Option Agreements for Solar Farms: A Guide for Landowners
 Topic: developing solar projects |  Read Time: 10 mins |
 Landowner type:Independent landowners | Institutional landowners |  Energy: Solar |
26th January 2024If you’re a landowner looking to understand the ins and outs of option agreements for solar farms, you’re in the right place. I’ll walk you through everything you need to know about reserving your land for a potential renewable energy project.
Has a developer approached you about optioning your land for a solar farm project? If so, you’ll want to read on.
The early stages of a solar energy project can feel overwhelming, and the first step is often an option agreement that secures the land for development.
If you’re unsure what an option agreement is (or want guidance on what to consider before signing), let me guide you through it.
In this in-depth rundown of option agreements for solar farms, I’ll cover:
- What an option agreement is
- How option agreements work
- Benefits of option agreements
- Pitfalls of signing an option agreement
- Things you should consider before signing an option agreement
So, let’s get started.
What is a Solar Farm Option Agreement and How Does It Work?
A solar farm option agreement is a contract between a landowner and a renewable energy project developer.
It reserves the land for five to 10 years and allows the developer to conduct feasibility studies and assessments to determine the site’s suitability.
This period also gives the developer a chance to:
- Carry out a Wildlife Impact Assessment
- Seek planning permission
- Set up a Grid connection (or at least get the process started)
- Finance the project through external investment
- Draw up an appropriate lease agreement for the final project
After the option period, the developer can enter into a formal development contract. If this happens, the project will move into the construction phase, followed by ongoing monitoring and maintenance.
However, it’s essential to recognise that an option agreement doesn’t always lead to a full-scale project. Option agreements are conditional contracts, meaning that they can fall through at any time.
This failure to launch might be due to land suitability or issues with planning permission or Grid connection.
To reserve the land, developers may offer the landowner a set, pre-agreed fee. This fee can range from a small lump sum to as much as £30,000 or more, depending on the land’s potential and the terms you are able to negotiate.
Over the years, my team and I have managed to negotiate holding payments of up to £50,000 to sweeten the initial deal for landowners.
For a successful negotiation, come to the table armed with current market rates and accurate data about your site. This can give you the upper hand in securing a fair and beneficial agreement for both parties.
How Long Does an Option Agreement Typically Run For?
The exact length of option agreements for solar farms can vary hugely. In some cases, they can be as short as one or two years, or as long as 10 years.
If you’re dealing with a longer option agreement, it’s always worth asking your developer for a clear timeline of their plans.
This will ensure you are kept informed about planning developments and can manage your expectations as time goes on.
Why Should Landowners Sign an Option Agreement for a New Solar Project?
As solar farms are starting to receive more planning approvals, developers are actively seeking suitable land for projects. This makes now a great time to sign an option agreement if you want to secure a profitable project on your land in the near future.
If you plan to host a solar project, you have very little to lose by signing an option agreement with a decent developer. By doing so, you can show a developer that you’re serious about taking things further.
A landowner’s role during the option stage couldn’t be more straightforward. While you won’t be able to alter your land at all, you simply wait for the developer to conduct relevant studies and secure the required approvals.
The average option agreement will usually allow landowners to continue using their property for rural and domestic purposes.
So, there’s very little to lose and a lot to gain by reserving your land for a solar project.
What are the Downfalls of an Option Agreement (& Common Mistakes Landowners Make)?
Unclear lease terms that don’t clearly define responsibilities
If you’ve never signed an option agreement for a solar farm before, you might not understand what it entails. The terms of the option agreement will often carry over to the final lease (and be tricky to amend later on). So, it’s important to get things right at the start of any project.
One of the significant clauses that may trip landowners up is that some agreements can include a confidentiality clause. This clause prevents landowners from discussing the terms of the lease or project with other parties. However, this doesn’t mean that landowners aren’t allowed to speak to professional advisers (including accountants, solicitors and land agents).
In my position as a chartered accountant, I advise landowners against diving into any agreement without consulting an expert. So, don’t be afraid to discuss this with your developer in the early stages.
If the developer refuses to reconsider the terms of the agreement (whether it’s related to confidentiality or not), it’s worth rethinking the relationship.
While these confidentiality clauses aren’t necessarily dealbreakers, it’s essential you’re not putting yourself at risk of legal complications. Be careful and double-check that all the contract terms align with your interests and you understand what is expected.
Not knowing who you’re working with
Many renewable energy projects are marketed to landowners through intermediaries, meaning the individuals that you deal with in the initial stages of the process may not be the ones involved in the later stages.
While this doesn’t always spell disaster, it can create confusion, especially if landowners think they’re dealing with a local developer, only to discover they’re speaking with a middleman representing third-party developers.
This can lead to challenges if the developer you end up with is difficult to work with.
To avoid such issues, I recommend vetting your potential developer carefully and ensuring you know exactly who you’re working with.
Poorly worded terms that lead to a poor final agreement
I’m not suggesting that all landowners walk away from the negotiating table with poor terms, but many landowners end up signing 30 or 40-year leases that include unclear terms from their initial option agreements.
For example, some option agreements may include an arbitrary rental income percentage without considering current market rates or inflation. This oversight can result in a real-terms income cut for landowners.
This isn’t because developers are trying to exploit landowners; it is often an oversight. Many developers will simply consult their current portfolio and offer a ballpark figure that they think is suitable.
