The Law of Wind: A Guide to Business and Legal Issues

The Law of Wind: A Guide to Business and Legal Issues

More On This Topic

Key Contributors

Ramona L. Monroe
See all contributors See less contributors

Media Inquiries

    Victoria Twogood Practice Group Director 612.373.8842

Wind Energy Lease Agreements

LawOfWindCover.JPG

Click here to download The Law of Wind - 8th Edition

At the core of a wind energy project’s overall value is the security, flexibility, cost effectiveness, and stability of the land rights for the project. The tool for capturing this value typically is a wind energy lease or easement agreement that creates and protects a developer’s interest and investment in the property and project, and provides reliable income to the landowner, while offering the developer the flexibility to transfer all or portions of the project over its lifetime.

I. Form of Agreement/Use of Option. A real property ground lease or easement rights for developing a wind project site with its accompanying wind resource easement and noninterference covenants (generally, together, a “Wind Energy Land Agreement”) is similar, in many ways, to an agreement for a ground lease or other agreement for the temporary use of land for commercial or industrial development. A Wind Energy Land Agreement provides for the developer’s entry onto and investigation of the property, and sets forth the term; the scope of the permitted uses of the property by the developer and the landowner; the amounts and methods of payment for the leasehold and/or easement interests; the allocation of insurance and other costs between the parties; the transferability and financing of the development; notice, default, and cure provisions; and other matters that may be required by applicable law, the specific needs of the parties, or the particular circumstances. However, Wind Energy Land Agreements are unlike a common, commercial ground lease arrangement in their treatment of the scope and use of the property, and, when well crafted, should anticipate changes in the ownership of the project and the property, and changing uses of the project property. This chapter outlines some common concepts, provisions, and potential issues in a typical site control arrangement.

Wind Energy Land Agreements can take many forms. A developer will usually develop its own preferred form consistent with its business model, the laws of the particular state(s) and jurisdictions in which it operates, and pricing and operating assumptions. That form will be refined over time to address changes in law or practice and those driven by experience or observation to better achieve best practices. The basic Wind Energy Land Agreement typically provides the developer with an initial period to investigate the underlying property and related parcels that it proposes to develop for its project. After the initial period, if the project goes forward, project construction and operation follows. Among other things, the typical form provides the developer flexibility regarding if, when, how, and where to develop; the right to terminate as to all or any portions of the site; and protective provisions for project lenders and/or others holding or acquiring interests in the project through or under the developer.

It is not uncommon for a developer to use an option that precedes, and gives the developer the exclusive right to enter into, a more permanent Wind Energy Land Agreement rather than entering directly into the project leases or easements up front. The use of an option gives the developer the option term to do its due diligence on the property before entering the longer term agreement, in place of or in addition to any preliminary investigation/contingency period that may be provided in the more permanent site control agreement.

Sometimes, the use of an option is driven by particular state law. Other times, it is simply a function of the developer’s historic practice. For instance, options are customarily used by wind developers in California to avoid property tax reassessment of the project site that would be triggered under California Proposition 13, both at the commencement and again at the end of the lease term, if the lease term ran 35 years or more (including extension options). Handling the initial due diligence during the option period before entering into the long term lease allows more time for the actual wind project operations, if the option is exercised, during the lease term without triggering the re assessment limit. By using the option and entering into the actual lease only after the initial investigation period is finished, the developer maximizes the term of the lease available for income producing operations without having to trigger potentially expensive property tax reassessment.

Use of an option also has disadvantages. Options carry a higher risk of avoidance in a landowner bankruptcy and a greater priority risk than a Wind Energy Land Agreement. Stand alone options (options that are not part of an existing lease) may not be considered interests in real property under a particular state’s law (or insurable under a policy of title insurance) until exercised. However, the properly written and documented option is a common tool to secure the developer’s right to obtain its more permanent Wind Energy Land Agreement. To be enforceable, an option should detail all the material terms and conditions of the Wind Energy Land Agreement it envisions. Without a clear statement of the actual terms of the long term agreement contemplated by an option (or an objective method of filling in the blanks), an option may be merely an unenforceable agreement to agree regarding the final form of Wind Energy Land Agreement to become effective on exercise of the option. Experienced developers’ forms of option usually have the actual complete form of Wind Energy Land Agreement attached or the terms included in the option to become effective on exercise of the option to avoid challenges based on lack of material terms.

While beyond the scope of this chapter, in some cases a wind developer may piggyback onto a prior Wind Energy Land Agreement through a sublease, subeasement, or the like, or through a partial assignment or split of the prior agreement into two or more separate split or partial assignment agreements. Those each have similar concerns as a direct Wind Energy Land Agreement with the added issues of dealing with the prior interest holders and underlying landowner to ensure that the derivative interest is protected and secure notwithstanding any problem with or termination of the prior agreement

II. The Scope of the Property Subject to the Wind Energy Land Agreement. One of the core issues during negotiations between landowners and project developers is the total amount of the landowner’s property that will be subject to a Wind Energy Land Agreement. A natural tension exists between a developer’s desire to include in the agreement as much of the real property as possible to allow flexibility and protection in locating its project and a landowner’s concern that its activities and rights will be limited by a Wind Energy Land Agreement that extends beyond the actual amount of land needed for the construction, maintenance, and operation of the wind energy facility on the property.

