Wind and Solar Farms from the perspective of the landowner’s mortgagee

The Australian energy sector is evolving, and as a result, we are seeing a growing development pipeline of renewable energy projects, including land based wind and solar projects. In almost all cases, these projects will be built across vast areas of farming land and require the cooperation of the relevant landowner, and inevitably, their mortgagee. This article provides an overview of what a landowner’s mortgagee should look out for when being asked to consent to a wind or solar farm project.

Why is the landowner’s mortgagee involved?

The entity that develops the wind or solar farm project (Proponent) will ordinarily enter into an option agreement (Option Agreement) with the landowner for the purposes of:

• obtaining a licence to enter the land and conduct initial feasibility studies (which may involve installation of monitoring equipment); and
• if the project proceeds, leasing the relevant parts of the land where the wind turbines, solar panels and related infrastructure are to be built.

Until a lease is registered on title, the Proponent’s rights under the Option Agreement are contractual only and do not attach to the land. To ensure those rights remain protected, the Proponent will usually lodge a caveat over the title of the land. Further, the Proponent will seek the consent of any mortgagee of the land to ensure the mortgagee is bound to honour the terms of the Option Agreement if the mortgagee enters into possession of the land or exercises power of sale.

Why would a mortgagee be concerned about giving consent?

Wind farm projects can bring numerous positive impacts in addition to supporting sustainable energy production.  For the landowner, the project can provide a potential passive income source, and for the community, the project can bring jobs and economic growth to an area.

However, a landowner’s mortgagee should carefully consider any Option Agreement it is asked to consent to since it will be bound by the terms of those documents. Wind and solar farm documents are far more complex than standard leasing arrangements and, with lease terms that span decades, can have long-term impacts on the relevant land.

What sort of issues arise?

The caveat registered by the Proponent on title will prevent or limit the mortgagee’s ability to freely exercise its powers of sale under its mortgage.  As the mortgage will ordinarily be the lender’s primary security, the existence of a caveat on title is a material risk to the mortgagee if not dealt with appropriately.  Additionally, some Option Agreements may strictly limit the transfer or sale of the land by the landowner without the Proponent’s consent – limitations that will also apply to the mortgagee if exercising power of sale.

An existing mortgagee would have provided funding to the landowner for the agricultural uses of the land. To ensure that funding can continue to be serviced, the mortgagee will need to consider the impact of the renewable energy project on those agricultural uses.  The size and location of the wind or solar farm project, limitations on land use (such as restrictions on the building of structures, planting of vegetation, and grant of mining rights), and any exclusivity granted, may negatively impact the agricultural uses and security value of the land.

An Option Agreement may also include certain other obligations on the landowner, such as to grant easements and rights to purchase parcels of land, to enter into licences of further areas, to comply with agreements to offset environmental impacts, to build or maintain certain roads and fences, and to apply for or support applications by the Proponent for various approvals.

Whilst the potential income from a wind or solar farm project may, from a mortgagee’s perspective, be attractive to offset some of the risks and concerns, material rental income is generally only payable once the project is fully operational, which may take a number of years. Further, the Proponent will usually retain a discretion to terminate the option and leasing arrangements or reduce the project size and scope, so the income may not necessarily be reliable from a credit perspective.

Make good obligations are critical for wind and solar farm project leases. Security bonds and deposits are growing in usage in wind farm leases and for good reason, the cost of decommissioning a wind turbine has been estimated to range between $400,000 to $600,000 per turbine. 

What sort of questions should be asked?

Prudent questions include:

• Who is the proposed Proponent and what is their reputation and renewable energy project experience?
• Has the landowner sought legal advice to negotiate the terms of the Option Agreement?
• Has the landowner investigated whether the project is bona fide and best and highest use? It is common for competitors to ‘lock out’ certain parcels of land by signing Option Agreements early with no intention of actually developing a project.
• Are the proposed fees and rent competitive and adjust for changes in scope of the project and technology? 
• Has the landowner considered the potential impact of the change in the nature of the land use to insurance policies, rates, and any approvals to be obtained (such as change of use for Crown leasehold land)?
• Has the landowner considered the scope of disruption during construction of the wind or solar farm project and how this will affect the agricultural uses of the land? Construction may take years and land may need to be cleared for movement and installation of wind turbine infrastructure.

How does a mortgagee deal with these issues?

The mortgagee should fully review and understand the terms of Option Agreements, any lease arising from the Option Agreement, as well as ancillary documents such as rent deeds and easements, prior to signing any consent. It is at the consent phase that a mortgagee can raise any concerns or issues and seek to have them addressed in the consent deed. In particular, the consent deed should deal with any caveat that has or will be registered by the Proponent over the landowner’s land, and any restrictions on the landowner’s rights to sell their land.

The McCullough Robertson Banking and Finance team regularly assist landowner mortgagees with wind and solar farm arrangements across Australia. For assistance or further information, please contact the team below.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.