Rusty Rumley, Senior Staff Attorney
Grace Henson, Research Fellow

 

Solar leasing is the practice of renting tracts of land to install solar panels and infrastructure to generate electricity from sunlight. The typical commercial solar lease is where an outside party approaches a landowner to negotiate placing solar panels, substations, power lines, roads and other necessary infrastructure on their property for a significant period of time (twenty-five to thirty-five years with optional extensions are common) for a specified rental rate per acre per year or with some form of revenue sharing much like a royalty payment for an oil or gas lease.

Because landowners and solar companies are free to negotiate terms, the clauses and terms vary greatly from lease to lease. However, there are several common clauses that all leases contain. Available commercial solar leases were gathered and analyzed to create this blog series about common clauses and to layout the variety of terms within those common clauses. The first article, available here, provided an overview of the topic.  The following post details common components of the payment structure of solar leases.

Common Payment Structures

Solar companies establish payment structures in their proposed lease agreements, and this is typically one of the first sections that a landowner will review. Many solar companies exist across the country resulting in diverse payment structures. While most lease agreements will vary, there are some common approaches that most companies follow. A very common approach to solar leases is to divide the lease into separate phases and pay different rates or through different calculations according to the phase of the solar lease. Some leases may pay a fixed rate based on the potential megawatts of power that the project could generate or even pay a royalty payment of some percentage of the power actually produced while many leases pay a fixed amount per acre per year.  Other factors, such as state laws can also impact lease agreements.  For example, both Tennessee and Florida statutorily require solar lease agreements to include statements of the lease’s compensation structure.[1] It is critical to carefully examine the lease and understand what compensation you are entitled to either during the life of the lease or if payment depends on the current phase of the lease agreement.

 

Simple Payment Structure

 

Simple payment structures may focus on one phase, such as the production phase, to compensate the property owner.  For example, one lease agreement we reviewed requires payment based on the potential amount of energy produced:

“… the annual rent of Seventy-five hundred dollars ($7,500) per megawatt (AC) of Installed Power (as defined herein) payable to Landlord, in advance, in annual installments.”

This type of payment structure exposes the landowner to a major potential risk.  Not all lease agreements turn into a completed solar project. There may be years after signing the initial agreement before a final decision on a project is made. Will the landowner be compensated for this time period? Simple payment structures may not take into account the time and complexity of building a solar project, so landowners need to ensure that they are adequately compensated for what they provide even if the project is never completed.

 

Payments Based on Lease Phases

Solar leases, and the developments themselves, are complicated projects that will take years to start producing power. It is common to break up lease agreements into different phases and the compensation methods and amount for the phases may differ dramatically. Common phases are the option phase, the construction phase, the operations phase and the decommissioning phase.  Lease agreements may use some, or all, of the phases above. Exact names may differ from lease to lease, but the practical effects are similar.

The Option Phase

An option phase is the time period between the signing of the agreement and the beginning of the construction phase. Some of these phases can be as short as six months, while others may last for years. During the option phase, most leases contain no guarantee that the leased land will actually be used for a solar project. The company may enter into contracts with several landowners while they decide which land to initiate their project on. The company will also need to sort out many practical issues such as permits, loans, power purchase agreements and a myriad of other things necessary for a successful solar project.  Because rental payments in the future are unknown, it is beneficial to require rent payments during the option period. Example:

“As consideration for the Option, during the Option Period, Grantee shall pay to Landowner option payments (collectively, the “Option Payments” and each an “Option Payment”) in the amount of (i) US $2,500 (the “Initial Option Payment”), due and payable on the date that is forty-five (45) days after the Effective Date and (ii) thereafter, US $625 per calendar quarter, due and payable on the first day of the applicable calendar quarter.”

Construction Phase

This phase of construction typically begins when they start bringing in construction equipment and materials and will last until solar project is actively producing power.  During the option phase there may be minimal disruption to the landowner’s use of their property, but during the construction phase the landowner may have very limited access to a significant portion of their property.  Payments for this phase tend to be more substantial than the payments from the option phase because of the loss of access to the property. Examples:

    • Payment is to begin when construction begins, and payment is to be made per acre.
    • Landowner shall be paid $20,000 annually during Construction period.

Operations Phase

This phase begins when the construction is complete and the project begins producing power commercially.  This phase can last for decades and ends when the project goes into the decommissioning phase.  It is important to carefully review the contract to see how long it can last.  Many contracts also include language where a specified period of time is guaranteed (20 years) and the company is entitled to extend this phase at their own discretion (company has an option to extend the agreement by five or ten years at their sole discretion). Payment calculations during the operations phase can also vary substantially.  Many contracts pay on a per acre per year basis, but other contracts are paid on installed megawatts or a royalty payment based on the actual amount of power generated. Because of the length of this phase in the lease it is a common practice build in an escalation clause to keep up with inflation. Examples:

    • $2,200 per acre of Easement Area per year during the Operations Period, escalating at a rate of 2% per annum.
    • …$1,000 per acre per year for the Rent Payment of the leased property. Starting on the third (3rd) anniversary of the first Rent Payment Date, and for each annual anniversary thereafter, the annual Rent shall be increased by three percent (3%) over the Rent otherwise then in effect.

Decommissioning Phase

This phase begins at the end of the operations phase and, hopefully, concludes when all of the solar project infrastructure has been removed from the property and the premises has been returned to the state that it was in before the construction phase began. Many older agreements do not address the decommissioning phase and landowners may need to negotiate for payment and additional security to ensure proper decommissioning.  Because of the length of these leases the original parties that signed the agreement may no longer be available (or the project could be sold to another company) so it is critical to document each party’s responsibilities in the contract. One common approach to ensure that funds are available to pay for decommissioning is to require a bond from the solar company that can cover cleanup at the end of the lease. It also may be a wise idea to have payments for the property to continue through the decommissioning phase to incentivize the company to move forward.  Example:

    • Rental Payment of $1,500 per acre per year shall continue until all solar infrastructure has been removed from the premises at the conclusion of the agreement.

 

Conclusion

Overall, it is important that the solar lease agreement accurately encapsulates the terms agreed on by the parties. It is important to have an attorney that is knowledgeable about solar leases to thoroughly review the agreement for the landowner because once the contract is signed it is very difficult to make any changes. The long lease period means that anything left out of the agreement is something that the landowner, and potentially their heirs, will have to deal with for years to come.

To see more articles in this series click here.

To read the Inflation Reduction Act of 2022, click here.

To read the Farmland Owner’s Guide to Solar Leasing, click here.

To read Understanding Solar Energy Agreements, click here.

 

[1] See Tenn. Code Ann. § 66-9-204; see also Fla. Stat. § 520.23 (2023).

 

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