Texas is known for its wide-open spaces and abundance of natural and renewable resources. The large array of land space gives real estate developers the opportunity to lease their property to solar companies to harness renewable resources, much like developers have done for years in the form of mineral rights. Developers do this by entering into solar lease agreements. Before entering into a solar lease agreement, there are several considerations real estate developers need to keep in mind when negotiating a lease. Wind leases are unique, also on the rise and will be further detailed in an upcoming post.

Solar Lease Agreements

First, lets examine the key considerations that developers and landowners should explore and be aware of when negotiating a lease agreement for solar energy. The considerations include:

• How long will the agreement last?
• How will current uses of the land be affected by the project?
• What are the landowner’s obligations under the agreement?
• What happens when the project ends?

Let us take each consideration one by one.

How long with the agreement last?

The trend for solar energy leases recently has been for shorter period terms. The terms often range from 20 years to 50 years. However, a majority of solar companies require a sufficient term length to recapture the project’s cost and return an acceptable profit to investors.

In negotiating the term length, any landowner should keep this timeline expectation in mind when considering any future use or development of the property. In addition to term length, the solar lease agreement will likely include an option agreement granting an exclusive right to the solar company to investigate the viability of the project.

During the option period, the solar company will perform numerous diligence inspections that may include, construction suitability for the site, surveying the property, verifying estimates of the solar capacity, and conduct environmental and wildlife impact studies. Notably, option periods on solar leases vary from lease to lease with some being as short as one to two years and others may extend to as long as 10 years.

Another facet of option periods for solar lease agreements is in almost every case the option will be “exclusive” to the solar company. This means the landowner cannot enter into any other solar lease agreement, and perhaps any other energy development agreement, on the land during the option period.

How will current uses of the land be affected by the project?

Unlike other energy uses, such as wind or oil and gas, solar lease agreements will typically disallow any other use for the land in order to prevent any disturbance to the solar equipment and site.

What are the landowner’s obligations under the agreement?

The primary obligation for landowners will be the non-obstruction term of lease. The non-obstruction term requires the landowner to avoid (and in some agreements, actively defend against) the creation of any environment that will cause interference of light reaching the solar equipment.

While this may not seem like a significant constraint, landowners may be unaccustomed to thinking about the shadows cast by a windmill, granary, barn, home, or other structure and could also affect not only the land where the solar equipment is located, but also neighboring land owned by the landowner. Depending on the size of the parcel in question, this may effectively block the construction of any new improvements on the land unless an agreement is in place that allows for discussion of potential improvements with project engineers.

Landowners may also need to examine the agreement to see if it requires the landowner to affirmatively eliminate other obstructions, such as trees and if it prohibits the leasing of the land for any other uses such as cellular towers.

An important aspect for solar companies in the initial stage of a solar project is the data they collect on the site. Therefore, a developer will want to take steps to protect that data in the solar lease agreement. This is done by including a confidentiality clause.

For landowners, confidentiality clauses can be prohibitive due to a lack of understanding of what it means. As a landowner, by signing a solar lease agreement with a confidentiality clause, you will be bound by its terms, and depending on the language in the agreement, you may not be able to speak with the professional specialists whose advice you will need.

Confidentiality agreements can also restrict landowners’ ability to negotiate together in instances of large solar developments. For landowners in the lease negotiation process, you should work closely with your legal counsel to ensure you understand the aspects of the confidentiality agreement and, if the developer is amenable, consider striking the confidentiality clause or ensuring the terms of the clause are written where you maintain the ability to speak to your professional specialists.

What happens when the project ends?

Solar energy lease agreements contain some form of “decommissioning” language. This essentially means that at the end of the project the developer is required to remove all equipment, restore the land to its original grade, vegetation, and soil condition and to remove subsurface materials to a specified depth. When negotiating the lease, landowners should take additional precaution and security to ensure the solar equipment is removed by seeking a “performance bond” from the solar company, the funds of which are used to ensure the performance of the decommissioning obligations.

Effects on the Surface Estate

As we touched on above, unlike other energy projects, solar projects typically restrict or prohibit land use to only solar energy production. This brings several concerns developers and landowners will have to work through in the terms of the lease agreement including:

• Conflict with mineral estate
  • Mineral estate is dominant in Texas.
  • If solar lease takes up entirety or majority of surface it may interfere with mineral estate access leading to conflict or litigation with mineral owners.
• Tax implications
  • Potential increase in valuation of property due to solar ‘improvements’ being present on the property.
  • Loss of agricultural use due to prohibitions in the lease thereby forfeiting ag exemption rights on the property.
• Resource access
  • Landowners should explicitly reserve the right to use the land to the maximum extent possible.
    • This provision in the lease should be as broad as possible while still allowing the solar company the necessary rights to successfully implement and maintain the project.
  • Carefully negotiate resource (water, rock, other materials) to ensure it is agreeable for both parties.
• Nuisance
  • Indemnity should be negotiated into the lease for potential liability for causing nuisance to neighboring property for things such as light reflections.

Solar energy leases are a growing feature within the real estate development space. As the investment in renewable energies continues, combined with Texas vast open, and mostly sunny spaces, landowners and developers will continue to explore new paths for these types of leases. When exploring and negotiating solar energy leases, it is important for landowners and real estate developers to consult closely with their legal counsel to ensure the terms of the solar energy lease align with the long-term goals of both the land and the project.