What Landowners Need to Know about Solar Leases

This article was written for and published in the November/December 2024 issue of ABA's Probate & Property Magazine.

Summary

• Landowners are increasingly approached by developers for solar energy leases, a trend bolstered by favorable government policies toward renewable energy.
• Solar leases involve long-term commitments, often spanning 50 years or more, necessitating thorough due diligence by landowners before signing.
• The lease terms can significantly restrict landowners' use of their property, both during the option and lease periods, with potential impacts on adjacent land as well.
• Payment structures, tax implications and decommissioning responsibilities are critical elements that landowners must carefully negotiate and understand.

More and more landowners are being approached by developers seeking to lease their properties for the development of solar energy facilities—a trend that will continue as state and local government policies become friendlier to renewable energy sources. If approached regarding a solar lease, there are many things landowners should consider before signing on the dotted line. Some of the most important lease issues are discussed here.

The Term

A solar lease creates a long-term legal relationship between the landowner and the solar company. There are typically two separate periods of time set out in the lease: an option period and a lease period. During the option period, which is usually three to five years from the date the lease is signed, the solar company will conduct its due diligence regarding the feasibility of its solar project on the landowner’s property. A solar company’s diligence activities will involve, among other things, evaluation of the physical characteristics of the site, legal and regulatory hurdles to the project, evaluation of the title to the real property, and the project’s eligibility for local, state, and federal tax incentives. The solar company also will use this time to secure an interconnection agreement governing the project’s ultimate connection to the utility grid and a power purchase agreement.

If, after conducting its due diligence and feasibility analysis, the solar company is convinced that its project will be successful, it will exercise its option to lease the landowner’s property for the construction and operation of its solar facilities, at which point the lease period will begin. The lease period is typically 25–30 years from the exercise of the option. Most leases also give the solar company the option to extend the lease period for up to 15 additional years. Thus, signing a solar lease creates a relationship with the solar company that could last 50 years or longer.

Because of the long-term nature of the relationship, it is important for landowners to perform their own due diligence before signing the document. For starters, the landowner should (i) have a thorough understanding of the terms of the lease and how they will affect the landowner’s own use and enjoyment of the property; (ii) conduct background research on the reputation, track record, and financial strength of the solar company; and (iii) discuss the potential lease with anyone else who has an interest in its effect on the property, including those who stand to inherit the property. Further, if the lease has been negotiated through an intermediary, such as a landman, it is important to understand and potentially limit the lessee’s rights to assign and sublease.

Use and Enjoyment of Landowner’s Property

The Option Period

During the option period discussed above, the solar company will have access to the landowner’s property to carry out its due diligence activities. The landowner should confirm whether the terms of the lease allow for the landowner’s continued full use and enjoyment of the property during this time, subject only to the solar company’s access for due diligence activities. Further, the landowner should confirm whether the solar company’s permitted access and activities are limited such that they will not unreasonably interfere with the landowner’s use and enjoyment of the property.

The Lease Period

During the lease period, the landowner’s rights to use the leased property will be severely limited. The solar company will require near complete control of the leased property to protect its solar project and prevent interference with its operations. In effect, when it comes to the landowner’s ability to use the leased property, a solar lease is akin to a sale of the property. It may be possible, however, to negotiate some retained rights to use the property, including limited agricultural uses. For example, in some parts of the country, landowners have successfully negotiated the right to plant certain crops that will not grow to heights capable of blocking sunlight from reaching the solar panels, a practice known as agrivoltaic farming. Other landowners have negotiated the right to graze certain animals, like sheep, that pose no threat to the company’s equipment. This practice is known as solar grazing and has the added benefit to the solar company of maintaining the vegetation surrounding the company’s solar panels.

Although agrivoltaic farming and solar grazing are likely the future of the industry, they have not been widely adopted as of the date of this article. The solar lease should contemplate the future use of the property for such purposes, including a determination as to who will have the right to use the property for these purposes and to whom the revenue derived therefrom will be owed.

