Quick Tips to Negotiating a Wind Lease

Thursday, August 2, 2007
Contributed by: Thomas Clayton Feighny

WHAT EXACTLY AM I LEASING OUT TO A DEVELOPER?

When entering into a wind lease, a landowner is conveying a significant and valuable asset to a developer that may affect the use of a landowner's property for decades. A landowner is granting a developer the right to come onto his land, set up testing equipment, explore for valuable wind energy production zones, and install wind turbines, overhead transmission lines, underground transmission lines, distribution centers and substations. Roads will be laid in order for the turbines to be installed and serviced, and the property will see frequent use by the developer as the turbines are serviced. The particular location of the wind turbines could affect the aesthetic nature of the property, could interfere with farming operations, and could interfere with oil and gas development. A landowner is agreeing to allow a developer to change the fundamental use of his property and he or she should be adequately compensated.

WHEN AND HOW DO I GET PAID?

Landowners are generally paid in five ways under a wind lease:

A. Bonus Payment - This is a lump sum payment that is paid either at the time the lease is signed or when construction starts. The earlier the payment, the better.

B. Base Rent - This is a minimum amount that a landowner will be paid per year despite how effectively the wind turbines generate electricity or the electricity is marketed. This is usually a figure between $3,000 and $7,000 for each megawatt of nameplate capacity on the property. This base rent is only paid if the royalty is less than the base rent.

C. Royalty - A landowner is paid a monthly royalty payment, typically a percentage between 1% to 7% (based on the terms of the lease) of the gross sale of electricity generated from the landowner's property each month. This is most substantial and long-term payment the landowner will receive.

Renewal and Extension Rent - These are rental payments paid by the developer to the landowner when development has not occurred during the development term but the developer wishes to keep the lease alive. Not all leases contain renewal terms.

Surface Damage Payments - These are itemized payments covering particular types of damages to the surface. Generally, leases will sketch out specific payment amounts per mile of road, transmission line installed, turbine constructed, and substation installed. The more specific the surface damage provisions, the better.

HOW LONG WILL THE LEASE REMAIN IN EFFECT?

Wind leases have two distinct terms: the development term and the operations term. The development term begins when the lease is signed and usually continues for a period of 2 to 4 years. In the development term, the developer has the right to explore for appropriate locations to place wind turbines and design how the wind field will be used. Once construction of the wind facilities starts the operations term normally takes effect. If towers are erected and energy is generated on the property, the operations term can last for a period of 20 to 40 years or longer based on the particular terms of the lease. If a developer fails to begin construction of the wind facilities by the end of the development term and the development term is not extended, the lease terminates.

Landowners should be mindful that many leases are written so as to keep the operations term alive even if no profit generating wind turbines are installed on the property. Landowners should negotiate with developers so that the lease is only in effect if profit generating wind turbines are installed on the property.

WHAT EASMENTS AM I GRANTING TO THE WIND DEVELOPER?

A wind lease typically grants the following easements:

A. An easement and right of ingress to and egress from the wind tower facilities.

B. An easement for the installation, use, repair, replacement and removal of wind energy facilities.

C. An easement for the aerial overhang of the rotors of the turbines located on adjacent property.

D. An easement for any audio, visual, view, light, shadow, noise, vibration, air turbulence, wake, electromagnetic or other effect of any kind or nature whatsoever which may result from the wind energy facilities.

Stand alone easements that allow the developer to make use of adjacent property owned by the landowner if necessary for the construction or use of the wind energy facilities. Generally, the stand alone easements are not advantageous to the landowner and could expose the landowner to tying up more of his property than necessary under the wind lease.

ARE ROYALTY PAYMENTS GUARANTEED UNDER THE LEASE?

Not always. First, the wind developer is not required to begin construction or produce energy under most leases. Second, if construction does begin, but generating units are not installed on the landowner's property (meaning no wind turbines are installed, only other transmission equipment), the landowner will only be paid his surface damages for the installation of this transmission equipment. This is the danger of entering into a lease which allows the developer to keep the lease alive without installing turbines on the property.

WHAT HAPPENS AT THE END OF THE LEASE?

Currently, there are some leases that state that the wind developer must tear down and remove the wind facilities following the termination of the lease. However, not all leases contain these provisions and it may be difficult to enforce these provisions 20 to 40 years down the line. Further, the cost of tearing down these wind turbines can be very expensive. Estimates for the cost of a crane large enough to tear down a wind tower are between $10,000 and $25,000 per day. Therefore, the landowner should be certain to negotiate for a provision which assures that the wind developer will bear the financial responsibility for the removal of the towers at the end of the lease term and that the necessary finances are available.

WHO CAN I WORK WITH TO ENSURE I GET THE BEST LEASE?

The discussion above outlines only a few of the many points to consider in negotiating a wind lease with a developer. Different lease forms are used by different developers and each landowner may have special circumstances that should be considered. In the Panhandle and throughout the U.S., the wind energy market is growing and changing everyday. Entering into a wind lease is a complex and long-term transaction and may affect a landowner's property for decades. A landowner can expect that the developer has an attorney that prepared the lease and will be involved in reviewing and modifying to the lease. To ensure fair treatment and a fair lease, a landowner should consult with and retain an attorney to represent him or her prior to entering into any written agreement.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.