CLIENT PAGE
Here Comes the Sun
Key considerations for landowners considering solar leases.
By Tiffany Dowell Lashmet
For Texas landowners who have been contacted by companies seeking to lease agricultural land for solar projects, there is surprisingly little information available to assist with weighing the pros and cons of entering into such an agreement. This article outlines some of the key considerations when negotiating a lease. As always, landowners should consult an experienced attorney to review any lease agreement before it is signed.
To which estate does the sun belong? Interestingly, the
Texas Supreme Court has never ruled on whether the sun is part of the
surface or mineral estate. Most legal scholars assume that the court
would hold that solar rights belong to the surface owner, making that
person the one who has the right to enter into and negotiate solar lease
agreements. Of course, this can be modified by agreement between the
parties. For example, assume that Adam owns both the surface and mineral
rights of a piece of land. Adam enters into an agreement to sell the
land to Beth, but he reserves solar leasing rights. If that happened,
even though Beth would own the surface of the land, Adam, rather than
Beth, would own the solar rights.
Rights of mineral owners. Because the mineral estate is
dominant in Texas, the mineral owner has the right to use as much of the
surface estate as is reasonably necessary to produce oil and gas. This
includes building drill pads, preparing roads, installing pipelines, and
drilling injection wells. The Texas Supreme Court recently held the same
with respect to severed ground water estates. This poses a major concern
for solar lessees looking to put in a solar facility on the same land.
Solar companies will likely carefully analyze the status of the mineral
and groundwater estates including how many ownership interests exist and
whether a lease agreement is currently in place. Some solar companies
refuse to enter a lease unless the surface owner owns or controls the
leasing of all minerals as well. Landowners should take care not to
agree to serve as a type of “middle man” or negotiator between solar and
mineral lessees, particularly if they have no relationship with the
mineral owners.
Solar leases are usually not short in duration. According to a
Texas attorney who frequently represents solar companies in lease
agreement negotiations, these agreements typically last between 20 and
30 years. They tie up property for a significant period of time, so it
is important to carefully evaluate the terms.
Royalties are not common in solar leases. Unlike oil and gas
lease agreements, it is uncommon for a solar lease agreement to set
forth a royalty as the payment method. Instead, annual payment terms are
usually defined in dollars per acre. Commonly, the price offered is
lower in the development phase and higher during the operations phase.
This makes sense because there should be income generated during the
operations period, while the same is not true during the development
phase. Because rental rates are usually lower in the development phase,
a landowner has reason to want that phase to be as short as possible in
the lease agreement. Lease rates, not surprisingly, vary greatly based
on a number of factors, chief among those being the value of the land
and proximity to the grid.
Solar leases will likely prevent any other use of the property.
All of us in Texas have likely driven by a piece of property and seen a
tractor farming around oil pump jacks or cattle grazing beneath wind
turbines. Because of how oil, gas, and wind production occurs, it is
quite possible for the surface owner to make agricultural uses of the
property even during the time while the oil, gas, or wind lease exists.
The same is often not true for solar leases. Often, a solar farm
requires numerous continuously placed panels that would prevent other
uses of the surface of the land. Landowners evaluating solar leases
should usually assume the lease payment will be the only income for the
property and negotiate accordingly.
A solar project could impact special tax use valuation eligibility.
In Texas, many rural landowners take advantage of the special
tax valuation available for agriculture or open space land. If a
landowner meets the criteria, the special use valuation allows the
property taxes to be calculated based on a percentage of its productive
capacity versus the fair market value of the land, which is usually much
greater. A solar project could impact the ability for property to
qualify for this special use valuation. If that is the case, a host of
issues arise, including a rollback period where the landowner may owe
the difference between the normal tax value and the modified value paid.
Importantly, even after the solar project has left the land, it could be
years before the property can qualify for agricultural or open space
valuation again.
Landowners should visit with their local appraisal district to
determine how solar projects are treated with regard to special use
valuation. It is important that landowners include a term in the solar
lease agreement whereby the solar company covers any additional real
property taxes owed as a result of the project and that the company pays
for any personal property taxes on the solar
equipment.TBJ
This article has been
edited and reprinted with permission of the author..
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TIFFANY DOWELL LASHMET is an assistant professor and extension agricultural law specialist with Texas A&M Agrilife Extension Service. She holds a bachelor’s degree in agribusiness farm and ranch management from Oklahoma State University and a J.D. from the University of New Mexico School of Law. She maintains the Texas Agricultural Law Blog at agrilife.org/texasaglaw. |