Recently, there has been several Texas landowners who have been contacted by solar companies seeking to lease agricultural land for solar projects. Surprisingly, there is little information available for landowners considering the pros and cons of entering into a solar lease agreement. This article will discuss some of the important considerations for landowners considering and/or negotiating a solar lease.
Which Estate Does the Sun Belong?
The Texas Supreme Court has never ruled on whether or not the sun is part of the surface or mineral estate. The majority—if not all—of legal scholars assume that the Court would hold that solar rights belong to the surface owner, making that individual the one who has the right to enter into and negotiate solar lease agreements. This can, of course, be modified by agreement between the parties. For instance, assume that Adam owns both surface and mineral rights of a piece of land. He enters into an agreement to sell the land to Beth, but he reserves solar leasing rights. If that occurred, even though Beth would own the surface of the land, Adam, rather than Beth, would own the solar rights.
The fact that solar is likely part of the surface state is critical from a legal standpoint with regard to implied rights. As between surface and mineral estates, the mineral estate is dominate under Texas law. Therefore, a mineral owner has the right to utilize as much of the surface as is reasonably necessary to produce minerals, without permission from or payment to the surface owner. This is not the case, however, for other surface substances. One surface substance is not dominate over others, so the implied right of use does not exist. For instance, assume an oil company leaves oil rights to a piece of property. Oil rights are part of the mineral estate, so the oil company would have the implied right to use the surface to produce the minerals, even if the lease was silent on the issue. However, if a solar company leased solar rights, all of their rights would need to be set forth in the lease agreement because no implied rights would exist since solar is not part of the mineral estate.
This issue raises a variety of other questions, including whether the accommodation doctrine might protect an existing solar project and how the duty owed by an executive rights holder to a non-participating royalty owner could be impacted. It is crucial to seek to avoid these issues and draft lease provisions to protect the landowner as much as possible.
Rights of Mineral Owners
Another key consideration for both landowners and solar companies is the status of the mineral estate under the land being consider for a solar project. As mentioned above, because the mineral estate is dominate in Texas, the mineral owner has the right to utilize as much of the surface estate as is reasonably necessary to produce oil and gas, including building drill pads, preparing roads, installing pipelines and drilling injection wells. Not surprisingly, this raises a major concern for solar lessees searching to put in a solar facility on the same land. Solar companies will likely analyze the status of the mineral estate carefully including how many ownership interests exist in the estate and whether a lease agreement is currently in place. Landowners should make sure not to agree to serve as a type of “middle man” or negotiator between solar and mineral lessees, especially if they have no relationship with the mineral owners.
Solar Leases are Generally not Short in Duration
According to a Texas attorney who often represents solar companies in lease agreement negotiations, these lease agreements usually last between 20-30 years. These leases tie up property for a significant period of time, so it is crucial to carefully evaluate the lease terms. Generally, there are two phases to a solar lease: development/construction and operations. The development phase involves testing to see if the project will likely work, conducting environmental studies, analyzing transmission capabilities and other information gathering. Conversely, the operations phase occurs when the project actually begins producing and selling energy. When reviewing draft leases, it is important to pay careful attention to how these phases are defined and what is required to occur to move from the development to the operations phase.
Royalties are not Common in Solar Leases
Unlike oil and gas lease agreements, it is uncommon for a solar lease agreement to set forth a royalty as the payment method. Annual payment terms are, instead, typically defined in dollars per acre. The price offered is commonly lowered in the development phase and higher during the operations phase, which makes sense as there should be income generated during the operations phase. The same is not true during the development phase. Rental rates are generally lower in the development phase, so a landowner has reason to want that phase to be as short as possible in the lease agreement.
Solar Leases will Likely Prevent Any Other Use of the Property
Most of us in Texas have likely driven by a piece of property and seen a tractor farming around oil pump jacks or cattle grazing beneath wind turbines. Because of how oil, gas and wind production occurs, its is quite likely for the surface owner to make agricultural uses of the property even during the time while the oil, gas or wind lease exists. However, the same is often not true for solar leases. A solar farm frequently requires a number of continuously placed panels that would prevent other uses to be made of the surface of the land. Therefore, landowners evaluating solar leases should typically assume the lease payment will be the only income for the property and negotiate accordingly.
