A solar developer has written to me about my land – what happens next?
If you own agricultural land, particularly in East Anglia and The Fens, it is increasingly likely that a solar developer will have written to you, telephoned your land agent, or asked to meet to discuss a possible solar development. The first correspondence you receive will usually confirm that the developer has identified your land for possible development. This letter is the start of a commercial and legal process affecting the land, the farming business, existing tenancies, borrowing, tax planning and succession for decades.
At a time where many farms are looking at diversification, solar schemes can provide a valuable, relatively secure, income stream. They should not be treated as simply another farm tenancy. Formal documentation generally begins with a set of heads of terms which may set out the specific terms of an Option Agreement. It is only later that this becomes a lease if planning, grid and funding all come together. Often, the option stage is underestimated. This stage is an important one as it can restrict what you do with the land long before any development takes place or full rent is paid.
What does the developer actually want?
The developer is not usually asking to rent the land immediately. At the outset, a developer wants control of a potential site while it investigates whether a project is viable. That means that in effect the developer is making a reservation of the land while it carries out surveys, environmental work, grid discussions, planning work, design, funding and commercial negotiations. The developer may also need rights for cables, access, substations, batteries, monitoring equipment and biodiversity areas, not just the potential site.
The letter may refer to an Exclusivity Agreement. A short Exclusivity Agreement may simply prevent you negotiating with other developers for a period.
An option agreement is much more significant: it usually gives the developer the right, but not the obligation, to call for a lease if the required conditions are satisfied. This tends to be for a more substantial period of time compared to an Exclusivity Agreement and is generally a more complex document.
How long does the whole process take?
Every site is different, but a realistic journey is measured in years rather than months. Initial landowner discussions and heads of terms might take two to six months. Exclusivity is often requested for a period of up to 12 months. The option agreement may then run for a period of two to five years, with extension rights if planning or grid matters are delayed. Planning can take 12 to 24 months, and grid connection timetables can be a major cause of delay. If the option is exercised and the subsequent lease is completed, the construction may take around six to 12 months sometimes even longer depending on the size and complexity of the site.
In broad terms, a landowner might expect three to five years from the first approach to the lease beginning and full rent becoming payable, although some projects are faster and others stall or never proceed. It is important to negotiate milestones and long-stop dates, so the land is not tied up indefinitely while the developer decides whether to proceed.
What is an option agreement and what am I committing to by signing?
An option agreement is a binding contract. It normally gives the developer an exclusive right to require you to grant a lease of the land if certain conditions are met. These may include planning permission, an acceptable grid connection and funding approval. You are not usually promising that the project will be built, but you are commonly promising that, if the developer exercises the option properly and conditions are met, you will grant the lease on the agreed terms.
This is why the option is often the most underestimated document. The lease may be the document that lasts for 30 or 40 years, but the key commercial and legal points are often fixed when the option agreement is completed. Once the option has been signed, it can be very difficult to renegotiate the plan, rent mechanism, access routes, cable rights, decommissioning obligations, tax protections, termination rights or landlord controls. The safest approach is to treat the heads of terms and option as the point at which the deal is made, not as a harmless preliminary step.
What rent should I expect and how is it reviewed?
Market rent depends heavily on the site, it’s location, scale, grid position, planning risk, competition and whether battery storage or other infrastructure is included. The rent commencement date, minimum acreage, indexation, review formula, caps and collars, payment dates and compensation for retained land can materially affect the value of the deal and rent which is received.
Most leases provide for index-linked increases, commonly by reference to RPI or CPI, sometimes with caps.. A landowner should understand whether the review is annual or periodic, whether it is upwards-only, whether rent is calculated by acre, megawatt, installed capacity or a fixed site rent, and whether there is any separate rent for batteries, substations, grid compounds or cable corridors. A lower starting rent with robust indexation may outperform a superficially higher rent which is poorly reviewed.
What happens to my agricultural tenancy?
Existing occupiers must be considered at the very beginning. If the land is subject to a Farm Business Tenancy, Agricultural Holdings Act tenancy, grazing licence, contract farming arrangement or informal occupation, the developer will need certainty that vacant possession can be given when required. Some tenancies are relatively flexible; others can carry significant security, compensation or succession issues. A developer’s timetable may not align with agricultural notice periods, cropping plans or the tenant’s rights.
The landowner should not assume that a tenant can simply be moved before construction. If there is an agricultural tenancy, the parties need early advice on termination, surrender, compensation, diversification clauses, access for surveys and whether the tenant’s cooperation is needed for planning or grid works. The same applies where the farm is mortgaged. Lender consent will likely be required for the option, the lease, any easements, substation rights or any restriction affecting the value of the security.
What about Business Relief, Agricultural Property Relief, tax and succession?
Tax is one of the most important reasons to take advice before signing. A solar lease may change the character of the land from agricultural trading land to investment land, which can affect Agricultural Property Relief, Business Relief, capital gains tax planning, income tax and succession arrangements. The effect to your tax position is not a simple calculation and will depend on the ownership structure, farming arrangements, wider estate, partnership or company position, and any retained agricultural use such as grazing.
Landowners should involve their accountant and solicitor before the option is signed, not after the lease is ready for completion. The option itself can be a trigger point for succession planning because it may affect value, control, partnership expectations and the family’s long-term strategy. If the rent will pass to one generation while the capital value and tax risk sit with another, that needs to be understood and documented.
Who pays my legal fees?
It is usual for the developer to make a contribution to the landowner’s reasonable legal and professional costs, often including solicitors, land agents and sometimes tax advice. The amount and timing should be agreed in the heads of terms. Landowners should be wary of capped contributions that are too low for a complex option, lease, title review, tenancy analysis, mortgage consent, tax liaison and planning support. If the developer wants exclusivity, they will likely be prepared to fund the Landowner’s proper advice.
What happens at the end of the term?
A solar lease should deal clearly with decommissioning and reinstatement. At the end of the term, or earlier termination, the developer should be responsible for removing panels, frames, inverters, cabling, fencing, tools, tracks and other equipment, and for restoring the land to the agreed condition. The lease should specify what must be removed, what can remain only with the landowner’s consent, the timescale for removal, standards of reinstatement and remedies if the developer fails to comply.
Landowners should also consider financial security for decommissioning, such as a bond, parent company guarantee or funded reserve. This is particularly important because leases can run for 30 to 40 years, during which timeframe, the original developer may have assigned the project, refinanced it or ceased to exist.
How Fraser Dawbarns can help
Fraser Dawbarns advises farmers and landowners on renewable energy projects, agricultural tenancies, rural property, tax-sensitive land arrangements and succession planning. We can work with your land agent from the first letter and heads of terms, review exclusivity arrangements, negotiate the option and lease, deal with lenders and tenants, and help ensure that the commercial opportunity does not create avoidable problems for the wider farming business or family estate.
If you have been approached by a solar developer, take advice before signing anything. Early advice can help you understand what the developer wants, what your land is worth, what risks need managing, and which points should be negotiated firmly before the opportunity moves on.
How To Contact Us:
To contact a member of our team, you can fill in our online enquiry form, email info@fraserdawbarns.com, or call your nearest office below. If you’d like to speak to a member of our team at one of our offices across Norfolk and Cambridgeshire, visit our offices page.
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This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances. Fraser Dawbarns LLP is always happy to provide such advice.