Tackling Option Agreements: What Landowners Should Consider
|Topic: New wind farm projects||Read Time: 9 mins|
| Landowner type:
Independent landowners | Institutional landowners
|Energy: Onshore wind|
If you’re a landowner trying to navigate the world of option agreements, stick with us. Join us as we cover everything you need to know about exclusivity agreements for wind projects.
If a developer has approached you about the prospect of a wind farm on your land, then you’re in the right place. In those initial stages of wind farm development, you’ll probably have heard the term “option agreements” being used. And if you’re not entirely sure what it is you’re signing, you might want a rundown of the pros and cons of this common contract. So, if you’d like to understand what an option agreement is and how you can make it work for you – we’ve got you covered.
Not only will we run through how these agreements work, but we’ll even give you tips on how to negotiate the best possible terms. Now, let’s get straight to it.
What Is an Option Agreement?
In simple terms, an option agreement (sometimes called an exclusivity agreement) is a contract that a landowner and developer enter. It essentially holds the land for a developer who wants to build a wind farm project for a certain period. This is typically around five years, but can be as long as ten years, depending on the agreement at hand.
During the option agreement’s length, the developers will be:
- Carrying out feasibility studies
- Seeking planning permission
- Sorting out grid connection
- Securing financial capital for the project (where applicable)
The option agreement means that the land will be tied up and reserved specifically for the developer.
For a set period, the landowner can’t promise the land to other developers or build on the land in a significant way. At least not in a way that hasn’t been agreed upon by the developer.
The option agreement also typically comes with a fee that’s paid to the landowner. This can be as little as £1, but landowners could attempt to seek at least £ 5,000 to £30,000 for their land, depending on the circumstances.
You don’t want to sell yourself short here, but we’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. The clue’s in the name here.
They’re strictly conditional contracts that are handed to landowners (usually on a simple piece of paper!). The agreements are legally binding, but they state holding terms, a fee to be paid upfront, and a few other financial considerations for the project.
The developer can decide to take out a long-term lease for a wind farm project at any time during the agreement period. At this point, a new lease will be created to outline terms for 25-30 years (the average life of a wind farm). So, the option agreement works by reserving the land for a developer on a no-obligation basis.
It’s hoped that landowners reserving their land for a set period will end up with a profitable project on their land. However, it isn’t always guaranteed if a developer runs into planning permission issues or other roadblocks that make the project unviable.
Why Is an Option Agreement Important?
We’ll say that 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 developing the project themselves [Link to blog, for that matter.
But if an option agreement is signed, the land can’t be leased to a third party, and 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. No ifs, ands, or buts.
It’s no secret that wind energy projects are relatively speculative at the beginning. Plus, there’s a high-risk factor and costs involved for developers. Whether there’s a chance they won’t get planning permission or struggle with grid connection backlogs, it’s no walk in the park. So, if the project isn’t feasible, the developer can simply walk away without having poured too much money in.
What are the Benefits of an Option Agreement for Landowners?
After all this developer talk, you might be wondering how an option agreement benefits landowners. Well, signing an option agreement essentially lets landowners show developers that they’re serious about a project. Most wind farm projects are great income drivers for landowners looking to make extra money from their land. And as most of the risk is taken on by developers with financing and running the project, a developer approaching you is an excellent opportunity.
If you’re in an area that’s been recognized by a local authority as being suitable for wind development, you may also be battling a lot of landowners for a potential project.
So, most landowners don’t particularly want to lose out on the assured rental income if developers are scouting their land. Plus, once a developer pays a premium for the land in question and builds the project, the role of the landowner here is relatively passive.
You’ll just need to sit back, wait for the project to be built, and start receiving the 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 we’ve touched on the benefits of option agreements for landowners, let’s address those pitfalls. And how you can avoid falling into them!
A lack of market knowledge
The main issue we see with option agreements is that landowners simply don’t know enough about the current market to secure a good deal. That goes for both option agreements and the eventual lease agreement for the wind farm project itself.
It’s important to mention that developers don’t usually want to part with a lot of cash in the initial stages of a project’s life. And that includes option agreements, as the lump sum payment to landowners will come out of the funds required to build the turbines.
To try and avoid falling into this trap, it’s key that landowners try to understand the potential value of a project first. By understanding just how much a project could generate down the line, you can present this value to a developer as a negotiating tool. Not only can this boost your option agreement payment, but your future rental income too!
