First published in Estates Gazette, 27 August 2011.
More and more landowners are looking at leasing their land to such projects. Vicky Nunn and Carlos Pierce review the points to be considered.
By 2020, estimates suggest that more than one-third of the UK's electricity must be generated from renewable sources. Coupled with publicity on the availability of subsidies under the renewables obligation, land diversification for small- and medium-scale wind farm use is of continued interest to landowners and developers.
This article considers the typical life cycle of an onshore wind farm project and how it affects the relationship between the landowner and developer.
Wind farm life span
Onshore wind farm projects usually have a lifespan of around 35 years, split into five phases: (i) site investigation: a developer will carry out detailed technical and environmental assessments to ascertain whether the land will support a viable wind farm; (ii) obtaining planning permission: once the project can proceed technically, the developer will enter into discussion with the local planning authority and a planning application will be made; (iii) construction: the period during which the wind farm and any associated infrastructure (access roads and grid connections) are built; (iv) operation: the period in which the wind farm is operational and electricity is generated; and (v) decommissioning: at the end of the lease, a developer may be expected to remove turbines and reinstate the land to a flat and level condition.
The operational period will usually last between 25 and 30 years and the developer will sometimes be entitled to renew at the end of this period. The commitment is therefore for the long term and both developer and landowner should establish from the outset an understanding of their respective obligations and expectations as well as a co-operative working relationship.
Onshore wind farms are usually placed on agricultural land. The two uses are particularly compatible because farming can be allowed up to the turbine bases, thus minimising the area required to create the wind farm and presenting a low impact opportunity for diversification. Wind farms also require minimal on-site supervision, other than maintenance, which means that (disregarding aesthetic arguments), if sympathetically designed, the consequences of the creation of a wind farm can be minimal.
Even a small wind farm comprising only two or three turbines will require the installation of an electricity substation, a switchgear base, anemometry equipment, new conducting media and usually new access roads in addition to temporary access roads used during the construction phase. The access roads must be able to support large vehicles carrying the turbines. Landscaping and other works may also be necessary as a condition of planning consent.
Further areas may also have to be removed from agricultural use during the construction phase to enable the necessary works to be conducted. A developer should reinstate these areas after the works have been completed, although, depending on the size of the wind farm, construction may take months to complete.
Most developers will be willing to discuss the layout and design of the wind farm when agreeing heads of terms with a landowner, although this may be subject to significant change at a later stage.
Before proceeding, a developer will need to establish that the proposed site satisfies all environmental and technical requirements to support the wind farm. Planning permission should also be obtained.
Most developers will not want to incur the time and expense of carrying out a full site investigation and surveys and applying for planning consent without knowing that the landowner will grant a lease of the land if a viable wind farm can be created.
A common way of achieving this is for the landowner to grant the developer an option, for a fee, to call for an agreed form of lease when the developer can proceed towards operating the wind farm, which is typically after the grant of planning permission. The lease will deal with the development and operational phases, the rental payments and the on-going obligations of both parties.
The option will grant a developer exclusivity during the option period (which is usually between five and seven years subject to extension) and will include certain restrictions on use during the option period that would interfere with the wind farm - for example, preventing buildings above a certain height, or carrying out any activity that might interfere with the developer's ability to obtain planning permission.
One drawback of the option structure is that the landowner will have to agree to the legal terms governing the operation of the wind farm (and to accept restrictions on the use of its land) before it is known whether the wind farm can be created. However, in recognition of this, most developers will contribute or cover the landowner's legal fees at this stage.
The most important terms for both parties to consider when agreeing heads of terms are:
Several rent structures can be employed, including a fixed one-off premium (although this is rare and often not preferable), a fixed annual rent (which can be index-linked), a minimum annual rent with a profit share or royalty arrangement or a combination of these payments.
Many wind farm leases are based on a combination of a fixed minimum annual rent and a profit share, guaranteeing a minimum rent to the landowner but also providing a degree of commercial protection for the developer against market conditions and interference with the ability to generate wind power.
Landowners should engage an experienced agent to agree rent structures because these payments can be complex.
Control over the design of a wind farm
A developer will require a wide discretion in respect of the wind farm's design because it will want to take into account the results of the surveys carried out during the option period to maximise the capacity of the wind farm and to ensure that it has sufficient flexibility on the use of the land to be able to secure planning.
However, a developer may agree to seek approval of the location of the supporting infrastructure from the landowner before submitting its planning application to avoid any adverse effect on land use that can be avoided.
Similarly, at larger sites, the area on which turbines are to be located may be restricted to a particular radius.
Restrictions on use
During the term of the lease, the developer will require similar restrictions on the use of the land to those that will be imposed during the option period. Often, these are compatible with the likely long-term use of the land, although since the wind farm will be in place for many years, these must be carefully considered.
Assignability and financing
In most cases, a developer will want to be able to assign and charge the lease (and the option), principally to reflect the way that wind farms are financed and operated and to enable the wind farm to be assigned to a third party.
A landowner should proceed in the knowledge that the obligations in the lease should be sufficiently clear and robust following any assignment.
Although this is not an immediate concern, a landowner will want to ensure that the lease includes firm obligations for the developer to remove the turbines and associated infrastructure at the end of the lease term or during a decommissioning period prior to the end of the term.
Foundations will need to be dug to accommodate the turbines and an electricity substation may be placed on the site and new roadways and appropriate grid connections created. The lease should therefore require the developer to return the site in a flat and level condition.
It is usual, as a condition of obtaining planning consent, for a developer to be required to provide a decommissioning bond in which the developer lodges money with a bond provider to stand as security that the site will be properly decommissioned.
Sometimes, it is possible for a landowner to be afforded the benefit of this bond, or a similar form of bond either for the duration of the lease, or at a future point closer to expiry of the lease when the likely decommissioning costs can be better ascertained.