A. The Interests at Issue. Developers frequently seek to maximize the amount of property subject to a Wind Energy Land Agreement for several reasons. First, in today’s competitive, wind energy project environment, and because access to and evaluation of a site typically requires an agreement with the landowner, developers usually acquire real property rights before they have done significant site specific due diligence. They typically require time to obtain wind data and information about the property’s topography and environmental attributes, the location of existing title encumbrances, and access to transmission facilities to determine the most productive and cost effective layout for the wind energy facilities on the property. Consequently, the developer will seek to obtain property rights, such as through a Wind Energy Land Agreement, across large areas of property to ensure its rights are broad enough to provide flexibility to ongoing siting and other due diligence investigations, changing conditions, permitting requirements, or new data. In addition, economies of scale play a role. By maximizing the amount of property the developer controls, the developer can better maximize the size and efficiency of the possible wind energy project or projects and benefit from economies of scale in reducing development costs and increasing productivity.

Second, the effective generation of wind energy from wind turbines is largely dependent on the annual average wind speed over the subject property. Any obstruction, natural or artificial (e.g., a tall building, silo, or row of tall trees), that interferes with the flow and speed of the wind over the property can have a dramatic, negative impact on the efficiency of downwind wind turbines to generate energy and could create turbine damaging turbulence. A developer will want control over the size and kind of structures and other obstructions that can be constructed or placed on the property by the landowner and third parties during the term of the Wind Energy Land Agreement. An effective way to gain this control is to encumber enough property to construct, operate, and protect the project and its wind resource and to include noninterference covenants in the Wind Energy Land Agreement that limit the landowner’s right to interfere with the wind flow over the property.

On the other hand, some landowners may be motivated to limit the amount of land subject to the Wind Energy Land Agreement. That could be because the landowner wants to limit the impact of the wind energy project on its other activities on the property (especially when the landowner is a farmer or rancher and plans to continue using the property in this manner while the wind energy project is operating on the property) or to preserve the opportunity to lease the excluded land for other purposes (e.g., cell towers), or the landowner may simply be reluctant to give up a measure of control over too much of the property.

B. Potential Resolutions. There are several means to help incentivize landowners to be more receptive regarding the amount of property to be included in the Wind Energy Land Agreement. These include:

  • Tying a portion of the payments made to the landowner under the Wind Energy Land Agreement to the total number of acres encumbered by the agreement.
  • Consulting with the landowner during the planning stage regarding the location of the proposed wind power facilities on the property. This may reassure the landowner and also provide the developer with useful information about the property. However, the developer should retain the final authority to determine if, how, and where to site its project facilities.
  • Offering a phased approach under which the landowner agrees to lease and/or grant easements to the developer over a greater swath of the property through the investigation and construction phases of the wind energy project (or some other fixed date). After construction has been completed, the developer may carve back the area leased to drop from the lease (but often reserving and preserving the exclusive wind rights and noninterference covenants on) portions of the property that are not part of or needed for the wind energy project. This approach should take into account any “phased” development that the developer may intend for the project and any applicable project boundary buffers or setbacks or the like that may be triggered by such action. In all events the developer should ensure that it retains a suitable buffer area around the wind power facilities to allow ample room for operation and maintenance activities and possible future repowering or relocation of the wind turbines. Further, while rarely seen, a developer may consider adding a right of first refusal to lease or obtain easement/occupancy rights on the released property. This would provide the developer with more flexibility if the landowner proposed to lease to a third party or otherwise encumber the released property for a purpose that, notwithstanding the noninterference covenant, might be incompatible with the wind project or on terms that were attractive to the developer. Before taking this approach, however, the parties should make sure that this arrangement will not violate applicable permitting requirements or other local land use laws (such as a requirement that the leased premises be a legally created parcel), and should also be aware that such provisions increase the ongoing time and expense of administering the Wind Energy Land Agreement.

III. Purpose of Agreement and Use of Property. Another common issue involves the purpose of the Wind Energy Land Agreement and the uses the developer may make of the property to accomplish this purpose. The obvious purpose of a Wind Energy Land Agreement is to allow the developer to determine the feasibility of and then construct and operate one or more wind energy projects. However, the developer and landowner may disagree about the scope and extent of the rights in the property that the developer needs to accomplish this goal. Typically, developers will want the right to take any action on, and make any use of, the property that the developer believes is necessary to accomplish the goal of evaluating, constructing, and operating its proposed wind energy project(s) on or about the property. This generally includes the right to grant rights to others within the scope of developer’s allowed uses where needed or desirable to the developer. For its part, the landowner may wish to see these rights limited so that the landowner has more control over what, where, and how the developer may develop the property and to have more flexible financial terms that contemplate landowner consent and/or additional charges for third party use or certain types of developments (such as substations, operations and maintenance (“O&M”) sites, or the like) as discussed below.

A. What Facilities Go on Whose Land? For most large wind energy projects, a developer must control the properties of numerous neighboring landowners to aggregate the large number of acres required to fully site the project. Few landowners own enough windy land (with access to transmission capacity) to have a utility scale wind energy project located completely within the boundaries of their properties. Inevitably, once the developer has conducted its wind, transmission, environmental, permitting, and construction studies on each property, some will stand out above the others as better candidates for locating wind turbines, while others may be more suitable for transmission lines, roads, and other facilities that serve the wind turbines.

Usually, the most lucrative and long term source of income for the landowner from a Wind Energy Land Agreement is based on the energy generated from project turbines on the landowner’s property. More turbines on the landowner’s land usually means more income to the landowner, and this continues as long as the turbines generate electricity. Accordingly, as a general rule in such a case, no landowner wants to have project transmission lines and roads on its property that serve wind turbines on a neighbor’s property while having few or no wind turbines on the landowner’s property. A landowner may negotiate to condition the developer’s right to extend the term of the agreement beyond the initial evaluation and development phases on the developer’s installation and operation of a minimum or fixed number of wind turbines on the landowner’s property or the monetary equivalent in payments to the extent of any shortfall in turbine number, or special minimum payments if its property is used primarily for transmission lines and roads or project purposes other than turbines. There are various ways to address appropriate compensation to landowners with no turbines on their property, including such concepts as community shares or pooling where a set percentage of annual project revenues is shared among those “no turbine” owners based on their relative land areas under contract to the developer.

