Key Solar Lease Considerations for Landowners Tiffany Dowell Lashmet, Texas A&M Agrilife Extension. To which estate does the sun belong?

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1 Key Slar Lease Cnsideratins fr Landwners Tiffany Dwell Lashmet, Texas A&M Agrilife Extensin In the last few mnths, I have heard frm several Texas landwners wh have been cntacted by slar cmpanies seeking t lease agricultural land fr slar prjects. There is surprisingly little infrmatin available fr landwners cnsidering the prs and cns f entering int a slar lease agreement. This article utlines sme f the key cnsideratins fr landwners cnsidering and/r negtiating a slar lease. As always, I highly recmmend that landwners cnsult an experienced attrney t review any lease agreement befre it is signed. As Stamfrd, Texas attrney James Decker explains, We re still early in the era f slar energy develpment in West Texas. Lease rates appear very enticing, particularly in an area f lw cmmdity prices, but landwners shuld seek advice frm straightfrward, practical-minded legal cunsel t minimize unintended cnsequences and avid a deal that s t gd t be true. T which estate des the sun belng? Interestingly, the Texas Supreme Curt has never ruled n whether the sun is part f the surface r mineral estate. Mst (maybe all ) legal schlars assume that the Curt wuld hld that slar rights belng t the surface wner, making that persn the ne wh has the right t enter int and negtiate slar lease agreements. Of curse, this can be mdified by agreement between the parties. Fr example, assume that Adam wns bth the surface and mineral rights f a piece f land. Adam enters int an agreement t sell the land t Beth, but he reserves slar leasing rights. If that happened, even thugh Beth wuld wn the surface f the land, Adam, rather than Beth, wuld wn the slar rights. The fact that slar is likely part f the surface estate is imprtant frm a legal standpint with regard t implied rights. As between surface and mineral estates, the mineral estate is dminant under Texas law. That means that a mineral wner has the right t use as much f the surface as is reasnably necessary t prduce minerals, withut permissin frm r payment t the surface wner. The same is nt true fr ther surface substances. Because ne surface substance is nt dminant ver thers, the implied right f use des nt exist. Fr example, assume an il cmpany lease il rights t a piece f prperty. Because il rights are part f the mineral estate, the il cmpany wuld have the implied right t use the surface t prduce the minerals, even if the lease was silent n this issue. If, hwever, a slar cmpany leased slar rights, all f their 1

2 rights wuld need t be set frth in the lease agreement because n implied rights wuld exist since slar is nt part f the mineral estate. This issue raises a hst f ther questins including whether the accmmdatin dctrine might prtect an existing slar prject and hw the duty wed by an executive rights hlder t a nnparticipating ryalty wner culd be impacted. It is imprtant t seek t avid these issues and draft lease prvisins t prtect the landwner as much as pssible. Rights f mineral wners. An imprtant cnsideratin fr bth landwners and slar cmpanies is the status f the mineral estate beneath the land being cnsidered fr a slar prject. As discussed abve, because the mineral estate is dminant in Texas, the mineral wner has the right t use as much f the surface estate as is reasnably necessary t prduce il and gas. This includes building drill pads, preparing rads, installing pipelines, and drilling injectin wells. Nt surprisingly, this pses a majr cncern fr slar lessees lking t put in a slar facility n the same land. Slar cmpanies will likely carefully analyze the status f the mineral estate including hw many wnership interests exist in the estate and whether a lease agreement is currently in place. Landwners shuld take care nt t agree t serve as a type f middle man r negtiatr between slar and mineral lessees, particularly if they have n relatinship with the mineral wners. Slar leases are usually nt shrt in duratin. Accrding t a Texas attrney wh frequently represents slar cmpanies in lease agreement negtiatins, these lease agreements typically last between years. These leases tie up prperty fr a significant perid f time, s it is imprtant t carefully evaluate the lease terms. Typically, there are tw phases t a slar lease: develpment/cnstructin and peratins. The develpment perid invlves testing t see if the prject will likely wrk, cnducting envirnmental studies, analyzing transmissin capabilities, and ther infrmatin gathering. The peratins phase, n the ther hand, ccurs when the prject actually begins prducing and selling energy. When reviewing draft leases, ne shuld pay careful attentin t hw these phases are defined and what is required t ccur t mve frm the develpment t the peratins phase. 2

