry out site investigations and pull together a planning and grid application.
When signing the Option Agreement you will also be approving the Lease that is to be granted when the option is exercised. Once you sign the Option Agreement you are effectively locked into the Lease if the developer proceeds with the matter.

Issues to consider

Option – whilst you can continue to farm the land during the option period you are restricted from carrying out activities on the option lands and adjoining lands that might interfere with the solar development.
Depending where the developer is with their planning and grid application you should look a shorter option period.

Milestones

Ideally a developer should agree to applying for a minimum amount of megawatts as solar and doing this by a certain time.

The developer should have in place adequate insurance when they are carrying out the site investigation works.

The developer should be obliged to give notice of their intention to come onto the lands and take adequate precaution to protect livestock etc.

2. Lease

Restrictions

There will be restrictions on certain activities on the lands that you will retain outside the lease footprint. You should try and reduce the restricted area to as short a distance as possible.

Access roads, ESB cables and other cables and conduits will come out from the leased lands across your other lands. These will be subject to ESB/Eirgrid and planning.

Term

The term of the Lease tends to be 25-30 years. 30 years tends to be the length that the planning permission so most leases are 25 years with an option to extend for 5 years.

Extensions

Sometimes the Lease will allow an extension or renewal of the Lease. Ideally the landlord should keep control of this. The tenant should renounce the legal entitlement to a renewal of the Lease.

GLAS/SFP

In the event the developer goes onto the land while you are still in GLAS or in the event that you lose SFP we would ask for an indemnity in relation to these. This is not always given.

Forfeiture

This is where the landlord is entitled to take possession of the land if the developer defaults on payment of complying with the terms of the Lease. This needs to be looked at carefully to ensure that as many circumstances are covered.

Decommissioning/Reinstatement

If the developer goes bust or the Lease ends a Bond or fund can ensure that funds are in place to remove the structures and reinstate the lands. Ideally there shojld be a Bond form the date the Lease is signed.

Termination

Most Leases allow the developer termination on 6 months notice. Whilst guarantees from a parent company will be asked for these will not be given. Accordingly there is no guarantee that the Lease will run for its full 25 years.
Costs

Most developers pay all the reasonable legal costs and also make a contribution to an accountant’s costs. In essence once you execute the agreements there will be no costs for you.

Substation

Eirgrid would require the freehold of the Land for the substation to be transferred to them. This means that at the end of the lease the land occupied by the substation will not be returned to you. How much will the developer pay for this?

Battery storage

I prefer that is be dealt with by way of separate agreement as this ensures better payment, more appropriate insurance and other safeguards for the landowner.

Rent

There are several ways of getting rent. There is the flat fee per acre index-linked in a rent review every year or two. In addition it is also possible that the tenant pays a percentage of the gross income received on the site full stop this would cover all income received through the site to include battery storage if applicable and perhaps other developments crossing onto the site.

Title Issues

The developer and more importantly the developer’s lenders/investors will need clear title to go with the Leases. The following points should be checked:
(i) Is the land in your name?
(ii) Are there rights of way impacting on the land? You will need to shoe that you have a right of way for all purposes from the site to a public road
(iii) Are there any sporting rights?
(iv) Is there a right of residence covering the entire folio?
(v) Is the land leased?
(vi) Is the land subject to GLAS?
(vii) If there is a bank charge on the land the bank’s consent will be required to the creation of the option and the lease. They will not require you to give other land as security. The bank’s agents cannot start the process of giving the consent until the final set of documents are ready for sign off.

There is an amount to be considered when looking at Solar Leases. Please feel free to contact us to discuss further

james.staines@staineslaw.ie or 00353 87 2735934.

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