Tackling Option Agreements: What Landowners Should Consider
 Topic: exclusivity agreements |  Read Time: 8 mins |
 Landowner type:Independent landowners | Institutional landowners |  Energy: Onshore wind |
25th September 2023If you’re a landowner trying to navigate the world of option agreements for a wind project, you’re in the right place. In this guide, I’ll cover everything you need to know.
If a developer has approached you about installing a wind farm on your land, they’ll probably have used the term ‘option agreement’.
But what does it actually mean for you?
In this guide, I’ll break down how option agreements work, highlight their pros and cons, and share key tips for negotiating the best possible terms.
What Is an Option Agreement?
In simple terms, an option agreement (sometimes called an exclusivity agreement) is a contract between a landowner and a developer that grants the developer the exclusive right to lease or purchase land for a wind farm within a set period.
Typically lasting five to 10 years, an option agreement allows the developer to:
- Carrying out feasibility studies
- Seeking planning permission
- Sorting out grid connection
- Securing financial capital for the project (where applicable)
The option agreement means that a developer will reserve the land. This means the landowner can’t promise the land to other developers or build on the land in a significant way without the developer’s consent.
In return, landowners typically receive an option fee.
This can be as little as £1, but landowners may be able to negotiate payments ranging from £5,000 to £30,000 for their land, depending on the circumstances.
You don’t want to sell yourself short here, but I’ll get to that later.
How Does an Option Agreement Work?
The important thing to remember about option agreements is that they’re an ‘option’ and not necessarily an obligation.
It’s a legally binding but conditional contract(usually on a simple piece of paper!) that gives a developer the exclusive right to lease land for a wind farm within a set time-frame. However, the developer may not proceed with the project.
How it works:
- The agreement outlines holding terms, an upfront fee and other financial considerations.
- The developer can choose to exercise the option at any time during the agreement period.
- If they proceed, they’ll create a new lease, typically lasting 25–30 years – the lifespan of a wind farm.
- Until the developer exercises the option, the land remains reserved for the developer, and the landowner cannot lease or sell it elsewhere.
While option agreements give landowners the potential for long-term income, there’s no guarantee the project will move forward once the developer has done their research on the land. So, landowners should be prepared for this potential outcome.
Why Is an Option Agreement Important?
Option agreements are typically more useful for developers than landowners, as they remove a lot of uncertainty.
Without one in place, there’s technically nothing to stop a landowner from going with another developer if the price is right – or even developing the project themselves.
However, once you sign an option agreement, you can’t lease the land to a third party. Past this point, the developer can exercise the option on their terms.
In other words, once the developer has assessed the feasibility of a project, they’re the first in line to lease the land.
It’s no secret that wind energy projects are relatively speculative in the early stages, with a high risk factor and substantial costs for developers.
Whether it’s the risk of not securing planning permission or dealing with grid connection backlogs, it’s not an easy process.
If the project turns out to be unfeasible, the developer can simply walk away without having invested too much money.
What are the Benefits of an Option Agreement for Landowners?
After all this talk about developers, you might be wondering how an option agreement benefits landowners.
Signing an option agreement shows developers that you’re serious about the project.
Most wind farm projects are great income drivers for landowners looking to make extra money from their land.
Since most of the risk is taken on by developers. This includes financing and running the project. So, a developer approaching you is an excellent opportunity.
If you’re in an area that’s suitable for wind development, you may find yourself competing with other landowners for the same project.
In such cases, you don’t want to miss out on the assured rental income that comes from leasing to a developer.
Once a developer pays a premium for the land and builds the project, the landowner’s role becomes relatively passive.
You’ll just need to sit back, wait for the developer to build the project and start receiving income from your payment arrangement.
It might take a few years, but the results of an option agreement are typically worth the wait.
What are the Potential Pitfalls of an Option Agreement for Landowners?
Now that I’ve touched on the benefits of option agreements for landowners, let’s address those pitfalls and how you can avoid them.
A lack of market knowledge
One of the main issues with option agreements is that landowners simply don’t know enough about the current market to secure a good deal.
This applies not only to option agreements but also to the eventual lease agreement for the wind farm project.
It’s important to note that developers don’t usually want to part with large sums of money in the early stages of a project’s life, including during the option agreement stage. The lump sum payment to landowners will come out of the funds needed to build the turbines.
To avoid falling into this trap, it’s essential for landowners to understand the potential value of a project.
By understanding just how much a project could generate down the line, you can present this to a developer as a negotiating tool.
Not only could this boost your option agreement payment, but it can also boost your future rental income!
