Just before leaving office in 2010, Governor Corzine signed into law P.L. 2009 c. 213, also known as the “Renewable Energy Farming Law”. This law would allow farmers to use part of their farm for solar, biomass, or wind electricity generation without forfeiting their farmland assessment. The law applies to both commercial farms and to farms that have been preserved, but each group must meet a different set of requirements in order to keep their assessment and the protections under the Right to Farm Act.
The Renewable Energy Farming Law has helped promote entrepreneurs seeking leases for solar farms. These entrepreneurs are locking up properties with options and proposed leases and it would appear that many farmers are signing these documents without adequately reviewing them. Developers seek to lock-in the property while they do the necessary planning and obtain the necessary approvals and permits but before signing any of such documents there are some basic contract provisions that you should consider.
First an “option” is a legally binding contract that a property owner gives to another person or company which ties up the land or object of the option. This option gives the option holder the right to tie-up the property for a period of time during which the developer conducts the engineering for the project. The developer also uses this time to obtain the appropriate permits from local land use boards, approvals from Pennsylvania Jersey Maryland Interconnect (PJM) or local utility to connect to the grid and a power purchase agreement to sell the power.
Under basic contract law for there to be a binding contract there has to be consideration. The asker for the option has to give something of value in exchange for the option. Obviously, this consideration is usually money. The developer pays a fee to the landowner so that the owner does not lease the property out to other people or sell it while the developer is doing what is necessary.
The option should also spell out how long the developer can tie up the property. This period of time should be used by the developer to conduct their due diligence which should include identifying how big of a system can be put on the property and whether or not they can get the interconnections with a local utility and/or PJM. During this time they should also determine whether there are any environmental issues including wetlands or c1 streams that would limit or impact the system. Other environmental issues could include whether the property is contaminated by past activities.
The option also sets out the proposed lease agreement. Therefore, the time to negotiate the terms of the lease is before you sign the option not afterwards. Once you have signed the option agreement the chances are that you have bound yourself to the terms of the lease agreement – whether you like it or not.
Some of the basic terms that should be outlined in the lease include: how long the lease is for and how much “consideration” you are going to receive from the developer. The lease should also state how payments should be made – monthly, quarterly, or yearly – and whether those payments escalate over the years or remain static, if there will be a commission or percentage earned from the generation and whether you will receive some of the energy for your own use (this is required by the law).
It is very important that both the option and the proposed lease clearly delineate what the developer plans on doing and that there is an explicit recognition that the developer must comply with the renewable energy farming requirements. The lease should also provide that if, for any reason, the development runs afoul of this law and the property loses its farmland assessment the developer – and not the farmer – will be responsible for paying the rollback taxes. As we all know farmland pays a reduced property tax but, if the farmland status is ever lost, the property owner is required to pay the full amount of the property tax for the current year and the two prior years – which could be a very substantial amount of money.
You should also consider whether the developer has insurance that will cover any injuries that may occur on the property due to the renewable energy systems or from any environmental damages. While the renewable energy system itself may not cause pollution, the support systems for capturing that energy might. For example a transformer might leak and those discharges will still need to be cleaned up.
Other things that should be dealt with up front also include how big the system will need to be. In order to comply with the solar farming law, a system on a commercial form cannot be any bigger than two megawatts. Additional restrictions apply to farmland that has been preserved.
And there are many other issues to consider. What happens to the lease, the system and your payments if the developer is in default of the lease agreement? What happens to these things if the developer goes bankrupt?
As you can see, the terms outlined in a proposed option agreement are very important. They can set the parameters of the relationship between the farmer and the solar company for twenty, thirty or more years. This is a very long time and requires careful consideration before entering.