Option Agreements for Solar Farms: A Guide for Landowners

Topic: solar projects Read Time: 10 mins
Landowner type:
Independent landowners | Institutional landowners
Energy: Solar
Back to Blog

If you’re a landowner who needs help understanding the ins and outs of option agreements for solar farms, you’ll want to keep reading. Join us as we review everything you need to know about reserving your land for a potential renewable energy project.

Has a developer approached you and mentioned optioning your land for a solar farm project? If so, you’ll want to stick with us.

Those early stages of a solar energy project can be overwhelming, and the first piece of the puzzle is often an option agreement that secures the land. If you need clarification on what this is (or want guidance on what to consider before signing), we’re here to run you through everything you need to know.

In this in-depth rundown of option agreements for solar farms, we’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 this document

So, let’s get started.

A solar farm option agreement is a contract between a landowner and a renewable energy project developer. It reserves the land for 5 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 and complete development contract. If this happens, the project construction period will commence before the site moves into a monitoring and maintenance phase.

However, it’s essential to recognize that an option agreement doesn’t always lead to a full-scale project. So, option agreements are conditional contracts that can fall through at any time. This failure to launch might be due to suitability issues based on the land’s characteristics or issues with planning permission or Grid connection.

To reserve the land, developers may also give the landowner a set and pre-agreed fee. The fee can be a small lump sum or as much as £30,000 or more, depending on how promising the plot of land is and what you’re able to negotiate. Over the years, we’ve managed to negotiate holding payments of up to £50,000 to sweeten the initial deal for landowners.

You can try to negotiate the fee by coming to the table armed with current market rates and accurate data about your site (but we’ll get to that).

The exact length of option agreements for solar farms can vary hugely. In some cases, they can be as short as 1 or 2 years or as long as 10 years. If you’re dealing with a more extended option, it’s always worth asking your developer for a solid timeline of their plans. This way, you’ll be kept abreast of planning developments and can manage your expectations as the years tick on.

As solar farms are starting to receive planning on a grander scale, developers are actively seeking suitable land for projects. So, now is the 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 project, you have very little to lose by signing an option agreement with a decent developer. By signing the agreement and reserving your land in principle, you can easily show a developer that you’re serious about taking things further. While you won’t be able to alter your land during the option period, a landowner’s role during the option stage couldn’t be more straightforward. You sit back, wait for the developer to conduct relevant studies, and wait for the green light.

The average option agreement will generally allow landowners to continue using their property for rural and domestic purposes. So, there’s very little to lose here.

If you’ve never signed option agreements for solar farms, you might not understand what it entails and as option agreement terms will follow on to the final lease (and be tricky to change), it’s important to get things right at the start of any project.

One of the significant clauses that may trip up landowners is that some agreements can “prevent” landowners from discussing the terms of the lease or project with other parties by way of a confidentiality clause. However, this does not mean that landowners aren’t allowed to speak to professional advisers (including accountants, solicitors, and land agents).

We advise many landowners in our position as chartered accountants, and we don’t typically advise diving into any agreement without the eye of an expert. So, don’t be concerned by this and discuss this with your developer in the early stages. If the developer refuses to reassess the terms of the agreement (whether it’s related to confidentiality or not), it’s worth rethinking the relationship. These confidentiality clauses aren’t necessarily dealbreakers, but if you don’t want to risk falling into legal trouble for sharing information, you need to be careful.

Many renewable energy projects are marketed to landowners through go-betweens. In short, the final project won’t involve the individuals that you deal with in the initial stages of the process. While this isn’t always the end of the world, landowners often think they’re dealing with a local developer on a personal level. In reality, they’re speaking with a charismatic middleman trying to option as much land as possible for third-party developers.

This process doesn’t necessarily mean the project is doomed to fail, but you could end up dealing with a developer that’s extremely hard to handle. And as most landowners will only want to work with a developer they have built rapport with, the relationship can quickly fall apart. So, we recommend vetting your potential developer carefully and ensuring you know exactly who you’re working with.

A businessman extending his hand for a shakehand

We’re not saying that all landowners walk away from the negotiating table with poor terms. But many landowners sign 30 or 40-year leases that include unclear terms from initial option agreements.

For example, some option agreements outline an arbitrary rental income percentage the landowner should receive. However, if this clause doesn’t account for current market rates and inflation, landowners will automatically see a real-terms income cut for leasing their land. This isn’t because developers are looking to pull the wool over landowners’ eyes, but is often an oversight. Many will simply consult their current portfolio and offer a ballpark figure that they think is suitable.

A farm owner reviewing a poorly worded solar farm contract

We’ve also seen instances from our own experience where unclear payment terms have led to enormous underpayments. This often takes the form of payments being sent to a sister company before being paid to the landowner. This can reduce a landowner’s payments significantly, and the reason for this is that the terms in the lease were not set out explicitly enough. So, if a unit of energy was sold for £100, the income may be received by a sister company first before a payment is made to the landowner at a reduced rate the potential lost income here is major.

