Real estate is at the heart of renewable energy projects
A successful large-scale renewable energy project builds from comprehensive due diligence. This is possible by entering into robust agreements with land owners. Ultimately, these agreements must satisfy the requirement of financiers and/or prospective operators of the project.
Generally in Australia, renewables projects will be either wind or solar based (or increasingly a combination of the two, potentially with co-located storage as well). Obviously every project is different. However, this article aims to provide a high level overview on the key real estate issues common across projects that a developer should keep in mind from day one.
For any renewable energy project developer, initial steps are usually based on undertaking preliminary desktop investigations to determine the suitability of a site. However, desktop investigations will only go so far. Eventually they will need to be verified by actual real world measurements and investigations undertaken at the proposed site. At that time it is necessary to obtain access to the land.
Heads of Agreement – is it needed?
After speaking to the applicable land owner, the first stage of land access should be a heads of agreement between the parties (this may also be known as memorandum of understanding, letter of intent or similar). This is typically a non-binding document setting out the key commercial parameters for the deal. It should contain all material commercial matters, establish the area the developer wishes to undertake due diligence upon, set out the possible compensation payable and address exclusivity arrangements. While a heads of agreement may often be fully or partly non-binding, a properly prepared heads of agreement should provide a clear understanding of the key commercial terms and act as a guide for finalisation of binding legal documents.
Where the commercial terms of the deal are not locked away early in a heads of agreement, they will often be renegotiated later (potentially many times). This will lead to drawn out negotiations and greatly increased legal expenses for the developer. Without a heads of agreement, particularly where a development area covers the land of multiple land owners, the developer is often left chasing the game and being pushed into continually adjusting its commercial terms to satisfy the different owners.
Balanced legal documents are now expected
In Australia, typically, land agreements will take the form of an option for the developer to call for a lease or an option to purchase the land outright. Providing unnecessarily restrictive or unbalanced legal documents that unduly favour the developer and largely disregard the interests of the land owner will oblige a land owner to seek legal advice. Typically the developer will be expected to contribute to, or pay all of, the land owner's legal costs. With the increasing prevalence of renewables projects and increasing understanding in rural communities of what they may involve (both the opportunities and risks), fewer and fewer land owners are prepared to just sign whatever is put before them in exchange for an easy option fee.
Legal documents with the land owner must recognise the amenity of the land owner and their ongoing need to freely access their land and operate their enterprise (at least during the term of the option). Additionally, wind energy projects will usually be documented via a lease that covers a series of turbine sites, complemented by other leased areas for supporting infrastructure and which are all linked by a series of over or underground transmission lines and roads (for which some form of easement may be required). The legal documents that create this structure can be inherently complex – much more so than for an option to purchase land for use as a solar farm. As documents may be complex in their effect, attention must be given to drafting the documents succinctly.
What should be in the legal documents?
Obviously there are lots of essential items that need to be covered. However from the perspective of the project financier some key things are needed. If a developer's land agreements do not contain them, they will be forced to go back and renegotiate the land agreements with the land owner. As such, it is worth considering them early. Some things may be addressed in call option document while others may be in the purchase or lease documents. Some of the key things a financier might look for are:
- Clear rights for the developer to access and use the land for any testing needed during any option period.
- The land owner's mortgagee has consented to the arrangement (the absence of which may be fatal).
- There is no prohibition on the developer lodging a caveat against the land.
- The ability to require easements for access and services over land surrounding the infrastructure.
- As much flexibility as possible over the final location and density of infrastructure to be installed in the development area (such as turbines, PV panels, substations and repair and maintenance compounds) together with the ability to relocate or install additional infrastructure in due course.
- Certainty that the landowner is not entitled to object to the project during the approval, construction or operational phases.
- The right to assign the developer's rights under the legal documents or transfer them to another party without input from the land owner and no right for the landowner to veto any change in control for the operating entity.
- The ability for the developer to grant security over its rights including the ability to require the land owner to enter into further documentation as needed for project financing at the construction stage (such as a tripartite deed with the financier).
- Certain protections including extended notice periods and multiple default notices to ensure a leasehold interest is not immediately forfeited if rent is overdue or where the operator might be deemed to be insolvent.
- For a lease, absolute clarity on how the ongoing rent will be determined.
Having robust agreements with landowners, that will pass due diligence with any potential project financier and allow proper project operation is a key foundation of any renewable energy project.
Without certainty around land access there is project uncertainty. Project financiers and operators do not want uncertainty. They want certain outcomes, little risk and no delays.
In a competitive landscape, inadequately prepared land agreements create risk and imperil project viability. If there is any doubt, the agreements must be reviewed. Dentons has both the global reach and local Australian knowledge to assist with any renewable energy projects.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.