Landowners should be aware that the solar company could exercise its option at any time during said period, at which point the lease period will begin and the landowner’s use of the property will become severely limited. Because of this possibility, the lease should address what will happen to any unharvested crops or standing timber on the property at the time the option is exercised, as well as how any existing leases, including agricultural or hunting leases, or other occupancies on the property will be handled.

Landowner’s Adjacent Property

In addition to the restrictions placed on the landowner’s ability to use the leased property during the lease period, the solar company will seek to place certain restrictions on adjacent property owned by the landowner. For example, solar companies will seek to prohibit the construction of buildings and planting of timber that will interfere with the panels’ access to the sun. They also will seek to prevent any activities that generate dust, which can coat the panels and interfere with the facility’s operations. They also may seek to restrict hunting activities in the vicinity of the facilities. The landowner should be aware of these restrictions and how they will affect the use and enjoyment of any adjacent property during the lease period. It also should be noted that the leased portion of the property will likely be surrounded with high fencing to protect the solar infrastructure. Such fencing could interfere with the free movement of wildlife and thus affect hunting on adjacent land, even if hunting rights are reserved.

The Leased Property

Because of the fluctuating nature of a solar company’s project plans and designs, the typical solar lease is drafted to give the solar company the right to lease all or a portion of the property subject to the lease option. Rent will be paid based only on the number of acres actually leased. (See discussion below under Payment Terms.) Thus, landowners are left to guess what their annual rental income will be until the solar company exercises its option and decides on the location and dimensions of the leased property.

Landowners should think carefully about what might happen if the solar company chooses to lease only a portion of the property and leaves the landowner with a tract of unleased property with no value, whether economic or otherwise. For example, what if the solar company’s chosen portion results in access to the balance of the property being cut off? What if the unleased portion is irregularly shaped and thus rendered useless? It should be noted that the solar companies often exclude wetlands, setbacks, ravines, existing pipelines, and other unusable portions of the property. Landowners should keep in mind that any part of the property the solar company chooses not to lease will automatically become subject to any restrictions affecting the landowner’s adjacent property, as discussed above.

Payment Terms

During the option period, the solar company will pay “rent” to the landowner on a per-acre basis for the entirety of the subject property. Likewise, during the lease period, rent will be paid on a per-acre basis, but only for the actual number of acres leased. The landowner might want to consider negotiating for rent during the lease period to be based on a minimum number of acres, regardless of the number of acres actually leased by the solar company. The amount of rent will vary based on several factors, including the underlying value of the land. Lands that bear significant potential for future development will command higher rents. It should be noted that rent during the option period will be significantly lower than rent paid during the lease period.

As a hedge against inflation, the lease should include a rent escalator, which will operate to increase the amount of rent paid each year by a percentage stated in the lease. The typical inflation escalator is two percent, which is based on the Federal Reserve’s target goal for inflation. It should be kept in mind, however, that if the consumer price index increases more than two percent per year, the actual value of the rent payments will decrease over time. Landowners might consider additional protection from such an occurrence, especially given the current inflationary environment. Land values will fluctuate over the lease period as well, so the landowner should carefully consider whether the rent escalator will adequately protect them over the years.

Unlike mineral leases, solar leases typically do not contain royalty clauses. Landowners may wish to begin pushing for royalties as a way to participate in the solar companies’ revenues from the sale of electricity. A royalty clause would likely be structured similarly to those found in mineral leases, i.e., with a guaranteed minimum payment. It should be noted, however, that calculation and verification of the amount of gross revenues from solar operations on a given property may prove difficult, which may be why royalties have not been offered at this time.

