The ultimate guide to renewable energy project lease negotiations
|Author: Travis Benn||Read time: 18 mins|
|Client type: Independent landowners||Technology: all|
Renewable energy is undergoing a rapid boom in demand. With big government targets just around the corner and landowners faced with a new list of challenges, renegotiating a great deal has never been more important.
With most renewable energy projects running on lengthy multi-decade leases, renegotiation is a chance to ensure plans are updated fairly or to reimagine the site altogether with a new site operator.
Navigating some of the complexities of the renegotiation process takes plenty of planning. Using a holistic approach, Lumify Energy takes a complete look at the project, analysing market data and producing a robust renegotiation case for the landowners we work with.
We’ve taken a closer look at the key challenges faced by landowners, including making sure you get the best rental price possible and what to do if your lease ends without a formal contract.
We also offer tips on how to overcome these challenges for optimum negotiation success.
The future of renewable energy
The renewable energy sector is an increasingly vital part of the UK government’s energy plans. Current targets are ambitious, with the aim of switching the UK’s energy use to 100% renewable sources by 2035.
This new target is only achievable with cooperation between landowners and site operators. Until very recently, new renewable energy projects were supported by generous subsidies, making them much more attractive by providing an inflation-linked, matched funding type arrangement.
The subsidies were first established, soon after the privatisation of the UK’s energy sector in 1989, and have supported a range of renewable projects ever since. Yet with government subsidies under threat, many sites could face a new push to ensure profitability and efficiency.
Landowners also face many additional ongoing challenges, including:
· Late payments
· Planning permission delays
Common concerns from the landowners we work with include difficulties in accessing information on issues such as, how best to choose a site operator, make the most of their site, review their site’s performance and negotiate a new contract.
With that insight, we founded Lumify Energy to close the information gap between landowners and site operators and using our expertise to make the management of renewable energy projects simpler.
If you’re wondering how renewables have become such a key part of the UK energy market, check out our comprehensive blog that explores the privatisation factor and the impact of subsidies.
What to do when your renewable energy lease is ending
The end of a project lease doesn’t have to mean the end of the project.
Strategic negotiations can secure a better deal that takes into account the new renewable energy landscape and leaves both landowners and site operators feeling more secure.
In the months leading to a contract’s end, we recommend you think strategically, gathering as much information as possible.
Be sure to focus on:
· Documenting the negotiations with care, so you can refer back to them at a later date if needed
· Checking the terms of any new lease, including opting out of the security of tenure provisions of the Landlord and Tenant Act 1954
· Carrying out a full land rent audit with an impartial professional, to ensure all payments are up to date before the start of the new lease
· Checking the prior lease for any clauses that need to be settled or liabilities that might not have been addressed
Good timekeeping can be the difference between a great deal and a disappointing one. So, save yourself the organisational headache by planning ahead and knowing what to do when your renewable energy project lease is ending.
Does your site operator have a right to renew?
There’s nothing more concerning than reaching the end of the contract and realising the site operator has a legal right to stay, whether or not this matches the landowner’s plans.
All the options during this stage depend on whether or not the landowner has opted out of the security of tenure provisions of the Landlord and Tenant Act 1954.
Landowners who opted out are in a far better negotiating position than those who didn’t. They maintain control over what happens next, and the tenant has no legal basis for remaining if that doesn’t match your plans.
A landowner may be able to convince the site operator to pay a higher rent if they want to stay. Alternatively, they can bring the project in-house or choose a new operator.
This is a much more likely scenario, as it is the default position on most contracts. But there are still things you can do. If you’re willing to keep the current site operator, then the lease can simply be renewed at current market rates.
Complications occur if the landlord opposes the renewal, though factors such as breach of contract or unpaid rent provide the basis for applying to the courts for an eviction notice.
This would leave you with the freedom to choose your next steps and work with a different site operator, without having to pay large compensation to the outgoing operator.
If you’re still unsure of whether your site operator has the right to renew their contract or you need more information on opt ins and opt outs, this handy blog has got you covered.
What are the tools needed for a successful negotiation?
Once a contract is under negotiation, landowners and site operators have a unique chance to establish new terms and ensure a smooth transition from one contract to another.
Knowing how to renegotiate is essential for getting the best deal. Thankfully, there are a few key ‘power tools’ that you can use to seamlessly renegotiate your renewable energy project lease agreement.
These ‘tools’ include plenty of research and evidence gathering, both of which can be quite time-consuming. But all the hard work will pay off by proving the validity of your claims.
Current market rent
Site operators are often unaware of rent, fees, and rates outside their own portfolio. To justify charging a different rent, it’s vital to bring some evidence that makes a solid business case.
Find similar sites and document discoveries. It’s crucial to keep the information as relevant and targeted as possible.
Value of the site
Calculating the net present value of the site also helps with renegotiations. This will give you a better negotiating position while providing site operators with financial evidence of why the suggested rent is reasonable.
Understanding the project lifecycle, shortlisting comparable sites, and showing the site operator that you’re equipped with plenty of knowledge will help drive negotiations in a positive direction.
Which experts do institutional landowners need during the lease renewal?
Institutional landowners face many challenges when arranging their lease renewal.
And just like independent landowners, having the right team of experts around can have a dramatic impact on the success of negotiations. In the case of institutional landowners, we recommend calling on your in-house team as much as possible.
These teams are important additions when renegotiating:
The finance team
They’ll assess the financial value of the project to ensure that the financial benefits are shared appropriately and make sure the site operator can meet all their monetary obligations. For landowners thinking of bringing the project in-house, they’ll also carry out a cost-benefit analysis and make sure this is financially viable.