3 Ryalties are nt cmmn in slar leases. Unlike il and gas lease agreements, it is uncmmn fr a slar lease agreement t set frth a ryalty as the payment methd. Instead, annual payment terms are usually defined in dllars per acre. Cmmnly, the price ffered is lwer in the develpment phase and higher during the peratins phase. This makes sense as there shuld be incme generated during the peratins perid, while the same is nt true during the develpment phase. Because rental rates are usually lwer in the develpment phase, a landwner has reasn t want that phase t be as shrt as pssible in the lease agreement. Slar leases will likely prevent any ther use f the prperty. All f us in Texas have likely driven by a piece f prperty and seen a tractr farming arund il pump jacks r cattle grazing beneath wind turbines. Because f hw il, gas, and wind prductin ccurs, it is quite pssible fr the surface wner t make agricultural uses f the prperty even during the time while the il, gas r wind lease exists. The same is ften nt true fr slar leases. Often, a slar farm requires numerus cntinuusly placed panels that wuld prevent ther uses t be made f the surface f the land. Based n this, landwners evaluating slar leases shuld usually assume the lease payment will be the nly incme fr the prperty and negtiate accrdingly. Watch fr prhibitins n use f ther prperties. A term that is smetimes included in draft slar agreements is a requirement that the landwner des nt cnstruct anything that culd impact the sunlight flwing t the slar prject. This culd impact nt nly the land where the slar panels are lcated, but als neighbring land wned by the landwner. Similarly, sme slar leases attempt t limit certain agricultural peratins, such as crp dusting. Landwners shuld carefully cnsider whether these types f prhibitins culd be prblematic fr their peratins. A slar prject culd impact special tax use valuatin eligibility. In Texas, many rural landwners take advantage f the special tax valuatin available fr agriculture r pen space land. If a landwner meets the criteria, the special use valuatin allws the prperty taxes t be calculated based n a percentage f its prductive capacity versus the fair market value f the land, which is usually much greater. A slar prject culd impact the ability fr prperty t qualify fr this special use valuatin. If that is the case, a hst f issues 3

4 arise, including a rllback perid where the landwner may we the difference between the nrmal tax value and the mdified value paid. Imprtantly, even after the slar prject has left the land, it culd be years befre the prperty can quality fr ag r pen space valuatin again. Landwners shuld visit with their lcal appraisal district t determine hw slar prjects are treated with regard t special use valuatin. It is imprtant that landwners include a term in the slar lease agreement whereby the slar cmpany cvers any additinal real prperty taxes wed as a result f the slar prject and that the slar cmpany pays fr any persnal prperty taxes n the slar equipment. Landwners shuld watch fr these cmmn legal technicalities. Mst cntracts include what several farmer I knw wuld call a bunch f legal mumb jumb. There are, hwever, a few f thse technical legal terms that landwners shuld watch ut fr in slar agreements. Guarantee f title: Als cmmnly included in lessee-drafted il and gas cntracts, slar cntracts smetimes include a term whereby the landwner guarantees r warrants gd title t the prperty. This term shuld be deleted as the cmpany is in a better psitin t investigate deed recrds and determine wnership f the prperty. Cnfidentiality clauses: Smetimes a slar cmpany will include a cnfidentiality clause in a lease agreement that prhibits the landwner frm discussing r disclsing the terms f his r her lease agreement with thers. Landwners shuld cnsider rejecting this type f clause s that they have the ability t talk t their neighbrs and wrk tgether t btain the best pssible lease terms. Frum clauses: Frequently, a cntract will cntain a frum clause identifying the lcatin where a dispute wuld be heard. Fr example, a lease might prvide that Any and all disputes ver this agreement will be heard in New Yrk City, the principal place f business f the slar cmpany. There are several reasns why a Texas landwner wuld nt want t agree t this clause. First, he r she des nt want t be flying t NYC every time a meeting, hearing, r depsitin might be scheduled. Secnd, the landwner wants hme field advantage, including a judge and jury pl f his r her peers wh live in the area. Althugh under the law, mst real prperty disputes are prperly reslved where the land is lcated, the curt will usually enfrce this type f frum clause if the parties agreed. Attrney fee prvisins: The general rule in the United States is that each party in a legal dispute pays fr his wn attrney fees, win r lse. One way this can be mdified is by cntractual agreement, s sme lease agreements include attrney fee prvisins prviding that the winning party may recver reasnable attrney s fees 4

5 frm the unsuccessful party. Be careful t ensure that the prvisin is reciprcal. Cmpanies will smetimes sneak in a prvisin that allws them t recver fees if successful, but includes nthing abut the landwner s right t d the same. Dispute reslutin clauses: Nearly all cntracts tday include sme frm f a dispute reslutin clause. While these clauses can certainly be useful in helping t quickly reslve disputes and avid expensive litigatin, they can als waive certain rights f the parties invlved. If a slar agreement cntains a dispute reslutin clause, the landwner shuld determine if the agreement prvides fr mediatin r arbitratin and be sure he r she understands the prs and cns f each befre agreeing t this prvisin. Here is a prir blg pst I wrte discussing this in detail. 5