Now, you don’t want to go in too hard with your negotiations and risk losing the project altogether. However, assessing the site in comparison to similar ones around the country and approaching multiple developers is a wise move. This should create a degree of competition between the developers and drive up the average offers considerably.
The presence of middlemen and unknown developers
A major pitfall we see with landowners and option agreements relates to middlemen and unknown developers. Although you may think you’re dealing with a local company who are 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 could end up working with. As you’ll have had no previous association with the actual developer, they could end up being extremely difficult to deal with.
To make things worse, the number of option agreements in these scenarios significantly reduces the chance of your land being selected for a project. Plus, this all happens without your direct knowledge! It’s certainly not an ideal scenario, we’ll put it that way.
Unclear terms that bleed into final leases
Although this doesn’t always happen, we occasionally see terms from option agreements bleeding into final leases. Yes, we’re talking about those long leases that 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 that the landover gets for the final project (say 5%). But if you think about it, this percentage will not be reflective of current and competitive market rates when the agreement expires.
Developers aren’t necessarily being malicious with this, but they also choose the terms! And that means they’ll naturally write them based on current market rates and the developer’s portfolio knowledge. It’s also worth mentioning that some option agreements can extend themselves by a further 5 years at the end of their initial period.
So, if you haven’t planned to tie up your land for 5 years instead of 10, you’ll be in for a shock.
This situation is usually avoidable if you’ve carefully 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 Option Agreements 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 and haven’t had a chance to truly gauge the value of your land – you might jump the gun. Without proper knowledge of the value of your site, its wind speeds, and its earning potential, you’re more likely to accept a raw deal. Equally, if you’ve only been dealing with a single developer, you’re more likely to take their word on things.
Although the gold standard of preparation is coming to the table armed with years of anemometer readings, that can be very expensive. But don’t worry – there’s plenty you can do aside from that.
The experts at Lumify 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 understand what you’re getting into.
You won’t look greedy by asking for more here. You’re simply offering accurate figures from around the country based on proven data from experts. Plus, you’ll be proving that other landowners are already receiving similar values on virtually identical sites. 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.
You should always get a specialist solicitor to look at any contract, and option agreements are no different. These experts will be able to offer both commercial and legal perspectives on your contract, which can be invaluable. And as we mentioned earlier, they can even spot wording that may move future lease agreements in the developer’s favour.
It’s also wise to contact land agents to pin down the future value of a project. Of course, a developer will give you forecasts and rundowns of what the project might produce across its lifetime. But having someone who’s in your corner can help when trying to finalise payment arrangements.
If there are any discrepancies, a land agent would also be able to negotiate a suitable deal without losing the contract entirely. Realistically, you want to go as far as you can defending your corner without scaring the developer away. It’s also wise to go to your land agent with any information you can gather on the value of your site.
At the end of the day, a land agent or agency can only offer so much assistance based on their frame of reference. But a SiteScan(™) will give you an overview of what ALL other land agents are seeing across the entire market. So, you’ll get an unbeatable 3D picture of the market that’ll give you the building blocks to negotiate a better offer. It’s truly as simple as that.
What Are the Differences Between Option Agreements for New Versus Existing Wind Farms?
For existing wind farms, landowners tend to get offered option agreements for wind farm extensions. This essentially means adding more turbines to the project or extending its capacity in some way. If the project is continuing as-is, the lease will simply be extended under the same terms or under negotiated ones.
Our Final Thoughts on Option Agreements
We’ve come to the end of everything you need to know about signing option agreements for wind farms. But we thought we’d leave you with a few final thoughts to ponder.
At the end of the day, you’re signing something that has a serious long-term impact on your land. So, you want to have as much information to hand as possible. With the market changing over time, it’s also a good idea to work clauses into your lease that offer flexibility. The best developers will be willing to work with you on a relatively equal footing. But to protect yourself, try working with a land agent and solicitor to get favourable terms into your option agreement. Better yet, make sure your final lease is watertight to help you secure reliable income for 25-30 years to come. Cheers to that.
If you’re even remotely unsure about signing option agreements, simply get in touch with the Lumify Team. We’re well-versed in the process and will provide all the data you’ll need to secure an excellent upfront fee.