In light of the recent economic stimulus plan and the Obama Administration’s push for green jobs and renewable energies, livestock producers from coast to coast are interested on how they can financial benefit from this trend and negotiate a wind energy lease on their property.
Since wind leases generally range from as five to as many as 50 years or more, cattlemen are well advised to put these agreements in writing and have them reviewed by an attorney prior to signing them. Here is some guidance to assist farmers and ranchers interested in a possible wind energy lease on their property.
The first question every landowner should ask themselves is whether their property is suitable for a wind farm. Another is determining whether your land is marketable to wind developers. Rocky, mountainous terrain and protected federal lands serve as constraints for wind developers. Proximity to transmission lines can also make a property more marketable. Finally, location also determines federal, state, and local legal frameworks and available economic incentives for wind developers.
Join forces with your neighbors. Once property is determined to be suitable for wind development, neighboring area beef producers should form a landowner association to increase their collective bargaining power with wind companies.
The more acreage that can be bundled, the more marketable the property will be to a wind developer and the greater the leverage of landowners in negotiating terms. Landowner associations also make it more affordable to retain an attorney to review and negotiate terms in the wind lease. Finally, cooperation among several producers helps improve transparency ensuring all landowners get the best possible terms in their lease.
Understand the four wind development stages. When negotiating a wind lease agreement, there are typically four major stages of wind development, and the duration of each stage should be narrowly defined in the lease:
- Development period,
- Construction period,
- Operational period and
- Termination period.
Construction period. During this period, wind turbine generators, steel towers, foundations, concrete pads, anchors, fences, and other fixtures will be installed in the pasture or field. If construction doesn’t commence within the specified time, the lease should terminate automatically or the wind developer may tie-up the land for 40+ years without ever constructing a turbine on the property.
Operational period. During the operational period, wind energy is being generated on the property, transmitted to available markets, and sold for profit. The operational period may last up to 50-60 years.
Termination period.. The wind developer ceases to produce wind energy and is obligated to remove its equipment from the farmer or rancher’s property. This is commonly referred to as “decommissioning.” Decommissioning may be limited to a few months, while remediation may take several years to adequately complete.
Negotiate financial terms. Since a farmer or rancher’s property will be significantly encumbered by a wind lease, a livestock producer should make sure he or she is adequately compensated.
There are no clear-cut rules with financial revenues as the market varies due to geographic location, total acreage, wind speed, terrain, proximity to transmission lines, and available economic incentives for the wind developer. Due to the uncertainty in the market and whether a wind developer will actually develop a piece of property, livestock producers should try to secure as much money as possible up front.
Financial terms in a wind lease should be periodically adjusted for inflation.
Before signing a wind lease, farmers and ranchers should consider the following financial terms:
- Minimum Rent. Landowners should ideally negotiate an annual minimum rental payment that should periodically increase each year during the development period. This helps ensure a guaranteed amount of money each year for the livestock farmer or rancher, regardless of fluctuations in the market or wind production.
- Construction Bonus. Livestock producers should negotiate a “construction bonus” in addition to the annual minimum rental payment for the time when the developer commences construction on the wind farm.
- Royalties. After construction, when the wind turbines become operational and generate electricity for sale by the wind developer, farmers and ranchers will typically receive an annual royalty –often a percentage of the gross revenues. The royalty percentage should also periodically increase as well and include a percentage of any money received by the wind developer in lieu of the sale of electricity.
- Termination fee. Livestock producers should negotiate to receive a “termination fee” if the wind developer terminates the lease agreement prior to construction. This is appropriate since the farmer or rancher loses revenue for the period necessary to negotiate with another developer.
- Attorneys fees. Especially if a landowner association is formed, farmers and ranchers should not be shy to ask the wind developer to pay for all or part of legal expenses necessary during negotiation or litigation expenses that may arise out of the wind lease.
- Payment for other uses. Among the other uses for which a livestock producer can expect payment include the following: roads, transmission lines, substations, meteorological towers, and payments for access to in-holdings if the land includes a large amount of federal or state land within its boundaries.
On a final note, livestock producers should also reserve the right to conduct an audit from time to time to verify they are receiving the amount of money guaranteed to them under the terms of the lease agreement.
Protect your property rights. The lease agreement should not only identify the uses for the wind developer, but it should also reserve all other uses to the livestock producer (e.g., farming and/or ranching). For example, the agreement should reserve all rights to mineral exploration and development to the landowner, as well as all water, hunting and fishing rights.