A landowner may also negotiate for additional compensation for the developer’s right to place various project facilities on the property. For example, when the developer wants to place on one landowner’s property a substation or an O&M facility that will serve the entire wind energy project, the landowner may believe it is entitled to additional compensation for the added benefit to the developer and added burden on the owner and loss of usable property caused by construction of such a facility on its property. The same may be true for transmission lines, collector lines, access and crane roads, and other features that remove land area from the landowner’s continuing farm or other use or that preclude wind development by other competing developers even if no facilities at all are placed on its property. In many cases, a developer will agree to pay such compensation if the landowner will not otherwise be adequately compensated as a result of turbines being located on the landowner’s property.

Finally, in some circumstances (such as when the project permits or applicable zoning impose setback requirements or to protect the free flow of wind to the project turbines), the developer may need to include a landowner’s property in the project’s “footprint” and encumber it with a Wind Energy Land Agreement even though no physical project facilities will be located on the property. Such arrangements typically provide for a fixed periodic payment to the landowner. Sometimes these concerns and requirements can be met by a less intrusive setback covenant, noise waiver, or restrictive covenant agreement that meets the applicable permit or project requirements without being a full blown Wind Energy Land Agreement.

B. Landowner’s Continued Use of the Property. A unique and attractive feature of wind energy projects is that, in most cases, even after the project is built and operating, the landowner may continue to use a great majority of the subject property as it had before entering into the Wind Energy Land Agreement. That is so because only a small portion of the subject property is used for wind turbines, roads, transmission lines, and related facilities. Some areas, such as the actual turbine pads and immediate surrounding areas, O&M sites, substation sites, and the like, will be for the exclusive use of the developer and off limits to the landowner. Other areas such as shared roads or other facilities would be available for joint use under the terms of the agreement. The remaining property suffers little or no impact from the wind energy project, apart from the physical presence of the facilities and the restrictions against interference with or use of the wind resource. Consequently, most Wind Energy Land Agreements provide that the landowner may continue to conduct its farming, ranching, or timber harvesting activities on the property outside the actual project facility footprint, provided that such activities do not and will not interfere with the construction and operation of the wind energy project.

C. Shared Use of Site Resources. Some Wind Energy Land Agreements contemplate developer access to and use of resources on the project site, such as water and aggregate/rock for use on the project. Water rights, of course, are subject to the limitations on use and point of application under applicable law and so may or may not be available to the developer in connection with the construction or upkeep of its project. For instance, an “irrigation” water right may not lawfully be used for non irrigation wind project purposes. Aggregate, sand, and rock from an existing quarry or deposit on the project land can save a developer time and money and provide another revenue stream to the landowner. Pricing on such resources is a subject for negotiation by the parties. If the developer contracts for and will rely on the availability, quality, and quantity of and access to such resources, additional due diligence is called for to determine and evaluate the value and quality of the resource and any third party rights that might interfere with the developer’s intended use, as well as any additional permits or approvals required from any agency or third party to extract or apply the materials (and any required remedial activities).

IV. Term. A Wind Energy Land Agreement usually provides for an initial term of three to 10 years to provide the developer with time to study the feasibility of wind energy conversion on the property. Developers that use options and complete their due diligence and permitting during the option period may omit this aspect in their more permanent agreement and go directly into the construction of the project facilities upon exercise of the option and entering into the Wind Energy Land Agreement. During this initial term or option period, the developer collects wind data from anemometer or meteorological (“Met”) towers installed on the property; performs geotechnical, environmental, and other studies on the property; and assesses the condition of title to the property. Assuming that the wind data and other studies demonstrate that the property is suitable for development and the balance of the other properties needed for the longer planned project are also under the developer’s control, the developer obtains necessary siting permits and constructs the wind energy project on the property.

Note that, in addition to length of term concerns such as the California Proposition 13 reassessment trigger at 35 years discussed above, some states have enacted statutory provisions that limit the effective period of wind leases or options to lease or the like to a set number of years. See, e.g., N.D. Cent. Code § 17 04 01, 03 & 05 (wind leases, options, and easements are void if no development occurs within five years of the commencement of the interest); S.D. Codified Laws § 43 13 17 and 19 (term of a wind easement or lease may not exceed 50 years and the easement/lease are void if no development of the potential to produce energy from wind power associated with the easement/lease has occurred within five years).

The Wind Energy Land Agreement typically provides the developer with an automatic right to extend the agreement past the initial investigatory phases for an additional period or periods ranging from 30 to 50 years (or even longer, subject to applicable state law restrictions). The developer typically agrees to one of the following: (1) pay the landowner a periodic minimum payment during the extended term, (2) pay the landowner a payment upon commencement of the extended term, or (3) install a certain number of wind turbines on the property that generate electricity (or commences paying an enhanced minimum payment stream). The number of wind turbines that the developer may be required to install on the property to trigger the automatic right to an extended term without having to pay a greater minimum payment to maintain the agreement in effect is subject to negotiation by the parties. In setting the proposed initial and extended term of a Wind Energy Land Agreement, the developer should take into account any requirements or restrictions imposed by applicable state law. As mentioned above, certain states, particularly in the Midwest, impose strict timelines that must be met to keep the Wind Energy Land Agreement in effect, and, depending on the state, development of the project must commence or commercial operations must begin within specified time periods, even if the Wind Energy Land Agreement contains a more flexible provision. Where the statutes apply, the statutes will govern over any conflicting provisions in any Wind Energy Land Agreement.