Crop Damages

In many instances, the property under negotiation is being used for agricultural purposes and, in many cases, is subject to an agricultural lease. Upon exercise of its option, the solar company will want to begin construction of the solar facilities in short order, which may result in the loss of unharvested crops or timber. It is important that the landowner and any tenant farmer receive fair compensation for such losses. The primary way to ensure protection is by establishing a workable formula for the calculation of damages owed to the landowner and any tenant farmer in the event of an exercise of the option. It also should be noted that there may be interim crop damages during the option period resulting from the solar company’s diligence activities. The landowner should be clear about the terms related to the developer’s responsibility for damage during that period in addition to the above payments for crop losses on the commencement of construction.

Mineral Rights

Solar companies likely will request that landowners waive their rights to explore for and extract minerals from the subject property. This is known as a waiver of “surface rights.” Solar companies will seek such a waiver to protect the solar project from disruption by a mineral operator with superior rights. Although it is necessary for the solar company to protect its project, solar companies frequently agree to set aside designated pad sites for the exploitation of minerals. Landowners requesting that pad sites be set aside should also be sure to retain rights for pipelines or collection facilities for transportation and marketing of the minerals. Where a landowner has conveyed its mineral rights to another party (or where mineral rights have been reserved by a previous owner), the landowner should take care not to waive rights it does not have or make false representations in the lease regarding such ownership. A waiver will need to be obtained from the actual “owner” of the mineral rights.

Property Taxes

The landowner may desire to include a clause placing responsibility on the solar company for any increases in property taxes resulting from the solar company’s development of the property. Additionally, the landowner should consider the effect of leasing the property on any existing agricultural or other special-use tax exemptions. Considering the severe limitations on the landowner’s use of the leased property, the landowner may lose some or all tax exemptions previously held. The landowner also should consider whether the presence of the solar facility will increase the ad valorem property taxes for the unleased portions of the property. As stated above, a solar lease is functionally akin to selling the land. The landowner retains little to no right to use or control the property. Thus, it may be reasonable for the solar company to bear the tax burden and assume payment of ad valorem taxes or an increase thereto.

Removal and Clean Up

A solar panel has a useful life of approximately 30 years and could release hazardous materials once it no longer produces energy. If the operator is no longer solvent at the end of the lease period or other termination of the lease, the costs to remove the solar facilities and restore the property will fall on the landowner. Many jurisdictions have imposed statutory and regulatory obligations upon developers related to decommissioning obligations and security related thereto. The lease should clearly identify the party responsible for restoration of the property and provide for adequate financial assurances of performance. A lack of certainty in the regulatory environment intensifies the need for clear lease terms.

A removal bond provides the landowner security for the removal of improvements on the property and addresses the landowner’s concerns for restoration of the property upon expiration or early termination of the lease. Typically, the lease sets forth an agreed-upon date for the solar company to post the bond. Solar companies will seek a bond postage date in the distant future to avoid tying up funds for an extended period of time. A landowner, however, might seek a bond postage date earlier in the lease term to reduce risk. In the interim (i.e., between the commencement of the lease and the posting of the bond), the landowner might seek a letter of credit or a guarantee from a creditworthy entity based on a reasonable estimate of the cost of removal and restoration of the property pursuant to the lease’s restoration clause. The lease often will include a dispute resolution provision for determining the value of the bond.

Assignment and Subletting

A landowner should be aware of the developer’s rights to assign the lease or sublease the leased property. A potential assignee or subtenant should be capable, financially and otherwise, of performing the developer’s lease obligations. A landowner might seek to allow assignments only to parties designated as qualified assignees.

Letter of Intent

Solar developers approach lessors with a complex lease prepared by the developer. Although some industry groups have suggested standard lease forms that strike a middle ground, the markets have not yet adopted this approach. Before engaging in costly negotiations over detailed, complex lease provisions, landowners may want to begin by negotiating a nonbinding letter of intent covering the most contested issues—rent, whether a minimum number of acres must be subject to the exercise of the lease, and the financial assurance for decommissioning costs, among other high-level terms.

This article provides insight into some of the key considerations for landowners regarding solar leasing. It should be remembered, however, that when it comes to complex legal documents, the devil is always in the details. There is no substitute for having an experienced professional review and negotiate the terms of a proposed lease.