What happens when leases end with no formal contract?

Renewable energy project leases are often 30-year agreements. In this time, plenty can change, impacting market rents and the costs that leaseholders can expect to pay if they choose to continue work on the site.

Other factors can impact the project, such as changes in family circumstances and within organisations themselves. Quite often, lease agreements remain forgotten in the bottom of a drawer somewhere – until the landowner’s site operator gives notification that it’s time for renewal.

We encourage landowners to stay on top of their project renegotiations and to prepare well before the lease expires. If not, it can be a little uncertain for landowners, particularly when a lease expires without a formal contract being agreed for continued activity on the site.

We recently helped a landowner who had a renewable energy project on their land. The project had run successfully for a number of years with a third-party company. It had been running so smoothly that the landowner, a local authority, hadn’t noticed that only a few months remained before the lease expired.

As a local authority, the landowner had a duty to ensure that the project delivered best value. But they also knew the market had changed significantly since the lease was first negotiated.

What happens in situations like this?  

Understanding the challenges

Limited options

Landowners may feel they have limited options if the lease hasn’t been renegotiated by the time it’s coming to an end. Whatever path you take, it’s always challenging to negotiate the best terms – least of all at the last minute! Some commercially savvy landowners will request tenders from several potential site operators or will consider bringing the project in-house.

Unclear terms

The existing lease will clearly explain the legal basis of the site operator occupying the site, alongside the other terms of the project. When this comes to an end, there’s often lots of confusion – do the rules remain the same, or will they change? Until a new formal agreement has been agreed upon, there is no real way of knowing.

Two possible scenarios

1.     A ‘tenancy at will’ - when a tenant remains on the land with the landowners’ consent indefinitely – either party can give notice at any time. This may be used as a temporary measure during the renegotiations. This may be created after the expiry of the current lease in the absence of a formal agreement.

Some landowners may not be agreeable to this arrangement, but it does provide a handy step towards new negotiations, without bringing the existing project to an abrupt close.

This would also give the current site operator exclusive possession of the site. The landowner would be prohibited from entering the site and/or allowing another operator to carry out any activities on site. Again, this may not suit all landowners, so consider the implications carefully before agreeing to this.

2.     A ‘periodic tenancy’ – this is a rolling tenancy with no defined end date.

If negotiations stall and the terms of a new lease cannot be agreed between the landowner and site operator, but the current site operator remains on site after the lease has expired, a periodic tenancy could be started. This can have devastating consequences for the landowner. One possibility is that the site operator could acquire a protected business tenancy and be able to stay on-site indefinitely.

Therefore if a landowner wants to take on a new site operator tenant, it could be extremely difficult to remove the current tenant. In cases where the current site operator has occupied the premises for more than 14 years, the landowner may even need to compensate the site operator twice the rateable value of the premises!

These costs can be in excess of £250,000 for some renewable energy projects, to compensate the current site operator for the inconvenience and cost of leaving the site.  

Landowners are strongly advised to make a formal agreement before the expiry of their current lease to avoid all these risks. For example, a landowner could grant the current site operator a temporary ‘license to occupy' the site. This would give the site operator the non-exclusive rights to continue operating at the premises for a defined period of time: for example, six months. This also allows for transitioning from one lease to another without an abrupt end to the agreement.

Crucially, this agreement would also ensure that the landowner can re-enter the premises, and/or grant further licenses to another site operator to carry out relevant activities on the site. 

The takeaway

Being aware of time is really important so that you don’t have to limit your options as a landowner. Try not to let your lease fall behind and always keep a close check on when contracts are nearing their end.

If you don’t monitor project leases carefully, then the future for the site operator – and their ability to stay on-site – becomes uncertain and there is a risk that the landowner, ultimately, may be unable to remove the tenant from their site.

To help limit the risks involved, remember to seek advice due to the complexities involved with commercial tenancies and great care must be taken when drafting any new leases.

If you have any questions about your own lease, get in touch with Lumify Energy! We know that this can be a complex issue, and we’re always happy to assist.