5 roles to remember as an institutional landowner when renewing your lease

Institutional landowners sometimes struggle with renewing leases for renewable energy sites. Sometimes, it is almost 30 years since the last time the lease was renewed, so it always pays dividends to get an expert team on-side when it comes time for renewal.

Usually, the team involved with the renegotiations is not the team that negotiated the original contract, so it can feel quite daunting! But when it comes to deciding the future of the project, organisations should use as many in-house team members as possible to help out.

This allows you to:

·       Draw on colleagues’ expertise to achieve best terms

·       Increase everyone’s familiarity and confidence in dealing with the project

·       Reduce costs

When we work with institutional landowners, we take care of the renegotiations, filling in gaps where needed whilst providing key data and financial reporting. Since projects can last for decades, it’s important to maximise the returns from the renewable energy project during the lease renewal process.

But who are the vital in-house team members that organisations need to call upon at this time?

The finance team

In our experience, the finance team is an underused asset during renegotiations.  

Firstly, they should be involved with reviewing your organisation’s rents so they are certain that they are fully up to date, in preparation for the lease renewal. This needs to be a full payment audit rather than just checking to see if payments have been made.

The finance team can also look at the financial viability of the project, even assessing who the new tenant will be and if they are financially secure. The goal is to ensure your organisation enters a lease with a company that can fulfil its financial obligations and operate the project as well as (or better than) other operators in the market.

If the company is considering bringing the project in-house then the finance team will be able to do a cost-benefit analysis of the plans to see if it is commercially viable to do this.

They will be able to look at the costings and budget and ascertain if there are sufficient funds available to carry out the works. All of these things will also need to be demonstrated if it decides to move away from the current operator that has a protected business tenancy (i.e. security of tenure).

The legal team

The legal team usually needs to start looking at contracts more than twelve months before the end of the lease. This gives them time to:

Serve a notice

If this is what your organisation decides to do, there are very specific time limits on the process and it’s important that the tenant does not stay on site after the lease has lapsed with no official agreement, as then there is the risk that they could acquire greater security under the Landlord and Tenant Act 1954, which then makes removing the tenant from the site difficult, in the event that you wish to change operators or bring the project in-house.

Renegotiate the lease agreement

Renegotiations can last for a long time. This is a specialist area of law and so the legal team is another crucial piece of the puzzle.

The legal team can also review any appropriate paperwork and ensure that the lease is fully compliant with current law and that parties agree on all key terms and definitions in the new lease.

They will also be able to help the site operator by providing site plans that are land registry compliant. This will be required for leases that are renewed, and the legal team will also be responsible for exchanging and registering the new documents. As you can see, they play a crucial role in the process of renewing!

The inhouse land agent

If your organisation has an in-house land agent, they can be really helpful. Large-scale renewable energy projects often require planning permission.

Your land agent colleagues can take these matters on and apply for all the necessary permissions, ensuring that these are done correctly and within deadlines. They may also need to check for unusual conditions being met, for example:

·       A project having to be a certain distance from a cliff edge

·       Highways needing to be restored after they were used to build projects

They are also able to look at terms that need to be agreed upon, including the rent. In-house land agents should have good knowledge of current market rents - the wider the better! We always advise a data-led approach. For example, they should know how much rents other renewable projects are being paid across the UK.

When assessing the market, we typically suggest reviewing a minimum of 60 comparable UK sites, noticing any trends and what key terms are being added to new renewable projects of the same technology - especially as we’re coming up to the post-subsidy era. This can also be built into the new contracts and how these contracts will look will be very different from how they looked 20 years or. More ago when the previous lease was drawn up.

The expertise of an in-house land agent is invaluable at this stage.

The in-house procurement team

Your procurement team can be helpful in advertising any new contract that the organisation has available relating to the renewable energy project. For example, when a project contract comes to an end, they can compare and assess the best value from a range of potential new site operators. Putting the project out to tender will help in ensuring the best value is being obtained.

The strict criteria the team uses for assessment will include things such as the rent that new operators are willing to pay vs. the quality of service that would be received.

The team can also put together a business case and liaise with external consultants to help them understand the value of the project and to clearly present a case to senior management, conveying what can be done with the project going forward. Again, here a data-driven approach is essential, and scanning the market and comparing the bids that are received is equally as important.

The specialist consultant

In the run-up to the end of the current project, it’s advisable for the company to seek advice from an external specialist or independent consultant.

The input of your finance team and whether or not your organisation has an in-house land agent, will determine how much assistance is required from a specialist consultant, and the specific areas where a specialist or consultant can help.

For example, these consultants can assist in putting a monetary value on the project. For this, data is key. It may involve the consultant looking at the project and its future, assessing its commercial viability. The process can involve looking at the historical performance of the site, identifying seasonal trends, and exploring other projects across the UK with similar characteristics. The consultant should then use this data to forecast what the future output of the site could be over the next 10 or more years, and what the likely income will be from the project.

Once the monetary value of a site has been determined, they can then assess whether it would be worth going forward with the project compared to what it would cost your organisation to run it.

If a decision is made to bring the project in-house, the consultant should be able to:

1.     Obtain an environmental permit and/or any other necessary consents to operate the project

2.     Secure government subsidies: sites can receive substantial amounts of subsidies from the government, which has historically been an important part of the commercial viability of renewable energy projects. There are strict rules, however. If a project comes to an end and is decommissioned then it could lose its entitlement to government subsidy, so the consultant should carefully plan and liaise with Ofgem so that the subsidy is preserved if and when the project is transferred in-house.

3.     Ensure the continuation of the sale of electricity to the grid. Similarly, they should liaise with the local network operator so they have continued connection to the National Grid and are able to continue to sell the electricity once the project has transferred in-house.

Organisations may also need to demonstrate to the relevant authorities such as the network operator that they have the in-house expertise to run the project, and consultants can help with this and/or to help in setting up an agreement for certain elements to be overseen by a third party.

The takeaway

When renegotiating renewable energy projects, the earlier you start preparing, the better – and the more options you’ll have available. Be strategic and start looking at options far earlier than you think you need to.

If you’re thinking of changing site operators then ensure that there is plenty of time for reviewing alternative options and planning. Please also be aware that following the COVID-19 pandemic, certain permits are taking up to a year to achieve, and therefore planning ahead is absolutely paramount.

To get the best out of your site renegotiations, take a data-driven approach. Chances are, things have moved on significantly since your organisation last negotiated its contract.

If you need any advice, the Lumify Energy team are always happy to have a chat with you.