Negotiating a Solar Lease on Your Land
Q: I’ve been contacted by a company wanting to enact a solar lease on my land. What issues do I need to be aware of?
A: As always, I highly recommend that landowners consult an experienced attorney to review any lease agreement, including a solar lease, before it’s signed.
As Stamford, Texas attorney James Decker explained, “We’re still early in the era of solar energy development in Texas. Lease rates appear very enticing, particularly when commodity prices are low, but landowners should seek advice from straightforward, practical-minded legal counsel to minimize unintended consequences and avoid a deal that’s ‘too good to be true.’”
Additionally, there are a number of legal issues for landowners to consider as they evaluate a solar lease. This article examines only a few of these.
Rights of mineral owners
An important consideration for both landowners and solar companies is the status of the mineral estate beneath the land being considered for a solar project. Under Texas law, the mineral owner has the right to use as much of the surface estate as is reasonably necessary to produce oil and gas. This includes building drill pads, preparing roads, installing pipelines and drilling injection wells. Not surprisingly, this poses a major concern for solar lessees looking to put in a solar facility on the same land. Solar companies will likely carefully analyze the status of the mineral estate including how many ownership interests exist in the estate and whether a mineral lease is currently in place.
Solar leases usually are not short duration
Typical solar lease agreements last between 20 to 30 years. These leases tie up property for a significant period of time, so it’s important to carefully evaluate the lease terms.
Typically, there are two phases to a solar lease: development/construction and operations. The development period involves testing to see if the project likely will work, conducting environmental studies, analyzing transmission capabilities and gathering other information. The operations phase, on the other hand, occurs when the project actually begins producing and selling energy.
When reviewing draft leases, one should pay careful attention to how these phases are defined and what is required to move from the development to the operations phase.
Royalties are not common in solar leases
Unlike oil and gas lease agreements, it’s uncommon for a solar lease agreement to set forth a royalty as the payment method. Instead, annual payment terms are usually defined in dollars per acre.
Commonly, the price offered is lower in the development phase and higher during the operations phase. This makes sense, as there should be income generated during the operations period, while the same is not true during the development phase.
Solar leases likely will prevent any other property use
As a Texan, it’s likely you’ve 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, it’s quite possible for the surface owner to conduct an agricultural operation even while the oil, gas or wind production exists.
The same may not be true for solar leases. Often, a solar farm requires numerous permanent panels that will prevent other surface uses.
Based on this, landowners evaluating solar leases should usually assume the lease payment will be the only income for the property and negotiate accordingly.
A solar project could impact special tax use valuation eligibility
In Texas many rural landowners take advantage of the special tax valuation available for agriculture or wildlife management. If a landowner meets the criteria, the special use valuation allows the property taxes to be calculated based on a percentage of its production capacity versus the fair market value of the land, which is usually much greater. A solar project could impact the ability for property to qualify for this special use valuation.
If that is the 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 be years before the property can quality for ag or open space valuation again.
Landowners should visit with their local appraisal district to determine how solar projects are treated with regard to special use valuation. It’s important 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.
Disclaimer: This article is for educational purposes only and not intended to provide any specific legal advice and does not create an attorney-client relationship between you and the author.
Tiffany Dowell Lashmet grew up on her family’s farm and ranch in northeastern New Mexico. She holds a bachelor’s degree in Agribusiness (Farm and Ranch Management) from Oklahoma State University and a law degree from the University of New Mexico. She is licensed to practice in Texas and New Mexico.
These questions are compiled on her blog, “Questions from Tiffany’s Desk.”
SUBMIT A QUESTION: Tiffany.DowellLashmet@ag.tamu.edu.
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by Tiffany Dowell Lashmet
Ag Law Specialist
Texas A&M AgriLife Extension Service