The developer may also reserve the right to further extend the term for additional renewal periods, often ranging from 20 to 30 years, and to “repower” all or part of the project at some point during the extended term or otherwise extend the life of the project. “Repower” typically means replacing all or a significant number of the wind turbines on the property, installing additional wind turbines on the property, or both. The net result of these successive terms is an agreement that has the potential to run for more than 70 years (again, subject to applicable state law restrictions). The unusual length of the Wind Energy Land Agreement may be troubling to a landowner, especially when the property is a family farm or ranch that the landowner envisions conveying to successors or heirs. The landowner may be reluctant to sign an agreement that may continue encumbering the property long after the landowner envisions transferring control of the property. Further, the length of the agreement may create concerns about the landowner’s ability to sell the property at some later date or give rise to questions about the long term viability of the developer. The landowner will want some assurance that the developer or its successors will have the financial means to operate the project for the term of the agreement and to restore the property at termination. Dealing with a reputable developer with a long track record of successful projects is one way an owner can get more comfort that his developer has the experience, ability, and wherewithal to develop a successful project that benefits them both. While the income from an operating wind project often significantly increases the market value of the owner’s underlying land, whether and how much of an effect a project has on land value must be determined on a case by case basis.

On the other hand, the ability to continue to farm, ranch, etc. the bulk of the property and the income stream generated from the landowner’s Wind Energy Land Agreement may allow some families to keep the property in the family and not be forced to sell or split up the property due to reliance on farming, ranching, etc. income alone or other factors. Subject to restrictions on severing the income stream from the land ownership under applicable law or under the Wind Energy Land Agreement, the income stream from a Wind Energy Land Agreement also may be a bargaining chip in any future sale (to keep it, split it, or let it go with the land). It will surely be a feature in determining the value of the property in any sale or financing of the farm, ranch, etc.

V. Payments. Wind Energy Land Agreements typically provide that the developer will pay the landowner periodic payments for the rights granted in the agreement. Less commonly in recent years, the developer pays the landowner a single, lump sum payment. One common issue that is encountered by developers regardless of the type of payment is dealing with multiple owners; changes in ownership due to death of the original owners, leaving scattered heirs in ownership (some of whom may be minors); or change in ownership resulting from sale or transfer of part(s) of the burdened lands or divorce or other means. An agreement that makes provisions for potential multiple landowners/payees can help lessen the administrative burden on the developer. The agreement could provide the developer the option to pay to a single address by joint check, or allow the developer to pay into an escrow, and let the various owners determine among themselves who is entitled to what payment(s), etc., or other arrangements. For a developer, having to track and deal with and determine who gets paid what in light of changing and increasing numbers of persons holding some interest in the underlying project lands or right to payments from the Wind Energy Land Agreement can be time consuming and contentious, and can expose the developer to multiple, competing claims.

The same issues arise if the developer needs to amend the underlying agreement or get some consent from the landowner. This burden on the developer is made heavier, more expensive, and riskier if one adds the complications and pitfalls related to the attempted or actual severance of wind rights or the income stream from a Wind Energy Land Agreement (discussed below) and keeping track of those interests. “Severance” is separating all or some of the “wind rights” and/or income stream from the ownership of the underlying land. Where there are multiple owners and any severed or reserved wind rights or income rights, the developer can face a daunting task to keep real time track of, evaluate, and properly deal with the different interests.

A. Lump Sum Payment. In the early days of the modern wind power boom, some developers would offer the landowner a one time lump sum payment as consideration for the rights granted in the Wind Energy Land Agreement. This lump sum payment typically was paid upon mutual execution of the agreement and, with a few minor exceptions, was the only payment the landowner received under the agreement, apart from special separate payments, such as payments for disturbance to land that was enrolled in the federal Conservation Reserve Program (commonly referred to as “CRP”) or similar programs where such disturbance triggers a requirement for the landowner to reimburse payments received or pay a penalty, or other disturbance or damage payments. A lump sum payment may be attractive to a landowner because it provides the landowner with a large amount of money up front, without concerns about the developer’s ongoing financial health and ability to make annual payments. However, attempting to calculate the time value of the lump sum payment against future annual payments can be difficult and time consuming. Further, such large, lump sum payments can have undesirable tax consequences for a landowner and leave the property encumbered by the ongoing operations and burdens without any continuing payment stream, which would almost certainly depress the value and marketability of the property.

B. Periodic Payments. Periodic payments from the developer to the landowner are the most common payment structure in today’s Wind Energy Land Agreements. Frequently, the payments are structured to include some combination of the following:

  1. Initial Payment or Signing Bonus. The developer will pay the landowner an up front payment for signing the agreement. The amount of this signing bonus varies widely, depending on factors such as the property’s perceived potential for wind power generation, the degree of competition between developers for use of the property, and the negotiating skills of the parties and their advisors. Where the agreement is an option, most if not all states’ law requires separate consideration to make the option binding. The amount of consideration to make an option binding can be minimal, but it must be actually paid to have the binding effect. Mere recitals that adequate consideration has been paid may not bind the parties where the recital is untrue. (See, e.g., Or. Rev. Stat. § 42.300.)
  2. Pre Operation Minimum Rental Payments. Once the Wind Energy Land Agreement is in effect, the developer typically pays the landowner annual, quarterly, or monthly rental or option payments for the initial period of time during which the developer measures the wind flow over the property, performs studies, obtains siting permits to construct the wind energy project, and actually constructs the project. Again, the payment amount depends on several factors. The parties may agree that the payments will be calculated by multiplying the number of acres of property subject to the agreement by an agreed dollar figure. In some cases, there are installation and/or periodic fees for Met towers or other facilities placed on the property. A landowner may prefer to be paid on a monthly or quarterly basis, but developers typically prefer to pay annually to reduce administrative burden and decrease the chance of missing a payment and the attendant risk of defaulting under the agreement. In most cases, these minimum annual, quarterly, or monthly rental payments often cease once the wind energy project is operating and the landowner begins receiving payments based on the sale of electricity generated by the wind turbines on the property that exceed the minimum payment.
  3. Installation Fees. Some Wind Energy Land Agreements provide that the developer will pay the landowner a one time installation fee for each wind turbine installed on the property by the developer. The installation fee is often calculated using the total megawatts of installed capacity (based on nameplate capacity) of wind turbines or other power generation facilities constructed on the property, rather than on a per turbine basis. This is because the manufacturer’s “nameplate” megawatt rating for the type of turbines that the developer installs on the property varies, and thus tying the payment only to the number of turbines may not reflect the generating potential of the turbines installed, which can result in a significant difference in the installation payment to the landowner.
  4. Operating Fees/Rent. Generally, once the project starts producing energy, operating fees are paid to the landowner by the developer. The fees are usually the most lucrative aspect of the Wind Energy Land Agreement for the landowner. For that reason, the operating fee provisions are often where much attention is focused in negotiating the agreement. The Wind Energy Land Agreement commonly provides for a continuing, base minimum periodic payment to the landowner during the operations phase of the project. If and when wind turbines are installed on the property and begin delivering electricity on a commercial basis to a purchasing utility or other purchaser pursuant to a power purchase agreement (“PPA”) or similar document or, if the developer is an end user or utility, when such energy is available for use, the developer will begin paying the landowner operating fees based in some respect on the output of those wind turbines, to the extent those fees exceed the continuing, base minimum periodic payment. Operating fees are usually calculated over an annual period. These operating fees are often based on (1) a percentage of the gross revenues received by the developer from the sale of the electricity generated by wind turbines on the property; (2) a fixed rate per kilowatt hour or megawatt hour of electricity generated by wind turbines on the property, with the rate being determined based on the expected capacity factor of the wind turbines on the property; or (3) a per turbine or per acre annual lump sum payment that has no strict relationship to the amount of electricity generated by wind turbines on the property.

When operating fees are a percentage of gross revenue, what to exclude from gross revenues for purposes of calculating the percentage based payment is frequently a topic of much discussion. Tax credits are typically excluded, while insurance proceeds payable with respect to lost power sales revenue or turbine production are often included. Further, operating fee provisions that work for a privately owned facility that is selling the project power under an arm’s length PPA to a third party off taker may not be appropriate where the project operator is an end user, a public utility, or an affiliate of the off taker. If the project is owned and the output used by a utility to serve its utility customers, the formula for calculating operating payments typically takes a different form than that for a project owner selling to a third party off taker. In addition, as discussed above, a Wind Energy Land Agreement may provide for the payment of some minimum amount to the landowner during the operations phase of the agreement, based on the number of turbines installed on the property, their nameplate ratings, the amount of acreage subject to the agreement, or other factors.

VI. Additional Considerations. In recent years, new legal issues have emerged in the area of Wind Energy Land Agreements. Two of these issues are (1) attempts by landowners to convey all or portions of the property subject to the agreement while “severing” or reserving “wind rights” to the conveyed property or royalty or participation rights in wind project proceeds derived from the property and (2) restrictions or reporting requirements relating to foreign ownership of certain types of land.

A. Severance of Wind Rights/Income Stream. Subject to applicable law, a landowner that conveys its property in fee may reserve certain rights to that property. Historically, such reserved rights may include easement rights for access, utility service, encroachment, view, and other matters, or a severed mineral right, including the right to explore for and develop oil and gas or other minerals. The law in the United States is, for the most part, well developed in connection with such reservations. To the contrary, reservations or severing of “wind rights” has not (to date) been scrutinized in depth by the appellate courts outside of a few reported cases. The most often cited case is Contra Costa Water District v. Vaquero Farms, Inc., 68 Cal. Rptr. 2d 272 (Ct. App. 1997) (recognized severance of wind rights in a condemnation action under California law). The Kansas Supreme Court upheld a complete county ban on commercial wind farms in Zimmerman v. Board of County Commissioners of Wabaunsee Co., 218 P.3d 400 (Kan. 2009), and deferred its consideration in that same case of the argument that severed wind rights are a separate property interest that can support a takings claim under the U.S. Constitution. The court’s follow up decision on the takings issue did not turn on whether severed wind rights were a cognizable property interest under Kansas law, but on the discretionary nature of the conditional use permit (“CUP”) required to construct the proposed wind farm. Because the CUP was completely at the discretion of the county Board (i.e., no right to construct the wind farm), there was no taking.

Some states, such as North Dakota, South Dakota, and, more recently, Kansas, have statutory prohibitions on severance of wind rights and limit the length of terms for wind project leases and easements, or require certain development actions to occur within a certain time to preserve the contracted for wind rights. See N.D. Cent. Code § 17 04 01 through 06 (certain development and permitting milestones within five years); S.D. Codified Laws § 43 13 19 (commencement of wind resource development must begin within five years (requires site permit or CUP and active interconnection request in process), no severance of wind rights except pursuant to a lease with a term not more than 50 years, requires annual payments); Kan. Rev. Stat. § 58 2272 (also includes solar).

A number of states have statutes that expressly contemplate and impose certain requirements for creation of wind leases and wind easement rights that burden one property for the benefit of other property, but those do not specifically address the issues of a landowner severing wind rights in other contexts.

