A Landowner's Legal Introduction to Wind Energy Leases

Dutch windmills have produced mechanical power with wind energy for centuries. U.S. interest in electrical power production utilizing wind energy began in the 1980s. Numerous legal and public policy issues surround the erection of large electrical producing turbine wind farms. These issues include tax credits and other economic considerations, regulatory issues, construction financing, the availability and construction of transmission lines, competition from oil and gas, environmental concerns such as bird strikes and the variable nature of wind and weather (an average wind speed of 13 miles per hour is said to be necessary to power the large turbines), and the physical construction of the turbines themselves with substations, maintenance and communication facilities, and roads. There are a number of excellent online resources concerning wind energy and related agreements. This comment provides a brief and incomplete educational overview of only the landowner's side of legal issues related to a wind turbine farm. Always consult experienced legal and engineering professionals in specific situations.

Typically about one acre of land is required to physically locate each turbine but additionally from 40 to 60 acres of unobstructed land is required to have access to the wind. Related infrastructure requires additional land. While land might be purchased, this is an additional expense to a developer and most of the land in the wind farm may be used for other, frequently agricultural, purposes. Some states prohibit by statute the sale of wind rights apart from the surface, and this is a developing legal area. Would wind rights or surface rights dominate and may the surface owner be restricted from uses that might interfere with wind energy development? Conventional legal wisdom suggests not to sever wind rights from the surface. Hence, most projects are based upon leases or easements. State statutes and taxation issues must be reviewed to determine whether a lease or easement is best in a given jurisdiction. This comment briefly focuses on leases but one must consult an experienced wind energy attorney to determine the best approach.

From the landowner's perspective, an option to lease, either as a separate document or contained within the ultimate lease document, typically begins the process. The option frequently pays the landowner a fee per acre. The amount varies depending upon the location and competition from other potential developers. A prudent landowner will want a provision that neither the option nor final agreement may be assigned or otherwise transferred to a third party without the landowner's written approval. A landowner must carefully exercise due diligence throughout the leasing process.

All wind energy lease provisions are subject to negotiation. Be thoughtful and complete. For example, the landowner may want the developer to pay for the landowner's attorney to review all agreements. The developer will desire a lease term of approximately 35 years at a minimum with perhaps an extension period. Financial compensation may take many forms including the initial option payment, bonus payments at signing, installment payments during the construction process, and royalty and electrical production payments. Royalties are somewhat like those in oil and gas production and are based on a percentage of gross revenue, with anywhere from 4 to 10 percent being found in the wind energy business. The landowner must carefully note the definition of "gross revenue" and should negotiate for a percentage not only electricity sales but other funds and income streams such as energy credits, business interruption insurance proceeds, damages, etc. Consult an experienced wind energy attorney.

Sometimes instead of royalties, the landowner is paid a fixed amount (inflation adjusted). Additional landowner revenues include a guaranteed number of turbines being constructed (phantom turbine payments cover unconstructed turbines), with minimum payments, substation fees, and transmission line and road fees. Compensation for loss of hunting and recreational revenue, crop damages, and loss of various governmental crop subsidies should also be included in the wind energy lease. The landowner will want the developer to pay any taxes and tax increases associated with the project. Taxation issues related to the payments to the landowner must be reviewed by a tax professional.

The landowner will want some say in the physical placement and appearance of the turbines and supporting infrastructure. Provisions concerning initial paint colors and repainting when needed may be included. The wind energy lease might state that there will be no development within 1,000 feet of an existing house or barn. Considerable surveying will be required to fix the location and legal descriptions. The landowner will want copies of the surveys.

The landowner will want a provision providing a mandatory release of unused land. This must be carefully written to protect both the landowner and developer. The landowner will want the right to use the property for the same purposes as those before the wind farm was constructed. Additionally, the landowner will want a broad set of retained rights such as farming, ranching, hunting and recreational uses, and mineral development. At the same time, the landowner will want to restrict the developer's uses of the premises. Mineral owners may potentially have superior rights to utilize the surface of the property and this must be reviewed in advance of any wind farm project. The developer will not want future uses of the premises that interfere with the wind. A landowner may wish to negotiate project "milestones" so that the property is either developed to completion or released.

Negotiation will address the overhang into the airspace of the leased premises of turbine blades that are located off premises, the right, if any, to utilize gravel, caliche and water, and easements for the noise, shadow flicker, vibration, and interference with electronic signals that the project will produce.

The landowner will want wind lease provisions addressing damages to livestock, crops, and fences and provisions requiring that gates be kept closed and locked, roads maintained, etc. These may be lengthy and detailed. The developer should submit to the landowner an annual certificate of insurance coverage. The landowner will want to be indemnified for the expenses associated with lawsuits by neighbors asserting nuisance, etc. The developer will want the right to acquire either outright land ownership or easements for transmission lines, as utility companies may require. All of this and more may be negotiated.

The landowner may want copies of wind resource information related to the site and the developer will want a confidentiality provision in the lease. A variety of other provisions such as the types and amounts of insurance, audit rights, hazardous materials usage, storage, and disposal (gear oil, for example, may contain toxins), compliance with the law and regulations, anti-assignment provisions, and condemnation provisions are common. Condemnation may involve a variety of situations including such possibilities as highway construction and environmental regulations.

Funding to decommission the project at the end of its useful life and remove the turbines, etc., and restore the land must be carefully and thoroughly considered. Besides the removal of the turbines and related infrastructure, the landowner may want a say in what is done with the concrete bases and roads. Perhaps they may be repurposed or perhaps removal is necessary. Funding options include cash funding or requiring a bond from a reputable financial institution. This amount will require inflation adjustment. The developer's potential bankruptcy must be considered.

While a "standard" wind energy lease form has developed, it is worth repeating that virtually every provision is subject to negotiation. Determine precisely what your unique state statutes require and how they may limit lease provisions. For example, state statutes may mandate that an easement agreement be recorded in the public records. Statutes may mandate that development occur within a specified period of years or the agreement automatically terminates. Again, consult an experienced wind energy attorney.

This comment provides a brief and incomplete educational overview of a complex subject and is not intended to provide legal, taxation, or engineering advice. Always consult experienced legal, taxation and engineering professionals in specific wind energy situations.