Over the past five years, the U.S. wind power industry has grown at an annual pace of 30%.  According to a recent report by the U.S. Department of Energy, wind power could account for up to 20% of the nation’s electricity supply by 2030. As business grows and competition intensifies, wind project developers are facing increasingly complex legal issues and their need for experienced counsel from the very first to the very last stages of the project cannot be overstated.  One of the first steps in starting a wind project is securing the necessary real estate.  In a series of three posts, of which this is the first, we will outline some of the major issues relevant to the negotiation of wind project leases or easements and will provide general recommendations for developers.

Lease or Easement?

The developer and the landowner must first decide whether to enter a lease or an easement relating to the wind project real estate.  Developers should prefer leases, which will typically grant them more baseline rights under state law than easements will.  When negotiating a lease, the landowner will have to carve out from the developer’s rights (which may include the right to exclusive use of the property for the term of the lease) any land use rights the landowner wishes to keep.  On the other hand, since easements are granted for specific purposes, the developer will have to ensure that all of its rights to the property are specified in the easement. 

Due in part to the bargaining power of well-organized landowners, easements have emerged as the dominant legal instrument in wind project development.  However, as a practical matter, easements and leases contain many of the same provisions and an expertly negotiated easement can properly secure the developer’s rights and satisfy its lenders.  For the remainder of this post, we will refer to “easements” as the relevant instrument, but our recommendations also apply to lease negotiations.

Term and Termination

Since wind project development holds a lot of promise but also a lot of risk, developers should try to secure the wind farm property for a reasonably long period of time, while maintaining the option to terminate the easement at will in case the project fails to perform as expected.  Many wind easements have a term of 25 to 30 years and can be renewed at the developer’s option for one or more additional terms ranging from 5 to 10 years each.  The developer typically has the right to terminate the easement at any time and without cause.  The landowner will likely insist on the right to terminate if the developer has not started construction of the wind project within a specified period.  When negotiating the term of a wind lease or easement, developers should consult with local tax counsel, as certain states treat long-term leases or easements as sales of land for tax purposes.

For further information about this topic, please contact Akin Gump.