While you don’t want to go in too hard with your negotiations and risk losing the project, it’s a smart move to assess your site in comparison to similar ones around the country. Approaching multiple developers can create competition and significantly drive up the offers.
The presence of middlemen and unknown developers
A major pitfall I see with landowners and option agreements is the involvement of middlemen and unknown developers.
While you may think you’re dealing with a local company planning to build and run the project, this isn’t always the case.
Often, charismatic middlemen will step in and try to sign up as many local landowners as possible for a potential project.
These middlemen will then sell off the option agreement to unknown third-party developers that you may have no prior connection with.
As you’ll have had no previous association with the actual developer, they could end up being extremely difficult to work with.
The number of option agreements in these scenarios reduces the chance of a developer selecting your land for a project.
All of this happens without your direct knowledge, which makes it a less-than-ideal situation for landowners.
Unclear terms that bleed into final leases
Although this doesn’t always happen, I occasionally see terms from option agreements bleeding into final leases. These leases can run for up to 30 years and match the life of your average wind project.
Sometimes, option agreements will outline an arbitrary rental income percentage for the landowner (say 5 per cent).
However, this percentage may not reflect current and competitive market rates when the agreement expires.
Developers aren’t necessarily being malicious, but they will naturally base the terms on existing market conditions and their portfolio knowledge.
Additionally, some option agreements can automatically extend themselves by a further five years at the end of their initial period.
If you hadn’t planned for this, it could come as an unpleasant surprise.
To avoid these situations, it’s essential to run all wording past an experienced and specialist solicitor.
They can usually catch wording or agreements that might trip landowners up (or unfairly benefit the developer).
What Should Landowners Think About Before a Developer Approaches Them with an Option Agreement for a Wind Project?
Do your research
If you want to get a decent deal for your land under an option agreement, preparation is key.
When you’re under pressure from developers, it’s easy to make hasty decisions without fully understanding the value of your land.
Without proper knowledge of the value of your site, its wind speeds and its earning potential, you’re more likely to accept a less favourable deal.
Equally, if you’ve only worked with one developer, you’re more likely to take their word on things.
While having years of anemometer data is ideal, it can be costly.
But don’t worry – there’s plenty you can do.
The team of experts at Lumify Energy can perform a SiteStart(™) to see just how valuable your site is and perform research on similar sites across the country.
Not only will these figures boost your negotiating power, but they’ll show developers that you’re informed and prepared.
Asking for more isn’t being greedy – it’s based on accurate, proven data.
Additionally, by demonstrating that other landowners are receiving similar terms on comparable sites, you reinforce your understanding of the market.
If you can invite a range of developers to look at the site to register their interest, that’s even better for drumming up competition and boosting your bargaining power.
Approach experts
You should always get a specialist solicitor to look at any contract, and option agreements are no different.
These experts will offer both commercial and legal perspectives on your contract, which can be invaluable.
And as I mentioned earlier, they can even spot wording that may favour the developer in future lease agreements.
It’s also wise to contact land agents to pin down the future value of a project.
Developers may provide forecasts and projections of what the project might generate over its lifetime. However, having someone in your corner can help when finalising payment arrangements.
If there are any discrepancies in the terms, a land agent can negotiate a suitable deal without jeopardising the contract.
Realistically, you’ll want to defend your corner as best you can without scaring the developer away.
Be sure to provide your land agent with any information you have on the value of your site.
A land agent or agency can offer insights based on their experience. But using a SiteScan(™) will give you a broader overview of what’s happening across the entire market.
This provides you with an unbeatable 3D picture of the market that’ll help you negotiate a better deal.
What Are the Differences Between Option Agreements for New Versus Existing Wind Farms?
For existing wind farms, developers usually offer option agreements to landowners for wind farm extensions.
This means adding more turbines to the project or extending its capacity in some way.
If the project is continuing as-is, a developer will probably extend a lease. This will be under the same terms or potentially under renegotiated ones.
Final Thoughts on Option Agreements
I’ve covered everything you need to know about signing option agreements for wind farms. But here are a few final points to consider.
At the end of the day, you’re entering into an agreement that will have a long-term impact on your land.
So, you want to have as much information to hand as possible.
As the market evolves, it’s also wise to work flexible clauses into your lease.
The best developers will work with you on an equal footing. But to protect yourself, try working with a land agent and solicitor to ensure favourable terms in your option agreement.
Better yet, when the time comes for the final lease, make sure it’s solid and secure. This way, you can enjoy reliable income for the next 25–30 years. If you’re even remotely unsure about signing an option agreement, simply get in touch with the Lumify Team. We’re experienced in the process and can provide all the data you’ll need to secure an excellent upfront fee.