Unfortunately, some landowners transferring their property have begun attempting to reserve rights with respect to existing or future wind projects on the property using conveyance instruments and contractual provisions that are far from clear. This compounds the complexity and uncertainty of the legal effect of their actions. The same issues arise in other transactions or proceedings, such as divorce or dissolution proceedings where the parties or courts seek to allocate and split assets once commonly owned, or in estate plans that may be drafted without a full understanding or appreciation of the issues raised by the proposed allocation of rights. If a landowner seeks simply to retain the rights to revenue from wind energy facilities on property to be transferred, the landowner should work closely with counsel to ensure that what they want to do is lawful, allowed under and consistent with their Wind Energy Land Agreement, and clearly documented on the record. Apart from whether the proposed action is allowed by state law or permitted under the Wind Energy Land Agreement, there must be clear direction to and protection of the wind developer from any risk related to the proposed split interests.

The same is true if the goal is to retain a wind easement for the unrestricted flow of wind and/or reserve a right to the transferring owner to control or have some say in future development of the property for wind purposes, and there is no Wind Energy Land Agreement currently encumbering the property. In each case, such rights would need to be set out in the conveyance instrument with clarity and in detail, and in compliance with applicable law. Even with clarity, such arrangements can make a property less attractive to a developer because of the added complexity and uncertainties they entail. Vaguely drafted language in these conveyance instruments or language that does not comply with applicable statutory requirements benefits no one and is likely to cause confusion for (and result in disputes among) the landowners, the wind developer, and third parties seeking to deal with the property in some manner. In any event, it is probably a very good practice for a landowner contemplating such a move to work with its developer before finalizing any such arrangement to better ensure there will be smoother sailing once it is in place.

From the developer’s perspective, allowing any severance of the wind rights or income stream from the ownership of the underlying land burdened by the Wind Energy Land Agreement raises concerns about the future relationship among the parties and the ability to adjust to changing circumstances, as well as additional administrative burdens and internal costs. For instance, it is not uncommon for a developer to seek changes to its initial Wind Energy Land Agreement to accommodate changed conditions encountered after (or not contemplated in) the original agreement. Where the landowner is the person to whom the payments are made by the developer, the landowner has an incentive to cooperate, especially where failure to cooperate may mean the loss of the income stream otherwise provided by the agreement. If the wind rights and/or payment stream have been severed from the underlying land ownership, that incentive is absent: the landowner merely owns land burdened by and has obligations under the Wind Energy Land Agreement. Other than whatever the landowner can extract from the developer in exchange for any concessions the landowner is willing to make to accommodate the developer’s request, unless the landowner otherwise has the clear and enforceable duty to take the requested course, there will be no incentive for the landowner to cooperate where the proposed change to the Wind Energy Land Agreement does not lighten the burdens on the land and/or landowner. The same result applies where a landowner sells or factors its income stream to a third party for a discounted present value of the overall contract value.

B. Federal and State Reporting Requirements. Finally, the federal government and some states impose reporting requirements and/or restrictions on some interests (such as restrictions on corporate ownership or ownership by foreign entities) in certain types of land. The federal acts include (but are not limited to) the Agricultural Foreign Investment Disclosure Act of 1978, 7 U.S.C. § 3501, et seq. (“AFIDA”) and the International Investment and Trade in Services Survey Act, 22 U.S.C. § 3101, et seq. (“IITSSA”). A number of states, generally in the Midwest, also have restrictions/prohibitions on alien ownership or interest in agricultural lands and/or special provisions regarding corporate ownership/interest in agricultural lands and their own reporting requirements, though those specific state laws will not be addressed here.

Under AFIDA, foreign persons (including foreign nationals and entities organized or formed under the laws of foreign governments and domestic entities in which a foreign person has a significant interest or substantial control) must file a report with the U.S. Department of Agriculture within 90 days of acquiring or transferring any interest in “agricultural land.” Leasehold interests of 10 years or more are “interests” subject to AFIDA, so most utility scale energy project leases would be covered. Under AFIDA “agricultural land” is land in the United States used, or, if currently idle, land used within five years, for farming, ranching, timber production, or forestry production, except tracts that are not more than 10 acres in size in the aggregate. Tracts totaling 10 acres or less in the aggregate and that produce annual gross receipts in excess of $1,000 from the sale of farm, ranch, forestry, or timber products must also be reported. Failure to report or late reporting may subject these entities to a monetary penalty capped at 25 percent of the fair market value of each real property interest.

IITSSA is separate from AFIDA and is administered by the Bureau of Economic Analysis. IITSSA applies to any foreign person that acquires, directly or indirectly, a 10 percent or greater interest in a U.S. person. Any of the following acquisition events triggers the obligation to report: (a) a foreign person establishes any new U.S. subsidiary or other type of for profit U.S. entity, (b) a foreign person acquires an existing U.S. business enterprise, or (c) a foreign person acquires a 10 percent or greater voting interest in an existing U.S. business enterprise. Acquisition must be reported within 45 days of the acquisition event and can be indirect, through an existing U.S. affiliate.

Once a foreign person enters into a transaction that triggers IITSSA, that person must file various forms at prescribed times unless it qualifies for a reporting exemption based on the size of the acquisition transaction or the magnitude of the activities of the U.S. person acquired. Even if the foreign person is exempt from the other requirements of IITSSA, in most cases it must file an initial report in order to establish and preserve the exemption. Civil penalties, including fines and injunctive relief, can be assessed on those foreign persons that fail to comply with IITSSA. Willful failure to file may result in additional fines and imprisonment. Criminal penalties also can be imposed in appropriate circumstances.

Developers and landowners should consult with counsel to determine if such laws apply to their interests and Wind Energy Land Agreements.

