Wind Turbine lease. Opportunity or life sentence?

Farming, like all other businesses is evolving on a daily basis. More opportunities are presenting themselves to young farmers than ever before. It is important however for farmers who are presented with the option of hosting wind farm companies on their land, to understand what exactly it is that they are getting into.

Like any business agreement there is a long term commitment needed. Most wind farm companies present the proposals to farmers and the first step usually involves an option agreement. It is this option agreement which sets the scene for the relationship and the future commitments of both parties.

So what exactly is the option agreement?

It is important to understand that the wind energy company when identifying a piece of ground suitable for wind turbines is still bound by the necessity to apply for planning permission. Obviously the application for planning permission is a costly one for a commercial activity such as wind farming and therefore the wind energy company naturally wishes to guarantee its own rights prior to expending such an amount of money. How they will do this is by identifying the piece of ground suitable for the wind farm and then negotiating an option agreement with the farmer. There will usually be a sum paid to the farmer in return for the option agreement and, accordingly, the option agreement gives a right of the wind farm company, subject to a successful grant of planning, to build on the lands the subject of the option agreement. While all of this might sound relatively straightforward, there are a number of key issues for the farmer to consider. Among them (although this is certainly not an exhaustive list) are as follows:

1. Term

Most option agreements have a term ranging between 5 and 10 years. This means to the farmer that the land, the subject of the option agreement, is effectively sterilised from most transactions for that period of time. For example, if the land is the subject of an option agreement for 10 years then the transfer or sale of a site may effectively become impossible due to the wind farm company’s priority. It is also important for farmers to understand that when they enter an option agreement such as this, the option agreement is usually (if not all the time) registered as a burden against the farmer’s land. This means that no transmission of the land can happen without consent of the wind farm company. Some farmers have found that this presents a major difficulty when they go to transfer the land to their children, or indeed sell the land upon retirement. It has also caused major difficulties when farmers attempt to lease lands, sell sites etc. The question then begs how long will this effective embargo last? It will last a minimum of the length of time of the option agreement and thereafter if the option agreement is taken up by the wind farm company, the areas upon which wind turbines have been placed, together with access wayleaves, rights of way etc. will all be prominently sterilised.

It is important to understand that at the time when the option agreement is entered into, the Wind Farm company are only applying for planning permission and thus do not know the exact location of the turbines (as same may be subject to change during the planning process) Accordingly the option is usually a blanket over all the Farmers lands (or at least a good portion in the area of the proposed wind farm. Thus (and while the turbines might not take up a huge amount of ground once they are actually built,) the option effectively takes up all the ground (and will do so for as long as the option exists)

2. General Vagueness

The option agreement is for the placing of wind turbines on a farmer’s land at a location whereby planning permission is successful. This may not always be the location on the land which it is envisaged at first. For example, the wind farm company may point out a specific area where a number of turbines would be placed. The farmer might consider that this is a suitable area and does not affect the future plans for his land. In the future however it may be that the Planning Authority require the turbines to be moved to a different location and, if the option agreement allows, the wind farm company place the turbines anywhere on the lands (which the option agreements normally do) then this location can change to a point on the land which is most unsuitable for farmers. This needs to be borne in mind to avoid tying up areas of one’s land that would not be suitable. Such a move could for example, ruin a potential site.

3. Payment

The signing of an option agreement is always accompanied by the payment to the farmer of a sum of money in return for the agreement. However, we have noticed over the past 10 years that the amount being paid ranges from €1,000 to €5,000 / €10,000 in exceptional cases. One must consider whether such a payment is actually worth it given the fact that the land is effectively being sterilized for a period of 5-10 years.

4. Devaluation of Land

Wind farms generally cause a devaluation of lands and in particular the closer one gets to an actual turbine, the more the land can become devalued. Further, the land becomes heavily devalued in terms of selling sites, for obvious reasons. The farmer must therefore consider the monies being offered, not only for the option agreement, but also for the lease thereafter if the wind farm company is successful in obtaining its planning permission. At a very minimum the farmer should arrange to have professional valuations carried out on his land in a “before and after scenario”. A full cost ratio benefit analysis should be carried out.

5. Tax

It is also important to understand that the payment under an option agreement is subject to tax. Therefore whatever money is being received in return for the option agreement must have tax factored into same. The farmer must then decide whether the net figure being received is worth the effective sterilisation of his land for the period of the agreement and thereafter whether it is worth the leasing monies to be paid.

Furthermore the Irish Revenue Commissioners have indicated that farmers may not be able to avail of agricultural relief on lands, the subject of wind farms, by virtue of the fact that these lands may now be treated as commercial. Accordingly if a farmer is planning on transferring the property to a relative in the future then the tax implication could far outweigh any benefit financially being received by the farmer for the option agreement or indeed lease. We always strongly advise our clients to seek their accountants / tax advisors advice before entering such agreements.

Conclusion

In these hard economic times it can be most tempting to see the approach of a wind farm company as an unexpected turn of good fortune with a cash boost coming from same. While this may actually be the case for certain farmers, it is a situation that needs to be seriously considered given the potential ramifications involved and arising from any such option agreement being put in place. Clarke Jeffers Solicitors have over 10 years’ experience advising farmers on option agreements and leases in the wind farm industry and would of course be happy to talk to any farmer who is worried about the implications of signing such an option agreement.