Renewable energy success 02: Navigating the negotiation terrain with landowners

We've already explored how developers of renewable energy projects should consider structuring their land arrangements to ensure the best outcome for their project. In this second instalment, we delve into some of the sensitivities involved in negotiating those land arrangements with landowners.

Securing a land arrangement, such as a long-term lease, is not simply a matter on agreeing the rent – it requires a delicate balance between accommodating the landowner's ongoing land use and facilitating the development, construction and operation of the project.

We explore some common challenges that developers face in negotiating long-term leases with landowners and provide some strategies as to how they may be addressed to preserve the requirements of the project.

Avoiding rental disputes

Developers should consider how rental payments are calculated. For example, is rent:

• determined as a percentage of output from the project (more common for wind farm projects);

• determined on a per square metre basis of the project site; or

• a fixed amount?

If rent is determined on a per square metre basis or a fixed amount, how should rent escalate over the life of the project? Rental rates typically move with the market however where we see disputes arising between landowners and developers is when complicated formulae are applied to determine the output of the project.

Developers may want to limit the extent to which they are required to disclose confidential information about the project to the landowner (in order to calculate output) and may want to restrict the percentage of output to the particular infrastructure on the landowner's land (such as the particular wind turbine), rather than to the output of the wind farm project as a whole.

Increased land costs – who should be responsible?

Landowners may be concerned about the potential for land costs to increase as a result of a renewable project on their land. Land tax and Council rates may rise due to increased land value and public liability insurance premiums may go up as a result of the location of the project.

Developers should consider the extent to which they are willing to pay the cost of any such increases. If developers agree to pay or share costs with landowners, they may want to seek the ability to dispute or challenge increases with the relevant authority (with the landowner's assistance) or to approve any changes to insurances.

Developers should also build any land costs into their project feasibility models at an early stage, as these costs will be in addition to the rent.

Easements and land access over the balance of the landowner's land

Developers often require not only a long-term lease of part of the landowner's land for their project site, but also the right to be granted easements over other parts of the landowner's land (for example, to access the project or erect transmission lines). Often the location of these easements is not able to be determined when legal documents are entered into.

Landowners may be concerned that these easements could interfere with their ongoing use of the balance of their land. To address these concerns, developers could try to be as clear as possible about:

• the specific land that is needed for these easements. While it may not be possible to tell a landowner exactly where a transmission line will be located, a landowner may be satisfied about the grant of future easements if the parties map out an exclusion zone around the landowner's home and essential farming infrastructure, within which no easement sites may be located;

• the terms of those easements, so that it is clearly established which party is responsible for the ongoing maintenance of an easement site, such as maintaining the surface of a road or clearing fauna; and

• the landowner's obligation to grant and facilitate registration of those easements being triggered when the required location of the easements are determined.

Restrictions on the landowner selling or dealing with their land

A primary issue for developers is to preserve their rights over the landowner's land, even when then landowner wants to sell, mortgage or otherwise deal with their land over the life of the project. While a lease will travel with the land and bind future owners or mortgagees of the land (subject to complying with registration requirements in relevant jurisdictions), rights such as options, rights of first refusal and licences will not necessarily bind such third parties.

Developers should consider restricting a landowner from dealing with its land, unless the landowner arranges for any future owner, mortgagee or other third party to formally recognise the developer's rights under the project documentation.

Further, before a lease is registered, a caveat should be lodged on title to the land to prevent the land being sold to a third party that has not formally agreed to recognise the developer's interest in the land.

As additional protection, developers might consider requesting a right of first refusal (ROFR) from the landowner to purchase the landowner's land. A ROFR clause would typically give the developer the first right to purchase the land if the landowner decides to sell to another party (either at the same price offered to a third party purchaser or at a price determined by market valuation). The exercise of a ROFR and the purchase of the land underlying the project might give the developer a strategic edge if it can control ownership of and future dealings with the land.

Decommissioning and decommissioning bonds

Decommissioning, or the removal of infrastructure at the end of a lease term, is a complex aspect of renewable energy projects. Landowners are increasingly concerned about the risk of developer insolvency before decommissioning can be completed, raising the possibility that infrastructure may be abandoned.

While no national law in Australia mandates decommissioning bonds for renewable energy facilities, some State governments have issued guidelines or requirements regarding decommissioning plans that need to be incorporated in the project planning process. Internationally, some countries are taking steps to address these concerns by (for example) having dedicated agencies overseeing decommissioning, requiring developers to submit a decommissioning plan or requiring developers to provide financial guarantees before a project begins. These guarantees are then reviewed and adjusted throughout the lease term to ensure they remain adequate to cover the costs of decommissioning and site rehabilitation in the event the operator defaults.

Given this evolving regulatory landscape, it is important for developers to approach discussions with landowners with awareness of both current expectations and the potential for future changes.

Developers may consider:

• implementing a decommissioning period after the end of the lease term, for example, to ensure that the developer has sufficient time to safely de-energize the battery before removal; and

• a decommissioning bond or escrow arrangement to secure their decommissioning obligations – which could be provided closer to lease expiry, when a more accurate assessment of decommissioning works and costs can be made. A decommissioning expert could be engaged at the appropriate time to determine decommissioning costs and sign off on completion of decommissioning works.