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Power points and positive rights

15 October 12

Leases of land for wind or other renewable energy generation need to contain safeguards against interference with the energy source. How can these best be made legally effective?

by Nick Mackay

In all leases there is a balance to be struck between the extent of the tenant’s rights and the landlord’s reserved rights. This article considers how wind farm leases deal with the “wind protection zone” around wind turbines, commenting on the legal context and the practical implications for landowners and developers. Similar considerations apply to hydroelectric projects where the developer wishes to ensure that its rights in relation to the entire water catchment are properly safeguarded.

There are two broad approaches when drafting a wind farm lease. The first is for the “leased subjects” to compromise solely the sites of the infrastructure within the development, as illustrated in figure 1 below. This sort of arrangement is often referred to as a “spots and strips lease”. Here the wind protection zone (“WPZ”) does not form part of the leased subjects.

The WPZ is the area within which the tenant is able to limit the height of vegetation, buildings and other obstructions so as to maximise wind flow to the turbines. Depending on topography and size of turbine, the WPZ can extend up to 750m radius from each turbine. The WPZ is ancillary to the leased subjects in the sense that the tenant can typically only enforce negative restraints on activity within the WPZ. This contrasts with the tenant’s right of access to the leased subjects: while that access route is also ancillary to the leased subjects, the tenant is given a positive ancillary right to take access.

The alternative approach is for the developer to lease the WPZ as well as the project infrastructure sites. If there are a number of turbines, the areas around the turbines are likely to intersect to produce one large contiguous area, as shown in figure 2.

Common ground?

From the developer’s perspective, the wind resource is vital to the success of any wind project. Interference with the wind resource can have a major impact on project economics. Most commercial scale turbines come with the benefit of a performance warranty, but such warranty will be conditional on the wind resource being adequately safeguarded. Additionally, project funders will insist on adequate protection for the wind resource as part of their due diligence process. It is therefore not enough for a developer to lease sufficient land for the turbines and other infrastructure and forget about what happens upwind.

On the landowner’s side, many successful wind energy projects are sited on farming and estate land. There may be existing sporting activities as well as farming, forestry and other estate operations. Landowners and their advisers therefore seek to minimise the extent to which such activities are impeded by the wind turbine(s). Further, landowners often consider that there is a significant risk in tying up large areas of their land for a project over which they have relatively little control and which they cannot be certain will be successful.

However in many respects the interests of the developer and landowner are aligned. Maximisation of wind yield maximises landowner (rental) income. Additionally there are many uses of the land within the WPZ which will be perfectly acceptable to the developer. Grazing of livestock and arable use of the land are likely to present no difficulty (post construction), and even re-stocking with forestry may be acceptable to the developer.

Safeguarding the WPZ

Unquestionably the safest route for developers and project funders is for the leased subjects to include the WPZ, as per figure 2. This confers a positive right on the tenant to occupy the land and, subject to the landlord’s reserved rights, to exclude others. Upon registration of the lease the tenant obtains a real right over the WPZ. If any part of the leased subjects is sold, the lease automatically binds the purchaser of the part that is sold.

It is more difficult to find authority to justify the position if the developer leases only “spots and strips”, as per figure 1. While the developer gains the real right of lease over the project infrastructure land, the status of ancillary rights, both positive and negative, over the WPZ is less clear. If part of the WPZ is sold off by the landowner, can the developer be certain that it will be able to enforce its ancillary leasehold rights against the new owner? The purchaser may receive no share of wind farm income, notwithstanding that the ancillary (WPZ) rights will be noted on his title. While the purchaser will be deemed to know about the developer’s rights, there remains uncertainty over the extent to which a developer could enforce such ancillary rights against a new landowner.

Those who are more pessimistic about the continuance of the ancillary rights may refer to the body of case law dealing with clauses in leases that were deemed not to be inter naturalia (“among the natural elements”) of the lease. In The Advice Centre for Mortgages Ltd v McNicoll [2006] CSOH 58 Lord Drummond Young stated that an option to purchase contained in a lease is not inter naturalia and will not generally be enforceable against singular successors. Such an option to purchase was a personal right that was not transferred along with the lease.

It follows that there may be uncertainty as to whether an ancillary lease right, which has been divorced from the main lease, continues to be fully enforceable by successor parties. Such uncertainty does not sit comfortably with project shareholders and funders.

Accordingly, in cases where landowners insist on a “spots and strips” lease, it is common for developers to ask the landowner to grant a standard security over the WPZ, thus creating a real right in favour of the tenant via another route. This can however have its own complexities, and there are doubts as to whether it is competent to secure a purely negative restraint. Further, many landowners are reluctant to grant securities, knowing that it may complicate the process of securing loan finance in the future. Ranking of securities, existing and future, requires to be addressed. Considerable delays can be experienced, particularly where the landowner’s bank struggles to understand the issues.

However it is clear that tenants can benefit from positive ancillary rights such as access. For instance, a tenant in a first floor flat holds an ancillary leasehold access right over the stairwell and ground floor close. That right remains enforceable even if the owner of the building sells the stairwell and ground floor to a third party. Therefore, while it may be difficult to justify ancillary leasehold restraints that are akin to negative servitudes, there may be an alternative whereby the wind farm tenant is given a positive right to enter the WPZ and remove offending growth or structures. Such a positive ancillary right is much more likely to be deemed enforceable against successors in title.

From the outset

The prospect of leasing large areas of land to a wind farm developer is initially unappealing to many landowners. However, if the extent of the landowner’s reserved rights is properly discussed at an early stage, the lease can potentially balance the interests of the parties in a manner that is acceptable to both. The legal status of the WPZ in particular should be carefully considered from an early point in negotiations. Solicitors who receive heads of terms that provide little or no clarity regarding the legal status of the WPZ are encouraged to seek early clarification of this important issue before the first draft lease is produced.

Nick Mackay, Head of Legal & Commercial, Force 9 Energy, Glasgow
The writer is grateful to Professor Roderick Paisley for his helpful comments in reviewing this article.

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