The legal team
It’s vital to keep all renegotiations legally sound. The lease should be compliant with the latest law, and the legal team can also serve the relevant statutory notices on the site operator before leading on all the legal aspects of the new lease agreement.
The in-house land agent
Land agents typically front-face the negotiations and can help with planning permission, as well as checking terms such as rent (due to their knowledge of the wider market). If the project needs to be situated in a high-risk area, the land agent can also offer their guidance and expertise and leverage local commercial relationships. Teams with an in-house land agent have a real advantage during negotiations.
The in-house procurement team
The procurement team helps assess how to get the best value from the renewable energy site that is up for contract renewal. They can also liaise with external consultants, and with all key members of the team to keep moving the project forward.
The specialist consultant
Consultants help with vital research and planning, looking at the future of the project, and gathering data that will form the basis of constructive negotiations. They check for trends, assess historical performance, and condense this data into a format that’s easy to understand for non-specialists.
The earlier institutional landowners start their preparations, the more opportunities there are to develop the right team with the right skills to help renegotiations.
Whether that’s curating a top-notch finance team or checking in with a specialist consultant to put a monetary value on your project, teamwork truly makes the dream work here.
To find out more about the important roles to consider during renegotiations, simply read here.
How can independent landowners improve their renegotiation prospects?
Renewing a lease is a stressful time for independent landowners, but there are experts available who can help make the process much less anxiety-inducing!
Thanks to the length of many renewable energy contracts, renegotiations represent the chance to start afresh, armed with more knowledge in a changing renewable energy landscape. Developing a strong negotiating team helps to bridge any gaps in knowledge and skillset.
Who are the team members to turn to when renegotiations roll around?
· A solicitor
· A land agent
· An accountant
Solicitors should get involved months before the end of the current lease. They’ll keep on top of all relevant deadlines and paperwork, and also help the site operator by ensuring their plans for the land are compliant with land registry requirements.
Land agents can help with planning permission and front-facing negotiations. They’ll also make sure there’s a realistic timetable for both the landowner and the site operator to work to. They can be relied upon to keep on top of trends and provide valuable insights.
Accountants are an underused resource in many renegotiations. They can review energy generated at the site, calculate the total value of the contract/project and make sure rent is fully up-to-date before a new lease is started.
But accountants can help in other ways, too. They’re helpful for overseeing all the financial aspects of the project – including, if necessary, checking your tenant is secure enough to take on the lease.
Seeking professional advice is always an excellent idea when you’re dealing with competitive environments. So, it’s wise to put your best foot forward by reading our associated blog on taking a team approach to renegotiations!
How do I choose the right rental agreement?
As a landowner, you have a few different rental agreement options during the renegotiation process. The decision will be guided by the project’s scope, location, and type, as well as the agreement that was set up during the first negotiation.
Key options include:
Under a fixed rental agreement, landowner payments stay the same, regardless of the project’s performance. The rent is generally less than the market rate, due to landowners never being exposed to financial risk during the project. However, rent is also paid no matter the status of the project, making it a stable (if less lucrative) option.
In this scenario, landowner rent payments amount to a percentage of the project’s overall income or turnover. This usually results in a higher rental payment, but many landowners unearth payment errors during the project lifecycle (due to the complex energy trading transactions involved), which could mean receiving less than you’re owed.
Combining elements of both fixed and turnover rent, hybrid rent guarantees a minimum rental payment and adds a percentage of the turnover on top of this sum. Landowners have partial visibility across all aspects of the project, but the arrangement could take longer to establish and require a little more monitoring time.
Multiple of outputs rent
This rental agreement provides landowners with rent based on the amount of electricity produced at the site, multiplied by a set value. As the landowner, you won’t face any price fluctuations but will be exposed to operational risks, leaving you with no payment if the site stops producing electricity.
It’s important to carry out some market research and see where the project fits within a wider context. After establishing this, you can move on to analysing the pros and cons associated with every type of payment arrangement.
What happens when the lease ends with no formal contract?
Renewable energy leases typically last as long as thirty years. In the time between the last contract was agreed and the present day, there have been lots of changes to the way the renewable energy sector works.
Contract negotiations should ensure any agreement reflects the realities of the project, the site, and the current market environment.
The existing lease already explains the legal basis for site occupation by the operator, but negotiating better terms is difficult when there’s little time remaining before the current contract expires.
There are two common situations that can arise. Firstly, a tenancy at will can arise if you allow the site operator to stay on-site.
However, a periodic tenancy may be inadvertently created, and if negotiations stall this could be catastrophic for the landowner. The site operator may be able to stay indefinitely, making it near-impossible for you to remove them from the land.
Ending one contract without a new formal agreement in place can be highly uncertain for the renewable project. We always recommend landowners keep on top of the deadlines and timelines associated with their project, to avoid finding themselves in this tricky situation.
To learn more about what happens when a lease ends with no formal contract (and why you should keep on top of your deadlines!), check out our in-depth post that will help you avoid common pitfalls.
Being a landowner of a renewable energy site can be challenging, but it’s also a hugely rewarding way of both generating income from the land, and contributing to positive, eco-friendly energy solutions that make a big impact on reducing climate change.
With the right team around you to support your renegotiation strategy, you can ensure the best deal for your site and liaise with site operators to maintain efficiency.
If Lumify Energy can lend a helping hand, reach out to our team to discuss your project.