Furthermore, livestock ranchers may wish to protect part of his/her property from development such as the riparian areas, irrigation ditches, or boulder formations.
Reduce liability. Most wind lease agreements will include an indemnification provision requiring both parties to defend and hold each other harmless from claims for any future loss or damage arising from the various uses of the property. Beware for this provision as farmers and ranchers are not on an equal playing field with wind developers. To explain, any loss to the landowner arising from the wind developer’s use and occupation of the land may total in the thousands or tens-of-thousands of dollars; however, any loss to the wind developer arising from the landowner’s use and occupation of his own land may total in the millions or tens-of-millions of dollars.
To illustrate this disparity, the cost to replace a livestock producer’s fence, barn, a good horse, or show steers does not compare to the cost to replace a wind turbine or electrical substation. Most farmers and ranchers can’t afford this type of liability. Therefore, farmers and ranchers should limit potential liability to an affordable figure, such as the receipt of insurance proceeds. Otherwise, a single accident may completely bankrupt a family’s livestock operation.
Wind developer should pay taxes and utilities. As expected, wind energy development will inherently increase the property value on a farm or ranch. Due to this fact, livestock producers should make sure the lease agreement assigns any increase in property taxes to the wind developer – otherwise, the increase will be the burden to the landowner. In addition, any utilities necessary for the construction or operation of the wind farm should be the responsibility of the wind developer.
Make sure you’re notified when rights are assigned. Without question, the wind lease agreement will specify whether the landowner and the wind developer may assign the contractual rights and obligations to third parties. Almost always, wind developers will request freedom to sublease, assign, and mortgage their rights without the consent of the landowner. These broad rights may be necessary in order for the wind developer to obtain financing; however, livestock producers should demand to be notified each time the lease is transferred to another party to understand who is responsible for any default of the lease agreement.
Don’t let the wind developer put liens on your property. Farmers and ranchers should require the wind developer to keep the land free and clear of all liens related to the wind farm. It should be the responsibility of the wind developer instead of the livestock producer to contract and make payment for all labor and materials related to the construction of the wind farm. Additionally, the wind lease should not hold the cattlemen responsible if the wind developer cannot afford to pay for labor and materials.
Negotiate ability to terminate lease in event of default. One of the most important provisions of any wind agreement is the default and termination clause. Most wind leases allow the wind developer the ability to terminate the lease at any time and for any reason while the landowner has little autonomy to terminate the agreement. Farmers and ranchers should negotiate to have the ability to terminate the lease if the wind developer defaults in any way such as fails to: pay rent, maintain adequate insurance, pay taxes, or any other obligation in the contract.
Protect your land during decommissioning and remediation. In the event of default, or termination of the lease, the landowner should specify how much time the wind developer is permitted to remove the wind turbines from the land. Payment must also be established during this time period. In order to prevent the wind developer from simply “walking away” from the project, farmers or ranchers should demand a “decommissioning security,” to be paid as soon as the wind turbines become operational.
Designating proper reclamation provisions is one of the most important aspects of the wind lease agreement. Reclamation is necessary during construction, operation, repairs, and after the project has been removed from the land. Livestock producers cannot rely on the governmental authorities to protect their property so reclamation must be adequately explained in the lease itself. This is particularly important if the landowner’s property contains any unique characteristics or wildlife habitat that need protected.
Reclamation measures should identify the means to keep track of the original condition of the property, either through photographs or an assessment prepared by a range professional. Moreover, other reclamation measures should discuss the following issues:
- identification of improvements that should be removed,
- instructions on depth of soil removal,
- description of stockpiling of topsoil and storage during construction,
- decompaction of the soil,
- reclamation of roads,
- protection of revegetation,
- noxious weeds,
- dust control and
- trash removal.
Look at your particular situation. The above mentioned issues are the most important to properly negotiate with a wind energy company before entering in this type of long-term agreement. However, several miscellaneous issues may need attention such as a forum selection clause, arbitration clause, condemnation or discussion of what happens to land included in a Conservation Reserve Program other governmental program.
For more info, contact: Cari B. Rincker, associate attorney ( [email protected] ), licensed in New York, New Jersey and Connecticut; or Brandon L. Jensen, senior associate attorney [email protected] ), Cheyenne, WY (307-632-5105).
-- Cari Rincker, Brandon Jensen, Budd-Falen Law Offices, LLC