Green Energy Leases: Traps for Landholders

By 15 June 2021Property
Green Energy Leases: Traps for Landholders

While green energy offers a valuable income stream for Queensland landholders, there are some traps to be aware of.

Lease terms

Long option terms can lock landholders out of a more profitable deal

Generally speaking, the money a landholder can get for an option is a lot lower than the amount they can get for the actual lease. The problem arises where landholders sign what looks to be a simple option to lease without getting advice from a lawyer with experience in the area.

Many green energy companies are hedging their bets by putting multiple potential sites under the option. They may also take out an option over a large piece of country, knowing that they will eventually only need a small portion of that land for the eventual lease.

This gives them exclusive rights to take out a lease over the land in the future. While the option exists, the landholder cannot go to another company and negotiate a lease.

The most desirable pieces of land, from the point of view of the energy companies, are those which are closest to the existing electricity substations that have excess capacity. If a landholder has a less desirable holding, they might agree to an option for only a relatively small amount of money. A risk arises here. The energy company that holds the option might delay for years, holding out for years to see if they can get a better piece of land. Meanwhile, a different operator who needs to start production as soon as possible might be willing to sign an immediate lease for more money.

Be wary of long leases with low increases

Green energy companies are sophisticated, and landholders may not realise the implication of agreeing to their standard terms. Typically, the landholder will be approached with a relatively innocuous-looking document. This grants the energy company the right to talk to them exclusively for a period of one or two years. The amount of money offered for this right is often more than the farmer or grazier can make in a year from the land, even in a good season. It’s a compelling offer.

However, the document often contains a further set of obligations, which may not be obvious in the fine print. The landholder will, in actuality, be agreeing to grant the lease if the energy company takes up the option. That could be a 25 or even 30-year commitment with limited review mechanisms built-in.

The rent rate, which is very attractive at the time the landholder signs the agreement, may not be so attractive in a decade. A regular rate increase of 3% might seem generous in an era of historically low inflation, but inflation won’t always stay low. If inflation rates rise, and you have agreed to a fixed rate of return for up to 30 years, you can very rapidly fall behind.

Generally, long term lease arrangements without a review to market at appropriate intervals risk becoming unprofitable.

In one example, we are familiar with a landholder who inherited land where his relative had negotiated a deal to allow a mining company to mine their bluestone quarry at a set rate per tonne. The original agreement was written in the late 1960s and built in an annual increase of 2% per annum. It had a fixed rental increase rate that seemed fair during that period of low-interest rates. The lease had many long renewal options at the same rental increases. In the ’70s & ’80s, inflation rates rose to 14%, while commodity prices have continued to rise steadily ever since. That client now receives less than 50 cents per tonne of bluestone, which the mining company would normally buy in the open market at up to $4 per tonne. Even now the mining company has still more renewal options at the same cheap rate!

On the other end of the spectrum is the recent case of McWilliam’s Wines, which went into receivership in January 2020. McWilliam’s signed a 50-year lease for a block of land in Chullora, on which to host their new production facility in 1974. The lease terms stipulated that there would be a rent review every three years, and the rent adjusted to a percentage of the current land value.

At the time Chullora was out in the middle of nowhere and the land was cheap. Rent in the first year was $52,640. Over time, however, Sydney expanded and Chullora is now a Western Sydney suburb. In 2020, the land was valued at $30 million and the rent was more than $3 million, ‘choking’ the company and contributing in large part to its demise.

Green energy companies aren’t trying to cheat landholders. As the case of McWilliam’s illustrates, there are compelling reasons for them to limit their future exposure to rent increases. Investors and financiers want some certainty over the future returns, and uncontrolled rent increases are a threat to that certainty. However, landholders must ensure that their interests are also protected.

Impact on the land

Green energy may not leave the same visible impact on the land as fossil fuel mining, but it does still have an impact. Landholders should ensure that they’re not left with the cleanup.

Solar and wind farms usually send the power as it is created but it makes sense to use batteries to store harnessed power on-site if possible.  At the moment batteries are not particularly viable on-site but technology research is working overtime to change that. Any energy company negotiating a lease will want the right to install batteries in situ. Those batteries can contain large amounts of chemical components that would be harmful if they leached into the soil. The infrastructure installed on the land can be costly to remove, ranging from solar panels or wind turbines to access roadways.

If at the end of the lease, the energy company leaves infrastructure behind, landholders may struggle to convert the land back to agriculture.

With a standard commercial lease for more traditional commercial premises, it is fairly straightforward to negotiate a clause that requires the tenant to leave the premises as they found them. For energy companies, it’s a little more complex since it’s not always clear at the outset what potential issues might arise.

Our advice to clients has been to obtain a security bond that covers the cost of any rehabilitation and makes provision for a dispute resolution process if there is a disagreement about what the impact on the land has been.

For expert advice on green energy leases and how to avoid common traps, get in touch. Murdoch’s Property Law team are experts in agribusiness and will help you protect your family’s interest in this complex area.

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