Solar Leases: Negotiating Key Provisions

We have structured and negotiated more than 100 wind, solar, and energy storage ground leases, for developers and for landowners. As a result, we understand the needs and perspectives of both sides of these complex, specialized leases. That experience makes us uniquely qualified to review and negotiate them.

Experience with this type of lease is critical. Utility-scale solar, wind, and energy storage leases share many recurring concepts, but there is no true standard form lease that works for every project. Solar, wind, and storage projects continue to expand — both as stand-alone facilities and as power sources for data centers and other large-load users. As development activity increases, so does the demand for land, and the need for leases that can support projects from site control through financing, construction, operation, and eventual decommissioning. A well-drafted lease must do more than give the developer site control. It must also protect the landowner, allocate risk clearly, and satisfy the investors and lenders whose requirements often determine whether the project can be financed and built.

That is why negotiating these leases often feels like steering between a rock and a hard place. The landowner and the landowner's counsel understandably focus on preserving the property, maintaining flexibility, and ensuring the land can be restored. The developer, however, must also negotiate for parties who are not yet at the table: sponsor equity, tax equity, construction lenders, permanent lenders, and potential project purchasers. Provisions that may appear tenant-favorable are often required because those financial parties will later review the lease for "bankability."

Terms

The leases generally distinguish between development rent, construction rent, and operating terms. During the development term, often four to seven years, the developer studies the property, pursues interconnection, evaluates environmental and title issues, seeks power offtake arrangements, and determines whether the project meets the developer's, investors', and lenders' criteria.

The development or option period gives the developer time to secure interconnection, permits, offtake, and financing. During this period the developer pays a modest per-acre option payment and the landowner's use is largely unaffected.

The construction term, often two to three years, allows the project to be built. The construction period is short, disruptive, and usually compensated at a higher level.

The operating term begins when the project is generating electricity and revenue, and it may extend for several decades through an initial term and multiple renewal options. The operating term is of course the longest, from 20 to 35 years, with extension rights that can take the total term from 40 to 60 years.

Rent

Rent typically increases as the project moves through the three phases and is highest during operations.

Escalators also deserve careful attention. An annual rent increase may help protect the landowner against inflation, but it must be evaluated against the project's revenue structure. If the power purchase agreement or hedge does not include a similar increase, even a modest escalator can materially affect project economics over a long operating term. A lease with 2% annual escalation and one with 1.5% escalation differ by roughly 20% in total rent across a 35-year term. Over a long tenure, the escalator outweighs the starting rate.

Mineral and oil and gas interests

Mineral estates deserve separate attention. In Texas, the mineral estate is generally dominant, and a solar lease that ignores an outstanding mineral interest creates a problem for the developer. That right can conflict directly with a solar facility that covers most of the leased land. Accommodation agreements or surface waivers are frequently necessary, and they are far easier to obtain before the solar lease is signed.

Assignment, financing, and lender protections

Developers require broad assignment rights, because the project may be sold. Lenders and tax equity investors that will provide the funding to construct the project require their own protections: notice and cure rights, the ability to step into the lease on default, restrictions on amendment or termination without consent, and often a direct agreement with the landowner if the developer no longer operates the project.

These financing accommodations are best negotiated at the outset.

Decommissioning and financial assurance

This has moved from a negotiated term to a statutory one in Texas. Texas statutes now impose decommissioning and financial assurance obligations on wind, solar, and battery energy storage projects, and those requirements are non-waivable. We have written about that in more detail in Texas Enacts Comprehensive Decommissioning Requirements for Battery Energy Storage Systems.

In short

Renewable energy leases are more complicated than they may first appear. A successful lease is not only a real estate agreement; it is also a development document, a financing document, and a long-term operating agreement. The best negotiations recognize legitimate landowner concerns while also anticipating the requirements of investors and lenders. When the parties keep that broader objective in mind, they are more likely to produce a lease that is practical, protective, bankable, and capable of supporting a project that is actually built, operated, and profitable for both sides.

Because we act for both developers and landowners, we can generally tell a client early which of their positions will hold and which will not. Familiarity with the typical views and concerns of both sides gives us the ability to counsel clients on reasonable and market provisions, and on how to negotiate them.