Landowners Need to do Background Research Before Entering Into a Solar Energy Lease
Updated: Jul 9, 2020
By Ashley Ellixson and Paul Goeringer
This post is not legal advice.
Solar energy developers have begun approaching farmers and other landowners in the Mid-Atlantic region to lease land for large-scale solar energy projects. These projects typically require, on average, 7 acres to produce a megawatt of electricity, depending on equipment. Because of the amount of land required, farmland and open space are ideal for these solar projects. Current low commodity prices may make lease offers from solar developers attractive to many farmers and landlords.
In many cases, landowners will be presented with a written contract that can run 20 pages. The first rule of contracts is the drafter took care of themselves and not the other party. You will need to evaluate the contract carefully to determine to see if it matches your goals with the property. Before signing the lease, you need to consider a few issues and consult with an attorney; to find a competent attorney near you, see http://go.umd.edu/LegalDirectory.
First, consider how the land is titled. Do you own the property as a tenant in common, life estate holder, or joint tenant? How the land is titled is important in deciding if you, by yourself, can sign the lease or need co-owners or future interest owners to agree to the lease. In a tenant-in-common relationship, one tenant in common cannot bind other tenants in common with a lease; all tenants in common would need to agree for the lease terms to be binding. To better understand forms of property ownership, see http://go.umd.edu/PropOwn.
Beyond titling of property, you must consider whether the property for lease is bound by a conservation easement. Conservation easements limit the landowner’s use of the property to the conservation objectives of the landowner and holder of that easement. If the land has a conservation easement, you need to check the terms of the easement and the easement holder, such as Maryland Ag Land Preservation Foundation or Eastern Shore Land Conservancy, before entering into the lease agreement. If you are unsure of whether the land has a conservation easement, and who the easement holder may be, you should check the deed to the land in question. For more about easements and how to search for deeds, see http://go.umd.edu/easementsonfarmland.
Another issue when considering taking land from one type of zoning to that of solar energy is the tax implication. Many landowners may be using their land for agricultural purposes and benefitting from agricultural use tax assessment. This tax allows real property used in production agriculture to be taxed as agricultural use and not the highest and best use. Landowners must consider if the development of the property for a solar farm will leave the land ineligible for agricultural use tax assessment and taxed as commercial property instead. Because the solar farm could impact property taxes, landowners should consider language requiring the solar energy company to pay any resulting increases in property taxes. The State Department of Assessments and Taxation (SDAT) is the agency to contact when questioning the tax implications of a change in use of the particular land subject to the lease.
Another consideration is how the project will affect future uses of the property when bound by the solar lease. The average solar energy lease can last 25 years or longer depending on the number of extensions in the lease. Future use near the solar panels is often limited by lease terms. Future building on the property may also be limited unless the solar energy company agrees first. If you plan to transition the property to the next generation during the lease period, talk with your heirs to determine if the solar lease will be compatible with their plans. To learn more about planning for future generations, see http://go.umd.edu/FarmEstatePlan
Check out the company presenting you with the lease. Are they registered to do business in Maryland, Delaware, or Pennsylvania (depending on where you are located)? You can check with the state’s Secretary of State office to determine if the company is licensed to do business there. Check on the company with the Better Business Bureau, request the company’s financial statements, and utilize other sources of relevant information on the developer. This research will help ensure the company can actually deliver on the financial terms promised in the lease.
How the project will be cleaned up or removed at the end of the lease term is another consideration. Will the solar company take care of this? Is the company putting up a bond and you are required to get the project removed? Or is it all on you to handle? Check the language and whether the written terms will work for you in the future. Parallel to this consideration is after the equipment is removed, will the land be restored to the condition it was before the solar farm was constructed? Even if the company removes the equipment, the land may not be in the same condition as before unless those terms are agreed upon in the lease.
I have just a scratched the surface of issues to consider before signing a solar energy lease. Landowners approached by a solar company to lease their land need to work with an attorney to negotiate these leases. An attorney familiar with solar energy leases will help protect landowners’ interests for the long term and prevent surprises down the line.