The Anatomy of a Wind Farm Contract – Part 1

 

wind prisoner

I am often approached by people asking me to explain just how a wind farm contract works. I usually evade these questions either by honestly pleading ignorance or less honestly, by using the well-used cop-out employed by lawyers: “It’s difficult to answer that conclusively, as it all depends on the circumstances and I would need to see the contract”.

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I attended one of those overpriced legal workshops back in 2012 offered by some or other firm of solicitors on renewable energy contracts. A generic precedent of a wind farm contract was supplied in our packs.  I thought I might, over the next few weeks, take some of those clauses and do my best to explain what they mean. Things might have moved on a bit since then, but unless there is a wind farm owner out there who is prepared to publish his or her contract, the 2012 model will have to do.

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It is important to understand that a typical wind farm contract is made up of two parts. The first part is an Option. The second part is a Lease.

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Let’s talk about the Option.

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In a general sense an Option is a right to buy or sell a particular thing at a specified price within a set time. The first important thing to remember is that the Option gives its holder a right to buy, not an obligation to buy. The holder can walk away without exercising that Option, (i.e. without buying the subject matter) whenever they want.

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With a wind farm contract, what the option does is give the wind developer the right to enter into a lease with the landowner and to build a wind farm on the landowner’s land.

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Again, it is important to understand that the Option offers the wind developer the right, but not the obligation, to enter into the lease during a certain period of time or on a specific date. If the wind developer decides not to build the wind farm, or cannot get permission or the finance to build a wind farm, the developer can just walk away without exercising the right to lease the land.

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If the developer does walk away without building the wind farm, the landowner is only entitled to the sum of money agreed in return for the Option, even where the developer has used up all the time allowed in that Option Period.

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This means that the landowner is left in limbo during this time that the Option lasts, because the landowner makes the land available, but cannot use the land for anything else while he waits for the wind developer to decide whether to go ahead with the wind farm or not.

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And how long can this Option last? Well, the contract that I have says the Option Period is seven years, but I know that this can typically vary from five years to ten years. Fifteen or twenty years is not unheard of.  In addition, the wind developer very often has an option to extend the option.

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The contract that I have provides for an “Option Period Extension Event” which is defined as an event that is beyond the control of the wind developer and which “affects the viability of the Project”.

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That is a very broad definition indeed, and would include, but definitely not be limited to, events like delays in planning permission, delays in finance, delays in delivery and instalment, other technical problems, even bad weather / floods, etc. (as long as they cannot be laid at the door of the wind developer). The happening of one or more of these ‘events’ will mean that the Option period will continue indefinitely.

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You might say, well so what? The landowner is getting paid handsomely for being in this limbo. Well, perhaps not. I have seen contracts where the “Option Fee” is the princely sum of Ten Euro. The contract that I have simply says: “Ten Euro” (as opposed to Ten Euro per annum). Ten Euro for giving up the use of your land for seven years!

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Again, some landowners have certainly received more than Ten Euro as payment for giving the developer an Option over their land, and sums of one thousand euro are often mentioned, with the odd mention of ten thousand euro. However, when one considers what the economic, personal and financial consequences of being bound by an option are, even ten thousand euros seems hardly worth all that grief.

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The Irish Farmers Association recommended an Option Fee of one thousand euro per annum. Is it worth it?

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To add insult to injury, the option payments are fully taxable and with regard to farmers, for example, they do not qualify as income that can be set off against ordinary agricultural expenses as a tax relief.

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This money suddenly seems very small when you consider the chains that come with it.

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Why do I say that the landowner gives up the use of his land? Well this is what the landowner typically agrees to in these contracts:

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“The landowner consents at any time during the Option Period to the developer and the developer’s employees entering into possession of the land for the purposes of erecting and maintaining wind testing apparatus and if necessary drilling bore holes and making application for planning permission for the erection of wind testing apparatus on its own costs. The developer shall not be responsible for any costs including temporary inconvenience.

The landowner consents at any time during the Option Period to the developer making application for Planning Permission for the erection on the Premises and adjoining lands, adjacent lands of wind turbines and ancillary works for the Project on its own costs.

The landowner consents at any time during the Option Period to the developer carrying out any site investigations needed for the  preparation  of the application for Planning Permission and an Environmental Assessment to be carried out for such application.

The landowner will not during the Option Period object to (or concur with any other party in objecting) to the responsible Planning Authority and An Bord Pleanala in respect of any of the following:

– any application for planning permission or other statutory consent;

– any appeal by the developer against a refusal of planning permission or the imposition of conditions on the granting of planning permission which the developer feels are unreasonable;

The landowner will sign any necessary documentation as expeditiously as may be required in connection with any of the applications referred to above and will take any other administrative steps to perfect any statutory agreement required by the developer in respect of the grant or issue of planning permission or any of the statutory consents and will allow the developer to erect notices on the landowner’s Property.

That during the Option Period the landowner will not submit any planning application in respect of their Property without the consent of the developer.

The landowner shall not without the consent of the developer, erect any structures on nor grow or cultivate or permit to be grown or cultivated any trees, shrubs or bushes on the landowner’s Property within 500 meters of the Option Property.”

 

Assuming you had the strength to read all of that (and remember that the contract contains all of those clauses, not just one or some of them), what it means is that the wind developer can deal with that land as if it is its own, as the Option agreement essentially confirms the landowner’s acceptance in principle to having a wind turbine or turbines erected on their land.