Aside from payments, it’s also important to recognize that option agreements often run between 5 and 10 years. So, you’ll need to carefully read the terms of your agreement and ensure you know how long your land will be tied up.

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 from similar sites across the country will give you an incredible “big picture” overview of the project. This way, you’ll be able to negotiate a better offer with a major dose of confidence.

Farm owners shaking hands with a solar farm expert

In case you’re still doubting the importance of experts, they 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

Doing a hefty amount of market research before signing option agreements for solar farms is essential. Now, developers should refrain from pressuring 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. So, they’ll often try to push through a typical contract that has worked for several developments before yours. However, it’s vital to grasp the true earning potential of your site before signing, as you could be missing just how valuable it is. And as we always say – if you fail to prepare, you should prepare to fail.

It’s an excellent idea to come to the table with everything from accurate acreage readings to irradiation measurements. If you can get measurements ahead of time, having several years’ worth of data will only help prove your site’s potential to a developer.

If this isn’t plausible, the experts at Lumify 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 (or more) for the land you’re leasing.

Get the most suitable project developer 
Compare the rents of UK wind farms to negotiate the best land rent for you
Get the best contractual terms
How SiteStart works

As you probably know now, developers will use the optioned land to explore the site’s suitability for solar development. So, if you want to sign option agreements for solar farms, you need to understand that the developer will be conducting site tests.

For example, they may need to excavate large pits to test the soil or install pyranometers to test for irradiation levels.  They should carefully measure the gradient of the land or the suitability of the land for long rows of panels. They may need to carefully assess the area for a Wildlife Impact Assessment that rules out potential damage to nearby habitats from the solar project.

Whatever it is, the developer will need a degree of access to your land for the duration of the option agreement. Developers won’t be dropping in on you excessively, but you’ll need to appreciate that the process won’t be entirely hands-off.

Many developers will attempt to sweeten the deal with promises they intend to keep once you sign an option agreement. But getting every appealing clause into your agreement IN WRITING is incredibly important.

While a verbal agreement proves a degree of trust between two parties, you want to rely on something other than the spoken word regarding legal documents. Not only can things get “lost in translation” or miscommunicated, but there’ll be no viable paper trail to follow if a dispute arises. So, ensure that you consult those trusty experts and fully understand the terms you’re agreeing to before signing.

And if the terms of the agreement don’t work for you, it’s worth asking your prospective developer to rework the contract. After all, the terms should benefit both parties as you’re giving up a significant proportion of your land for a set period.

Oh, and one more thing. Ensure you have valid timelines for each process step to keep you in the loop. Any decent developer can provide this, and it’ll keep you updated on how quickly the project progresses.

A farm owner and solar farm developer reviewing contract

It’s no secret that the size of land you need to host the average solar project is vast. The consensus in the industry is that you’ll need around 5 acres per 1 megawatt of installed capacity. So, you’ll need a lot of land if you’re planning a commercial-scale project. However, this vast acreage requirement can work to your advantage if you have an impressive acreage to offer.

With solar farms set to expand over time, developers actively seek out larger areas to ensure their projects will be viable. Plus, you’ll need to consider that even smaller-scale projects need space for mounting rods, panels, inverters, and substations. If giving up this amount of land isn’t appealing to you (for anywhere between 25 to 40 years, no less), you may want to rethink signing an option agreement.

Aerial view of a solar farm

Before signing an option agreement for a solar farm, it’s essential to recognize that the eventual project will vastly change the appearance of your land. Unlike wind farms, solar projects dramatically affect the look of your land once they’re up and running.

Wind turbines don’t typically take up as much land as solar and aren’t too visually disruptive. On the other hand, solar panels take up a significant amount of space on any patch of land and are highly visible. So, you’ll need to be aware that you’ll be tying up a large portion of your land for the duration of the option agreement.

If you’re even remotely unsure of HOW drastic the change to the landscape will be, talk with your developer. They should be able to outline their proposed design, the acreage they’ll need, and where equipment will be placed. With this information in hand, you should be able to consider your options carefully.

This handy guide should cover everything you need to know about signing option agreements for solar farms. But before we head off, we’ll leave you with a few thoughts to consider before committing to a potential project.

Now, this goes for anything that reserves your land for another purpose. But you must consider whether you’re happy to restrict your day-to-day operations slightly. The option period shouldn’t significantly impact your activities. However, you won’t be able to build on your land for the duration of the option agreement. Running through any option agreement with a qualified accountant and solicitor is also crucial to getting favourable terms. This way, you’ll also be able to catch any clauses that may lead to issues later on. 

Finally, it’s vital to do your research and come to the negotiating table armed with up-to-date figures on 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 getting a project on your land (or are still worried about option agreements), get in touch. The Lumify Team has seen its fair share of option agreements. So, we can provide everything you need to know about getting started.

How likely is your land to get planning permission for a solar project?

Enter your details to find out.