C. Issues Raised by Multiple Owners/Severed Rights. For a developer, having to track and deal with changing and increasing numbers of persons holding or claiming some interest in the underlying project lands or right to payments from the Wind Energy Land Agreement can be time consuming and contentious, and can expose the developer to multiple competing claims and increased risk. Payment issues related to multiple owners are addressed in Section V of this chapter.

Similar issues arise if the developer needs to amend the underlying agreement or get some consent or estoppel from the landowner in relation to the current project, to meet a lender, government, or permitting requirement. Whose consent or certification is required? What comfort does the developer have that it is dealing with all of the right people? This is another area where a sophisticated and responsive title company can be a great help, even if only to help identify interested parties and the underwriting requirements that need to be satisfied to insure the transaction (if insurable) and to chart a plan to ensure an insurable result. The developer must then locate the required counterparties and obtain their individual and/or collective agreement to the proposed solution. Another day in the life of a developer.

VII. Co Location. Co location can have a number of meanings. One meaning is joint use of an area by two or more different entities. Another is different projects using different energy resources on the same area, such as wind generators (active generation of electricity) and storage serving those generators (passive available electricity) or active solar. In one sense, virtually every Wind Energy Land Agreement contemplates co location of different operations: the wind farm use and the continuing underlying use by the landowner of the property outside the project facility footprint. Likewise, one sometimes sees a project that is initially documented as a single, large site that is later split or broken into multiple smaller sites, each with its own wind power project under a stand alone “split” Wind Energy Land Agreement or partial assignment of the original site control agreement(s). In such cases, the original site control agreement usually contemplated the right to split the larger site into separate stand alone sites. The separate, derivative stand alone agreements typically include provisions to protect the stand alone and separate nature of each such split or partial assignment. They should also avoid any cross default or the like that might otherwise be attendant to a derivative right and preserve any common use of needed access or other features that serve more than one site.

A. Shared Facilities. It is not uncommon for projects in close proximity, especially those originating from the same underlying developer and original site agreement(s), to share certain project facilities. Economies of scale gained by sharing facilities between related or nearby projects can make otherwise marginal project sites economically feasible. Sharing the use of and spreading the costs of permitting, developing, operating, and maintaining such facilities as common substations and switching stations and related new transmission upgrades or line extensions, O&M and supervisory control and data acquisition facilities, access roads, and other necessary facilities that can serve more than a single project can reduce the out of pocket costs to each participating project. In some cases, one project may host and construct the substation site or O&M site and sublease or grant some other derivative right to other projects to use the facility. In others, the participating projects might co own the facility. These joint use agreements are often entered into before the facility is constructed. Such arrangements can help maximize the efficient use of resources and finances and address concerns of lenders and others regarding the financial burden that a single project might otherwise sustain in undertaking the development work.

B. Storage. Energy storage is the focus of increasing interest in the renewable community. Efficient and reliable energy storage technologies are seen as one solution to enhance the integration of intermittent resource electricity onto the power grid, to reduce or eliminate imbalance charges to the project, as well as to increase the ultimate efficiency and economics of an energy project. Storage technologies can benefit a range of energy producing technologies, not just intermittent renewable sources. Any electricity producing project that could more efficiently use or sell its output to better meet the timing of energy supply and demand could benefit, including intermittent, nondispatchable projects such as wind and solar.

Whether and how co location of storage and the electricity transmitted to and out of the storage facility might be treated under the Wind Energy Land Agreement compensation provisions is beyond the scope of this discussion. Is the storage facility before or after the project meter? How does the agreement contemplate charges based on production? Are the additional charges based on area taken up by a storage facility? How does an applicable PPA treat stored energy? These are all good questions and one can expect developers and landowners alike to revisit the forms of Wind Energy Land Agreements as storage becomes more widespread.

While energy storage co location is not limited to co location of a wind project and related storage facility by the same developer as part of the same project, or by a third party storage developer to support the wind project, those seem the most likely scenarios, at least currently. An energy storage facility located on a project site that is owned by a third party storage developer or that serves a different project (or is shared in some respect between two or more projects) would implicate the same concerns and issues as other shared or third party facilities generally. The developer considering such a third party arrangement would have to confirm whether, how, and under what conditions its Wind Energy Land Agreement allowed such third party rights and what, if any, additional compensation and other obligations might be owed to the landowner. Likewise, the developer would have to satisfy the concerns of its lender(s) and investor(s) as to the arrangements.

Energy storage solutions that involve battery technology are probably the most compact and localized of the current storage technologies. The siting of a bank of batteries within a project area could provide enough energy, depending on the scale, to provide a separate profit center in its own right or just balance the periodic fluctuations of a wind farm that may be balanced on, for instance, a five minute interval. Apart from any benefit to a project’s bottom line that a larger storage system might bring from sales of the stored electricity, a project that included enough immediately available storage capacity to cover its balancing interval window could avoid many of the imbalance charges that might otherwise be imposed.

Adding a series of electric car batteries removed from junked electric cars to a wind project, with a few per turbine (for instance) to offset imbalance issues, should not materially affect any other project facility or require extensive additional land or infrastructure. A larger, high volume battery farm serving the same wind farm or another project or projects would require lines into the bank from the generators and out of the bank to the substation, together with communications lines and some staging/secure area, but otherwise would be a discrete, localized installation not unlike other fixed facilities. Other storage technologies, such as pumped hydro, compressed air, or the like, would be more land/area intensive and require much more complicated permitting and site control due diligence and agreements.