Watch for Prohibitions on Use of Other Properties
A term is often included in draft solar agreements is a requirement that the landowner does not construct anything that could impact the sunlight flowing to the solar project. Not only could this impact the land where the solar panels are located, but it can also impact neighboring land owned by the landowner. Similarly, some solar leases attempt to limit specific agricultural operations, such as crop dusting. Landowners should consider carefully whether these types of prohibitions could be problematic for their operations.
A Solar Project Could Impact Special Tax use Valuation Eligibility
Many rural landowners in Texas take advantage of the special tax valuation available for agriculture or open space land. If a landowner meets the criteria, the special use valuation allows the property taxes to be calculated based on a percentage of its productive capacity versus the fair market value of the land, which is typically much greater. The ability for property to qualify for this special use valuation could be impacted by a solar project. In this case, a host of issues arise, including a rollback period where the landowner may owe the difference between the normal tax value and the modified value paid. Importantly, even after the solar project has left the land, it could take years before the property can qualify for agricultural or open space valuation again. Landowners should discuss with the local appraisal district to determine how solar projects are treated with regard to special use valuation. It is crucial that landowners include a term in the solar lease agreement whereby the solar company covers any additional real property taxes owed as a result of the solar project and that the solar company pays for any personal property taxes on the solar equipment.
Landowners Should Watch for These Common Legal Technicalities
The majority of contracts include what several farmers would call “a bunch of legal mumbo jumbo.” However, there are a few of those technical legal terms that landowners should watch out for in solar agreements.
Guarantee of Title
Guarantee of Title is commonly included in lessee-drafted oil and gas contracts. Solar contracts sometimes include a term whereby the landowner guarantees or warrants good title to the property. This term should be deleted as the company is in a better position to investigate deed records and determine ownership of the property.
Confidentiality clauses are sometimes included by solar companies in a lease agreement that prohibits the landowner from discussing or disclosing the terms of his or her lease agreement with others. Landowners should consider rejecting this type of clause so that they have the ability to discuss with their neighbors and work together to obtain the best possible lease terms.
Often times, a contract will contain a forum clause which identifies the location where a dispute would be heard. For instance, a lease might provide that “Any and all disputes over this agreement will be heard in New York City, the principal place of business of the solar company.” There are a few reasons why a Texas landowner would not want to agree to this clause. Firstly, he or she does not want to be flying to NYC every time a meeting, hearing or deposition might be scheduled. Secondly, the landowner wants home field advantage, including a judge and jury pool of his or her peers who live in the area. Although under the law, the majority of real property disputes are properly resolved where the land is located, the court will typically enforce this type of forum clause if the parties agreed.
Attorney Fee Provisions
In the U.S., the general rule of thumb is that each party in a legal dispute pays for his own attorney fees, win or lose. One way this can be changed is by contractual agreement, so some lease agreements including attorney fee provisions providing that the winning party may recover reasonably attorney’s fees from the unsuccessful party. Be careful to make sure that the provision is reciprocal. Companies will sometimes sneak in a provision that allows them to recover fees if successful, but includes nothing about the landowner’s right to do the same.
Dispute Resolution Clauses
Today, nearly all contracts include some form of a dispute resolution clause. These clauses can certainly be useful in helping to quickly resolve disputes and avoid expensive litigation, but they can also waive certain rights of the parties involved. If a solar agreement contains a dispute resolution clause, the landowner should determine if the agreement provides for mediation or arbitration and ensure he or she understands the pros and cons of each before agreeing to this provision.
MAS Field Services is a field service company within the energy industry eager to be a part of the ever expanding goal of American energy independence. Whether it’s title for minerals on an oil and gas or solar project, leasing large acreage for a wind farm, or obtaining right of ways for long haul transmission and pipelines, MAS can get the right people in the right place. We are excited to tap the local oil and gas reserves needed to keep our way of life moving forward, capture the overwhelming wind and solar resources on local soil needed to help power America, and tackle the challenge of bringing those resources from production to consumption. Contact us with the link below for more information!