The introduction of Feed In Tariffs early in 2010 has led to a considerable interest in investment in solar parks especially in the West Country. Cornwall and has one of the highest averages of annual insulation in kilowatt hours per square metre. This may seem hard to believe given the last few summers. Feed In Tariffs (FIT) are part of the government’s 2020 obligation under the EU Renewable Energy Directive to increase the share of energy from renewable sources.
The larger schemes will cover between 25 to 30 acres and the capacity will be up to 5 MW. They will cost approximately £12m to £15m to construct.
The FIT is index linked to Retail Price Index and guaranteed for 25 years. The rate offered is fixed at the date of completion and registration of the project. The best tariffs are only available to installations commissioned before April 2012 hence the pressure on time to secure options in order to start the process as soon as possible.
Despite the pressure there are a number of points a landowner should consider.
The Initial Approach
Points to consider initially when entering into negotiations are:
1. What is the history of the company?
2. Are they experienced in dealing with such matters?
3. What investigations have they carried out with the local authority in respect of planning and the need for pre-consultation?
4. What other sites are they investigating?
The rent being offered varies widely. Some are offering a guaranteed minimum rent per acreage or a set guaranteed rent based on the site or a sum of money multiplied by the peak design capacity of megawatts of the equipment installed. Some are offering a share of the profits as well as the basic rent
The landowner should obtain the advice from a surveyor as to the most appropriate rental payment or package with a view to at least securing a minimum rent payment for the site.
There are some companies who are offering a nominal sum to a landowner to sign an exclusivity agreement. An exclusivity agreement is an agreement not to deal with any third party for a period of time. The company may have no intention of progressing the matter further but simply wishes to exclude that land from the market. For example an option on a potential site may jeopardize a grid connection on nearby land that that company is interested in. The landowner is then faced with a situation of being excluded from the market for the period of the exclusivity agreement with very little in return. As previously stated as the best FIT is for those sites commissioned before April 2012 and therefore the exclusivity agreement will result in the landowner having no opportunity of maximising the situation. Therefore if requested to do so a landowner should not sign an exclusivity agreement.
The option is not a contract but instead the right for the company to request a lease from the landowner. The option period is usually for 2 to 3 years with an extension in some circumstances such as an appeal in respect of planning.
The company should pay a fee for the grant of the option which varies from £100.00 to £10,000.00. Clearly an adequate sum should be paid to the landowner for granting the option.
The option agreement may well contain a licence to enter the land in order to carry out investigations and in some cases will include a licence to construct the site. Careful consideration needs to be given as to liability and insurance.
In addition some option agreements do not contain any obligation on the part of the company to progress a planning application.
The agreement should place some obligation on the company to pursue a planning permission and a grid connection. There should be a long stop date in the option agreement so that the landowner can bring this matter to a conclusion
The lease grants title to the company for the period of the term and is the document which governs the relationship between the landowner and the company and any subsequent tenants if the lease is assigned. Once again careful consideration is required in relation to indemnity and insurance. In addition other the issues need to be addressed such as to the position once the lease comes to an end in respect of the clearance of the site. In some cases the lease has been drafted in such a way to enable the company to clear the site twelve months after the lease is terminated without any rent being paid which is clearly unacceptable.
The lease will very often include a right for the tenant to renew it either by 5, 10 or 25 years. Some landowners may try to resist this but there is an argument that as the equipment has a life beyond 25 years then this is a reasonable request. There is very often a clause for the tenant to break the lease upon giving six months notice. This should be resisted by the landowner because it reduces considerably the value of the lease as a product in the commercial market. For example if a landowner wishes to dispose of the freehold of the site, say, five years after the commencement of the term then if there is no break clause the site with the benefit of the lease will be more valuable because it has a guaranteed income for the remaining 20 years. This will not be the case if the lease can simply be brought to an end upon giving six months notice.
Landowners should take tax advice on the consequences of entering into the option and lease. They should consider how this will impact on Agricultural Property Relief in respect of Inheritance tax. It may well be that there are tax planning opportunities which need to be investigated prior to the grant of the option or completion of the lease.
It will be interesting to see in two to three years time how many of those proposed solar parks have been constructed. Most of the electricity currently supplied is from nuclear power, gas and coal fired power stations. Only approximately 6% of the current electricity supply is from renewable sources. Nuclear power is clearly not a short term option. The UK must make the best use of its renewable resources to delivery energy for the future.
To find out more contact Kevin George on 01579 347600