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It allows the wind-farm development company to enter the landowner’s property to sink boreholes and carry out research, including environmental impact studies that will be required for planning applications. The wind-farm development company will usually also require the installation of a meteorological mast on the landowner’s property, which is essentially a guyed pole, 70-100 metres high, equipped with wind vanes to measure wind speed and temperature sensors; and all the other things that need to be done for the purposes of obtaining planning permission. And they have not even leased the property yet!

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On the other hand, even during the Option period the landowner is not free to use their own land as they wish, and need the written permission of the developer to do something with their own land, and that permission will only be granted if the proposed use by the landowner does not interfere with the developer’s plans.

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That land and its environs is now effectively beyond the use of the landowner as it would be nearly impossible to use it without interfering in some way with the developer’s use of that land. For example, a farmer will not want livestock anywhere near open boreholes nor would the wind developer want any beast near the delicate measuring equipment, and obviously one could not grow crops there for the same reason, as it would be impossible to harvest.

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Again, in response to this one might say that the Option Property is usually just a hectare of land which might not be much on a big farm. Well, from a physical point of view that hectare is extended by the prohibition of doing anything at all (including growing shrubs and trees) within 500 metres on any side of the proposed wind farm site. In addition, a stock farmer does not want his cows, sheep or horses anywhere near a wind farm. There is now extensive research confirming markedly increased levels of birth deformities when livestock are in proximity to a wind farm. No farmer is willing to take that chance.

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Similarly, the landowner is not likely to want to live near a wind farm because of the hazardous effect on his health and that of his family. Therefore it is likely that the entire property may well become unusable even if the “Option Property” is but a portion of the total acreage.

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In addition, from a legal point of view, the landowner’s entire property/land folio can be affected by this inhibition. A “disposition or transmission” is a very wide description and prevents the landowner from dealing with their entire property without permission from the developer. For example, simple things like a lease or a mortgage are dispositions, and would require the permission of the developer. You might remember the story in the newspapers of the farmer who had sold an option to a wind developer only to discover that he was prohibited from giving a section of his farm to his daughter as a wedding gift, on which to build her house.

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What else might happen to the landowner?

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Another clause in the Option section of the contract says:

 

“The landowner recognises that the developer may wish to finance or refinance the Project through limited recourse or other financing in the commercial bank debt and or capital markets and that the entering into one or more direct agreements (by which there is given to the Debt Provider a right to step into and/or procure an assignment or other transfer of the Option Property) may be a pre-condition to the provision of such debt finance by the Debt Provider.

The landowner will co-operate in good faith with the developer and use all reasonable endeavours to satisfy the requirements of any Debt Provider in respect of such financing or refinancing.

The landowner undertakes to use all reasonable endeavours without delay to agree the format of and enter into a direct agreement with any Debt Provider the developer or any other relevant party in respect of this Option and/or the Lease.”

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What does this mean? Put simply, it means that the landowner must do whatever is necessary for the developer to raise finance, which could include agreeing to further burdens on the property or entering into deals with an institution (“the Debt Provider”) that takes the place of the developer – a bank or finance company for example.

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Many wind-farm companies are multinational companies that trade their options with other global speculative investors. The landowner has signed away his/her individual control over their land and so cannot prevent it from being assigned to an unknown third party for its use and development.

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The Option portion of the contract is a lot shorter than the Lease portion of the Agreement, but it is clear that the Option can have far-reaching and possibly devastating consequences for the landowner should things not go to plan.

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In the next blog I will start looking at the Lease portion of the contract. Surely that must hold some good news for the landowner? I wouldn’t put money on it.

About Neil van Dokkum

Neil van Dokkum (B. SocSc; LLB; LLM; PGC Con.Lit) Neil is a law lecturer and has been so since arriving in Ireland from South Africa in 2002. Prior to that Neil worked in a leading firm of solicitors from 1987-1992, before being admitted as an Advocate of the Supreme Court of South Africa (a barrister) in 1992. He published three books in South Africa on employment law and unfair dismissal, as well as being published in numerous national and international peer-reviewed journals. Neil currently specialises in employment law, medical negligence law, family law and child protection law. He dabbles in EU law (procurement and energy). Neil retired from practice in 2002 to take up a full-time lecturing post. He has published three books since then, “Nursing Law for Irish Students (2005); “Evidence” (2007); and “Nursing Law for Students in Ireland” (2011). He is an accredited and practising mediator and is busy writing a book, with Dr Sinead Conneely, on Mediation in Ireland. His current interest is Ireland’s energy policy and its impact on the people and the environment. He is also researching the area of disability as a politico-economic construct. Neil is very happily married to Fiona, and they have two sons, Rory and Ian.
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5 Responses to The Anatomy of a Wind Farm Contract – Part 1

  1. Scott Bennett says:

    This is a very bias article.
    Landowners are not forced into signing into anything. If wind farms were bad for landowners why would a landowner enter the agreement ? Maybe for the opportunity to receive rent for 25+ years ? Looking forward to Part 2 – The Lease.

    • You are right Scott, I am biased because I hate to see farmers being forced off their lands and somebody has to counter all the spin produced by the wind companies with their huge advertising budgets. I never alleged that landowners are forced to sign these contracts, but rather plead with them to read and understand the contract terms, and the long-term implications, before they sign. I hope you enjoy Part 2 as much.

  2. 4TimesAYear says:

    Reblogged this on 4timesayear's Blog.

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