Solar & Wind Lease Agreements

As the demand for renewable energy sources continues to grow worldwide, landowners and developers have realized the potential in harnessing the power of solar and wind energy in Wisconsin. Wisconsin is well known for having large swaths of flat, open land, often used for traditional farming activities. Such topography is perfect for energy companies looking to expand their generating capacity, often paying landowners a premium for the use of such land.  

Leasing and easement arrangements are the essential methods that make solar and wind energy facilities possible. In this article, we explore the main considerations and negotiation items that both landowners and energy companies should understand when entering into solar lease and easement agreements. As a disclaimer, this article only covers a select few of the main topics to consider in renewable energy leases, and the specific facts for each project should be carefully considered. 

Clear Definition of the Premises

One of the most important items in any lease is to determine the definition of the “Premises.” The Premises, in most types of leasing arrangements, is typically considered the entire space that the tenant will be renting from the landowner. This may be the entire property that the landowner owns or limited to a portion of the entire property. Creating a detailed and accurate map or survey of the property and the premises, including boundary markers, GPS coordinates, and any other relevant geographical features, is often the most efficient method of defining the Premises.  

In addition to the general location of the Premises, a renewable energy lease should also consider (i) the location of the energy company’s future improvements in relation to the current improvements on the property, and (ii) whether the energy company’s use of the property is “exclusive” or “non-exclusive.” Renewable energy projects frequently will be on property that also has other uses, such as a residential family farm. Furthermore, given the typical length of the term of such leases and the extensive investigation and development period (as described further, below), it is important that landowners retain the right to utilize the property until the energy company decides to develop the renewable energy facilities.  

The parties involved should carefully consider how the renewable energy project will co-exist with other uses on the property. 

Compensation and Payment Terms

Compensation is a cornerstone of solar lease agreements. Landowners should receive adequate compensation for leasing their land for the solar project, and energy companies must consider competitive rates to make the project economically viable.   

Compensation models can vary, ranging from fixed annual payments to variable payments based on energy production or revenue sharing. The most common type of compensation involves a fixed base rent based on a price per acre used by the energy company, with adjustments made to the base rent amount as the lease term progresses. Adjustments to base rent can be based on a variety of methods, including, for example, a set percentage increase per year, a set dollar value per year, based on the Consumer Price Index, or simply based on the parties’ future “good faith” negotiations. Hybrid models that combine the fixed and variable elements described above can also be attractive to the parties involved. 

Outside of the base rent amount, the lease agreement should also address additional rent provisions. It is often the case that the energy company will reimburse the landowner for a portion of the landowner’s legal fees in connection with reviewing and negotiating the lease agreement. Additionally, an energy company may offer down payments or reservation fees as execution of the lease agreement or as future milestones occur through the lease term. Allocation of holding costs, such as the payment of taxes, assessments, maintenance, and insurance, is critical and can often be substantial burdens on the parties involved, especially when considering the length of renewable energy leases.  

Lease Term and Renewal Options

Since solar projects have a long lifespan, the lease term must be carefully negotiated. Landowners may prefer shorter terms to have the flexibility to reassess market conditions or renegotiate compensation rates more frequently. Conversely, energy companies often seek longer lease terms to ensure a stable investment period and recoup their initial investments. Negotiation items within this category should address not only the initial lease term length, but also the renewal options available to both parties.  

Wind and solar energy leases are often clearly divided between different phases of development, including (i) the investigation or development phase, (ii) operations phase, and (iii) renewal phases. Depending on the structure of the lease agreement, the investigation and development phases are typically used to perform the due diligence items described below and to actually build the facilities to be used. Essentially, these phases are used by the energy companies to determine whether the location of the project will work. 

The operation and renewal phases occur after the energy company has determined that the project will work, and the company can begin to reap the rewards of its efforts from the development of the project. In each of these phases, all parties will want to ensure that the lease agreement clearly addresses a number of items, including, (i) exactly how each party will act and use the property (e.g., when the energy company will have access and whether the owner will be able to use any part of the property for farming or other purposes), (ii) exactly how each phase of the project will begin and end, and (iii) exactly how the lease may be terminated by either party. 

Due Diligence

Both the landowner and the energy company will want to perform research into the renewable energy project, the underlying property, and the parties involved. This process, whether occurring prior to or after entering into a lease agreement, is generally called “due diligence.” Depending on the size of the property, the complexity of the renewable energy project, the sophistication and risk tolerance of the parties involved, the due diligence process can vary, but often includes things such as evaluating liens and encumbrances, assessing the environmental condition of the property, and determining zoning.  

Decommissioning, Removal, and Remediation

After the energy company develops the property for such purpose, it can be difficult to repurpose the equipment placed on the developed property. As such, land restoration and decommissioning requirements are particularly crucial items to negotiate, and often include removal of improvements and restoration of the surface and subsurface of the property, as well as penalties for failure to do so. 

Maintenance, Insurance, and Taxes

1. Maintenance. The agreement should outline the responsibilities of the energy company in maintaining and promptly repairing the solar equipment during the lease term. Regular maintenance is essential to maximize energy production and extend the lifespan of the installation. 
2. Insurance. Energy companies should be required to maintain comprehensive liability insurance that covers potential property damage, accidents, and third-party claims related to the solar installation. The landowner may also seek to include provisions that indemnify them from any damages caused by the energy company’s actions and requiring the energy company to (i) have its third-party agents obtain similar insurance, (ii) keep the landowner an “additional insured” under any and all policies, and as well as (iii) require the energy company to modify or adjust the insurance policy and limits to meet relevant commercial standards as time passes.
3. Taxes. Generally, landowners will be responsible for the real estate taxes associated with the underlying land value. However, landowners should be aware that the installation of a solar or wind project on their property might result in increased property values, potentially leading to higher property taxes. Energy companies are usually responsible for such increases in property taxes, but it is critical to spell that out in the lease agreement. It is also critical to include provisions requiring the energy company to be responsible for any personal property taxes associated with the improvements themselves.  

Conclusion

Solar and wind lease agreements offer a mutually beneficial opportunity for landowners and energy companies in Wisconsin to contribute to renewable energy production. By carefully considering and negotiating various legal considerations (including those outlined above) early in the process, both parties can ensure that their interests are protected, risks are minimized, and the project’s success is maximized. Seeking the assistance of experienced legal counsel during the negotiation process will result in well-crafted agreements that meet the specific needs and requirements of all stakeholders involved.