I’ve also seen instances where unclear payment terms have led to enormous underpayments.
This can occur if there are terms in the lease specifying that payments are sent to a sister company before being paid to the landowner. This can reduce a landowner’s payments significantly. For example, if a unit of energy is sold for £100, the income might first pass through a sister company, and only a reduced amount is sent on to the landowner. The potential lost income here can be substantial.
Aside from payments, it’s also important to recognise that option agreements typically last between five and 10 years. It’s essential to carefully read the terms of your agreement and ensure you know how long your land will be tied up.
Things to Consider Before Signing a Solar Option Agreement
Speak to experts
You might be a fan of going it alone, but you should always consult a legal and finance team before signing on the dotted line of any contract. These experts can break down the minutiae of your option agreement and offer financial, commercial and legal insight into each contract clause.
You should also consult land agents who can inform you about the site’s potential. Your accountant can offer excellent advice on payment arrangements and they should be able to forecast the project’s future value.
Pairing these experts with up-to-date market research will give you a valuable big-picture overview of the project. This approach will help you to negotiate a better offer with increased confidence.
Experts can help address major concerns like:
- Who’s responsible for paying legal fees
- The length of the option period
- How the site will be used
- Relevant option fees if the option period is extended
- Exclusivity terms
- Obligations for each party
- Payment terms
Don’t be afraid to do your research
Doing thorough market research before signing option agreements for solar farms is essential.
Reputable developers should never pressure you into signing quickly. But they’ll be acutely aware that time is of the essence when securing Grid connection and applying for planning permission.
They may try to push through a standard contract that worked for a previous project. However, it’s crucial to grasp the true earning potential of your site before signing. Otherwise, you could be overlooking its value. And as I always say – if you fail to prepare, you should prepare to fail.
It’s an excellent idea to come to the negotiating table prepared with everything from accurate acreage readings to irradiation measurements. If you can, gathering several years’ worth of data ahead of time will only help demonstrate your site’s potential.
If this isn’t plausible, the experts at Lumify Energy can perform a SiteStart(™). This innovative tool compares your site to similar projects nationwide and will give you solid figures to bring to the negotiating table.
By offering accurate figures from experts, you’ll be in a far stronger position to command the going rate for your land.
Understand that tests will be carried out
Developers will use the optioned land to assess its suitability for solar development.
If you’re considering signing an option agreement for a solar farm, understand a developer will carry out site tests.
For example, they may need to excavate large pits to test the soil. They may also need to install pyranometers to test for irradiation levels.
They will also assess the gradient of the land to determine its suitability for long rows of panels.
Additionally, they may need to carry out a Wildlife Impact Assessment to rule out potential damage to nearby habitats.
A developer won’t be excessively on-site, but they’ll need a degree of access to your land during the option agreement.
Don’t rely on verbal agreements
Many developers will attempt to sweeten the deal with verbal promises to encourage you to sign an option agreement. But ensure you get all of this in writing.
While verbal agreements demonstrate a degree of trust between two parties, you should never rely on them for legal documentation. Not only can things be ‘lost in translation’ or miscommunicated, but there’ll be no solid paper trail to follow if a dispute arises. Always ensure you’ve documented everything in writing to protect everyone involved.
And if the terms of the agreement don’t work for you, ask your prospective developer to rework the contract. You’re giving up a significant proportion of your land for a set period. So, fair terms on both sides are crucial.
Also, ensure you have clear timelines for each step of the process. Any reputable developer should be able to provide this, and it’ll keep you updated as the project progresses.
The size needed for the average solar project
It’s no secret that the size of land you need to host the average solar project is vast.
Typically, you’ll need around five acres per one megawatt of installed capacity. For a commercial-scale project, that can add up quickly.
If you have a large plot of land, this can work in your favour. Developers are increasingly looking for bigger spaces to ensure their projects are feasible.
Even smaller projects need significant space for mounting rods, panels, inverters and substations. So, if giving up this amount of land isn’t appealing to you (for anywhere between 25 to 40 years), you may want to rethink signing an option agreement.
Projects can dramatically affect the landscape
Before signing an option agreement for a solar farm, it’s essential to recognise that the eventual project will vastly change the appearance of your land.
Unlike wind farms, which typically require less space and have minimal visual impact, solar projects take up a lot of space and will be highly visible.
If you’re even remotely unsure about how much the landscape will change, talk with your developer. They should be able to outline their proposed design, the acreage they’ll need and where they’ll place the equipment.
With this information, you should be able to make an informed decision.
Final Thoughts on Option Agreements for Solar Farms
This handy guide has covered everything you need to know about signing option agreements for solar farms. But, I’ll leave you with a few more thoughts to consider before committing to a potential project:
First, consider whether you’re happy to restrict your day-to-day operations slightly. The option period shouldn’t significantly impact your activities. But remember that you won’t be able to build on your land for the duration of the option agreement.
It’s essential to run through any option agreement with a qualified accountant and solicitor. They can help you secure favourable terms and catch any clauses that may lead to issues later on.
Lastly, it’s vital to do your research and come to the negotiating table armed with up-to-date figures for your site. If you can present information about the profitability of your site down the line, you’re more likely to improve your payment terms.
If you’re interested in hosting a project on your land (or are still worried about option agreements), get in touch. The Lumify team has plenty of experience with option agreements and can guide you through the process.
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