Renewable energy success 01: building the foundation by structuring land arrangements

Developers across the nation are snapping up land for potential renewable energy projects, whether that be solar, wind, hydro or battery energy storage system developments. However, before entering into land arrangements, developers should consider:

1. how they structure their land arrangements;
2. how they negotiate those land arrangements with landowners;
3. how they investigate their chosen site; and
4. how they can ensure that their land arrangements satisfy their financier's requirements,

to ensure the best outcome for their project.

This is the first of a four-part series exploring how developers can tackle each of these issues and provides some insights into structuring land arrangements to suit the specific circumstances of the project.

What are the different types of land tenure arrangements appropriate for a renewable energy project?

Freehold title

This involves purchasing the land required for your project. This is the most secure form of tenure because it cannot be terminated (unless of course the land is compulsory acquired by a government entity for a public purpose). Once you buy the land, you will not need to deal with a landlord or other third party to use your land and can deal with your land as you think fit, subject to any planning or other regulatory restrictions.

However, buying land comes with a range of considerations, including:

• payment of an upfront purchase price and stamp duty on the transfer;
• payment of holding costs such as land tax and Council rates for so long as you remain the owner;
• whether a subdivision of land is required in order to buy only part of a larger title. If a subdivision is required, you will need to consider whether the proposed subdivision complies with the minimum lot size requirements applicable to the land and factor in the time and costs that are needed to effect the subdivision.

Leasehold interest

This involves leasing the land required for your project, usually for a reasonably long period to cover the proposed term of your project. There are some benefits to leasing rather than purchasing land, including, in most cases, no payment of an upfront premium and no payment of stamp duty. A lease will also give the developer exclusive possession of the land.

In most jurisdictions, leases are registered on title, which notifies any third person proposing to deal with the land (such as purchasers, mortgagees and other tenants) of your interest in the land. It also protects your interest if the underlying land is sold or mortgaged or otherwise dealt with. You may grant a mortgage over your lease (which may be registered on title), which will likely be necessary to facilitate the financing arrangements for your project.

Some of the factors that you will need to consider when entering into a long-term lease include:

• determination of rent and an appropriate rent escalation method over the term of the lease;
• the contribution that you will be required to make to the landlord’s holding costs for the land (which may increase as a result of the renewable energy project being constructed and operated on the land);
• ensuring that all registration requirements are complied with so that the lease can be registered on title; and
• what works you may carry out on the land and your make good obligations at the end of the lease term to decommission and remove those works.

As any lease will remain in place for the life of the project, it should be carefully drafted to reduce the possibility of early termination or disputes with the landowner.

Licence

This involves accessing the land on a non-exclusive basis. A licence may be appropriate where you only require a short-term interest in the land, for example, during a construction period. As a licence is a contractual arrangement between the landowner and developer, it does not give rise to an interest in the land, which means that it is not enforceable against any third parties dealing with the land.

The benefit of a licence is that it is entirely flexible and the licensed area can easily expand or contract.

Some of the other considerations for entering into a licence include:

• a licence will not give the developer exclusive possession of the land;
• a licence is not able to be registered and does not automatically bind a future owner, tenant or mortgagee of the land; and
• a licensee is not able to lodge a caveat on title to protect its interest under a licence.

On this basis, the grant of a construction or access licence while you are exploring more secure forms of tenure, such as a lease or easement.

Easement

This involves using a specified part of land on a non-exclusive basis for a specific purpose. An easement is usually ancillary to another type of land tenure and may benefit land or, in some jurisdictions, a registered lease. An easement may be an easement in gross, which means that it benefits a utility company or government authority, rather than a land or lease.

A benefit of an easement is that it is registered on title and accordingly binds future owners and mortgagees of the land. An easement can be registered on various parcels of land. The terms of an easement can clearly set out the rights and obligations of the parties in respect of maintaining the easement site or prohibiting works from occurring on or adjoining the easement site.

Some landowners require the grant of upfront compensation for the grant of an easement (which may attract the payment of stamp duty in some jurisdictions) and any easement needs to be consented to by any registered mortgagee or lessee of the land.

So what is the right land tenure for your renewable energy project?

The right land tenure structure for your project will ultimately depend upon the specific requirements of your project and the jurisdiction in which your project is located. For example, will your project budget allow for the payment of an upfront purchase price and stamp duty for the land? Will your project timeline allow for a subdivision of the land? If so, the purchase of freehold title may be appropriate. However, if your project budget requires the spreading of consideration for land tenure over the life of the project, then a long-term lease may be preferable.

A licence may be sufficient during a construction period, where the licensed area needs to expand and contract depending upon the stage of construction. And easements are usually necessary to support renewable energy projects, to ensure access to the project and to facilitate the erection and operation of transmission lines or infrastructure across neighbouring land.

If you would like to discuss your land tenure requirements for your renewable energy or other projects, please reach out (and stay tuned for the second part in this series, including tips for negotiating land arrangements with landowners).