Issue: February, 2008
Author: Mark D. Safty, Davina C. Maes, and Teresa Buffington
Printable Version (PDF)
Wind Energy Leases: What the Developer Wants
Development of renewable and clean energy projects is growing at a remarkable rate across the United States and especially in the West. Wyoming, a state with considerable wind resources, has been a particular focus for wind energy development.
There are several legal instruments through which a developer can acquire access to a landowner’s land and wind resources. A wind energy lease is one of them; it creates a landlord and tenant relationship and transfers to the tenant the right, for a period of time, to develop energy generation and transmission facilities on real property in exchange for consideration. This article provides a general overview of wind energy leases and summarizes some of the issues that are important to developers when negotiating them. The lease is a legally binding agreement that will govern the landlord and tenant relationship over the life of the wind project.
Land Subject to the Lease
It is important to the developer to acquire rights to enough adjacent land to ensure that the project site has significant average wind speeds, close proximity to available transmission lines and adequate access roads. The lease will grant the developer the right to install wind turbines and infrastructure anywhere on the landlord’s property. In the event a different landowner owns the land where the roads or cables cross, the developer will need to secure the right to cross over neighboring properties to access the wind turbines or to run electric transmission lines to transport the electricity from the wind power facilities to the electric grid.
Grant of Property Rights
Developers are always concerned with any uses of the land that would interfere with the free, unobstructed and natural wind flow and speed over and across the property, because such interferences can reduce the energy production from the turbines. To deal with this concern, the developer will include a non-interference covenant in the lease that restricts the landlord from interfering with the flow and speed of the wind across the property. The developer will also obtain similar agreements from neighboring landowners.
The developer will need the right to make the following uses of, and conduct the follow-up activities on the property:
- determine the feasibility of wind energy conversion on the property;
- develop and operate a wind-powered electrical generating facility for the conversion of wind energy into electrical energy;
- collect wind data;
- construct meteorological towers;
- conduct surveys and environmental, biological, cultural, and other tests and studies;
- create access roads where needed; and
- conduct all other activities that are necessary for the generation, collection, and transmission of electricity on the property
Term of Lease and Payments
The term and payment provisions of the lease will reflect economic and development challenges and realities. The initial term of the lease (typically two to seven years) will give the developer time to determine the feasibility of developing the wind power facilities on the property, consider uncertainties related to equipment and transmission availability, identify power sales opportunities, and assess the availability of financing for the wind project. In certain circumstances, the developer might have to extend the operation of the existing project, build a second project at the end of the first project’s useful life, or replace existing equipment before the end of its useful life with more efficient technology. The lease will therefore contain language that the developer has the right to extend the operations period for at least another 20 years.
The payment and rate structure in the lease will specify how much and when the landlord will be paid. The landlord will want the developer to clearly identify the lease payment amounts, how payments are calculated, and when payments are due. Some of the more common payment structures include royalties, lump-sum payments, or annual payments for the rights granted in the lease. When negotiating the payment terms, the developer will consider the location of the landlord’s property, the wind resource on the property, value of electricity in the local market, the turbines’ operating availability, and other factors.
Landlord Representations and Warranties
The landlord will be required to make certain representations and warranties for the benefit of the developer. For example, the developer will want a representation from the landlord that there are no other liens, encumbrances, or wind leases affecting the property other than those specified in the lease. If there are existing liens/mortgages on the property, the developer will require a non-disturbance and subordination agreement from the landlord’s lender. The purpose of the non-disturbance agreement is to ensure that the landlord’s lender will not interfere with the developer’s use of the property for the wind project. The purpose of the subordination agreement is that it will require the landlord’s lender to give the developer’s own creditors a first claim over any shared interest in the property.
The developer will also request that the landlord restrict hunting operations on the property in the area around the turbines, cooperate in obtaining governmental approvals and permits, ensure proper usage, storage, disposal, and release of hazardous substances on the property, and allow the developer the quiet use and enjoyment of the property.
While not necessarily a matter to be covered in the lease, the status of the ownership of mineral interests in the land will also be important to the developer. Neither the developer nor its lenders will want to assume the risk of disturbance or damage to the wind project as a result of mining or oil and gas production.
Developer Representations and Warranties
The developer will typically agree to comply with all state, federal, and local laws, obtain all necessary permits at the end of the lease, maintain commercial general liability insurance, and decommission the wind power facilities.
The developer will typically require that its rights under the lease be freely assignable and subleasable. Since the developer may not be the long-term project owner, it is important that the developer seek broad rights to sublease, assign and/or mortgage its rights under the lease. If the assignee agrees to assume all responsibilities of the developer, the developer should be released from any further obligations under the lease.
Almost all large-scale wind projects are financed through lenders. The developer’s construction and long-term loans are secured by the wind turbines and equipment on the property. In order to ensure the ongoing operation of the wind power facilities, the developer’s lenders will require that the certain terms be part of the lease including:
- language providing that the developer’s lenders will receive notice of any developer default under the lease and have the right to cure such default before the lease is terminated;
- in the event the lenders take over the wind project, the lenders will assume all liability of the original developer; the parties will not amend the lease without the lenders’ consent; and
- the landlord will provide estoppel certificates to the lenders from time to time stating that the developer is not in default under the lease.
Default and Termination
The lease will describe the circumstances under which termination of the lease by either party is permissible. The developer will want to have the right, at any time, to surrender or terminate all or any portion of its right, title, or interest in the lease. Since the developer spends a significant amount of time and money to build the project, the termination rights of the landlord will be limited.
Wind energy development leases are varied and often complex, and the scope of these documents continues to evolve as the industry advances. New investment and financing mechanisms in the renewable sector will continue to impact the nature of the leases. In a well drafted and negotiated lease, the goals and rights of all parties are balanced and clearly stated.
Mark D. Safty is a partner in the Denver office of Holland & Hart. He earned his B.A. and his J.D. from the University of Montana. In 1978, he earned a LL.M. from Boston University. Mr. Safty has extensive experience in connection with finance and project development in the fields of mining, manufacturing, power generation and transmission, health care, education, transportation and water and waste treatment. He has acted as counsel to a variety of participants including project owners, construction and engineering firms, lenders, and underwriters. Mr. Safty currently serves as the chair of Holland & Hart’s Project Development and Finance Group.
Davina C. Maes is an Associate in the Denver office of Holland & Hart. She earned a B.A. in Political Science from the University of New Mexico in 1996 and a J.D. from American University, Washington College of Law in 2004. Ms. Maes has assisted with the drafting and negotiating of project financing documents, as well as the underlying project documents, including wind energy ground leases, easements, engineering, procurement and construction contracts, and interconnection agreements.
Teresa Buffington is a partner in the Cheyenne office of Holland & Hart. She earned a B.A. with highest honors from Ohio University in 1977 and a J.D. from the University of Colorado in 1985. Ms. Buffington practices in all areas of commercial transactions throughout the state of Wyoming, including real estate, business, finance, and construction.
Copyright © 2008 – Wyoming State Bar