Among the various storage related energy projects that might be candidates for co location with wind could be a typical hydro generation facility in connection with a storage reservoir. For what it is worth, in at least one well known case, Contra Costa Water Dist., 68 Cal. Rptr. 2d 272 (better known for its holding regarding the severability of wind rights), the California Court of Appeal recognized the relative compatibility of wind and hydro electric generation in the same general area. The Contra Costa Water District court, with the benefit of additional briefing on the issues, held in part that it was “satisfied that private windpower generation is fully compatible with the Water District’s public uses [reservoir and related uses, including mitigation areas] for the land being taken.” Id. at 277.

C. Combined Wind/Solar Agreements. Though still the exception rather than the rule, occasionally one will see a combined wind/solar energy site agreement that allows either or both of wind and solar development on the same premises. Besides the synergistic benefits that might be obtained by proximate projects sharing certain infrastructure and improvements, co location of wind and solar projects has other ramifications for both the developer(s) and the landowner. For the landowner, the questions include how much land will be used/unavailable to the landowner, what will the compensation be for loss of use of the land, how will any expected royalty or power production payment be calculated, and how are wind and solar treated differently in the agreement regarding siting requirements, compensation schedules, etc. While it is unlikely to expect intense solar development over the entire expanse of a large wind project site, it is not so difficult to imagine that solar development may more heavily affect certain individual wind project parcels and areas than others and thus be of concern to a landowner who is approached with a wind and/or solar site control agreement.

For the developer (really both parties), just adding “and solar” to the definitions in the developer’s base agreement likely will not work very well. How does commencement of construction on one project affect any other proposed or sister project? Does any contractual obligation to build or terminate go away if either a wind or solar project hits commencement of construction or other contractual milestone in the allotted time even if the other form of renewable resource has not yet been exploited under the agreement? Extra care would be required in crafting any footprint carve back provision applicable to a wind project (where the agreement calls for the area for potential project facilities (as opposed to noninterference and exclusive wind rights, which would continue on the larger area) to be carved back from the larger premises to the actual facilities locations (plus buffer)) to preserve the possibility of future solar development outside of that footprint.

Another variable for developers with combined wind and solar site control agreements in states that impose statutory limits on the length of time before a particular project reaches commencement of construction or before development is commenced (like North Dakota and South Dakota for wind and Kansas for both wind and solar) is whether failing to meet the deadline terminates the agreement entirely (even for the other resource) or whether the site control agreement might continue for solar notwithstanding that the agreement would be terminated under the statute as it relates to wind development.

Unlike the conventional wind project, a typical utility scale PV solar project is a very land intensive operation that requires exclusive use of broad swaths of property. Other than roof top PV projects on existing buildings or structures that do not interfere with the surface use of the land, a utility scale PV project typically precludes other uses of the surface within the project footprint. Even if the solar project does not cover the entirety of a landowner’s property, carving up a large piece into separate high density solar areas can render the balance of the property unsuitable for continued economic use for farming or the like. Also, pricing and financial incentives differ between wind and solar projects. Accordingly, the site control agreement that contemplates or permits a possible combined wind and solar development presents a more complicated set of issues to everyone involved.

While wind and solar can co exist and share the economies of scale and joint use facilities discussed above, proximity of a high density solar project to a wind project does raise other concerns. For the wind project, does the area set aside or used for solar development leave enough area in case future conditions require or support the addition or relocation of wind turbines from the original project sites? The solar project footprint could also occupy land that would otherwise be suitable for satisfying wind project mitigation measures that become necessary over time through adaptive management.

With any co location of projects, care must be taken to ensure crane and other access routes, laydown areas, and the like (and potential alternates) are preserved for future use that will not unduly burden either of the co located developments or operations. One might expect a significant buffer area between the solar development sites and the wind facilities, especially the towers. Where wind developers micro site their turbine locations and are cognizant of and avoid turbine wake or wind shadow effects, solar developers are concerned with shadows that might be cast onto their solar arrays. Thus, even if permitted by project permits, the site agreement, and the wind developer (and its lender), no solar array likely would be located in the area swept by any wind turbine’s shadow. Beyond the potential shading, in areas where icing occurs, solar developers would also be cautious of areas where ice might be thrown from turbine blades. Where solar development occurred before a co located wind project, and generally in connection with any ongoing operations, precautions to control dust and particulates caused by construction activities would also have to be addressed. This sensitivity of solar to airborne particulates also mitigates against any solar project being co located with or near intensive farm, timber, aggregate, or other uses that can cause regular and continuous dust or particulate problems. Similar concerns for solar in proximity of tree farms or the like that periodically produce significant amounts of pollen or airborne seeds or with the potential for overspray of various chemicals or liquids.

VIII. Conclusion. Although critical to every Wind Energy Land Agreement, the matters discussed above are by no means the only issues the parties to the agreement must consider. For example, issues related to indemnities, ability to assign or sublease, financing provisions, crop damages, and methods of providing security for removal of the wind project equipment at the end of the term are additional key components of a Wind Energy Land Agreement that are frequently the subject of intense negotiation. Crafting a Wind Energy Land Agreement that provides a developer with the necessary flexibility and security to develop a wind energy project requires skill, experience, and creativity.
Download The Law of Wind - 8th Edition (PDF)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Contributors

See all contributors See less contributors

Media Inquiries

    Victoria Twogood Practice Group Director 612.373.8842
×
Saved Pages

Use the arrows to arrange content.  Download pages as a .pdf file or share links via email..

{{ item.Title }} {{ item.AttorneyPosition }}, {{ item.AttorneyLocation }} , C. {{ item.AttorneyCell }} , P. {{ item.AttorneyPhone }} , F. {{ item.AttorneyFax }} {{ item.TypeText }} Remove
You have no pages saved
            {{ state | json }}