Foster Swift Agricultural Law News
January 3, 2020
While every solar land use agreement can be unique, there are some considerations that are common to many of the agreements.
1. Window of Opportunity
Two factors seem to be driving much of the recent solar farm development. First, Michigan has strong Renewable Portfolio Standards (RPS) that require utilities to increase energy production from renewable sources – to as much as 40% by 2025.
A second factor driving recent development of solar power projects is a federal tax break for solar photovoltaic systems. The tax incentives drop from 30% to 26% for projects commenced in 2020, to 23% for projects commenced in 2021, and to 10% thereafter. Thus, developers have a powerful economic incentive to commence their solar photovoltaic systems to maximize the federal tax break.
2. Option to Lease
Solar Land Use Agreements are frequently presented as “options to lease.” For a modest payment, the solar company holds exclusive rights (but not the obligation) to lease the property. Usually the option extends for at least one year, but can provide for multiple years. If the land is subject to an option to lease, the land cannot be leased to another company and long ranging planning must include consideration of the possibility that the option will be exercised at any time within the term.
Most options either include a specific lease that will become effective upon exercise of the option or a statement of the most important terms that will be contained in the lease. Thus, it is important to negotiate the terms of the lease before granting the option.
Many leases and options to lease, contain confidentiality clauses which apply to all terms of the agreements, including the financial terms and even the identity of the solar company. Thus, once an agreement containing a confidentiality clause is signed, telling your neighbors about the terms of the agreement could constitute a breach of contract.
Some leases contain exclusivity clauses that preclude the landowner from leasing other property to a competing solar energy company. Landowners with substantial acreage should consider requesting a limitation of the breadth of the geographic exclusivity.
5. Renewal Terms
Most leases have an initial term of 10 to 25 years, that allows the solar company the right to terminate the lease early if the project proves to be economically unfeasible. These leases also often grant the solar company the option to renew the lease for several successive terms of five years. The combined renewal terms often equal the length of the original lease term.
6. Rent Escalation
Since a solar lease may extend for decades, it is important to provide a mechanism to make sure that the rent payments keep up with inflation. Many leases include a rent escalation provision that increases yearly rent by a certain percentage. If you are not comfortable with the rent escalation percentage, a land owner might consider tying the yearly increase to either the consumer price index or increases in power purchase contracts approved by the Michigan Public Service Commission (MPSC).
7. Tax Considerations
Most leases/easements provide that the solar company will pay any increased property taxes as a result of their installation of solar photovoltaic systems. However, amendments may be needed to address potential “uncapping” or the imposition of recapture taxes due to the loss of the “Agricultural Land” classification.
Most landowners will want the lease to require the solar company to restore the property when the lease ends. These provisions should include removal of all equipment to at least plow depth and leaving the property free of any dangerous conditions created by the solar company.
If you have further questions about the considerations regarding solar land use agreements, contact Scott Storey at 517.371.8159 or at email@example.com.
This article has been updated with new information since its original publication in March 2018.