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Host Landowner Negotiations

1.1. Observations

Background

Wind turbines are typically located on cleared primary production land owned by a landowner, often referred to as the ‘host’ landowner. The land’s existing use is typically for broad-acre agricultural production (for example, livestock or cropping) and, in general, a relatively small portion of the productive land is utilised for the wind farm’s operation, such as turbine siting, access roads and other related assets such as transmission line easements, electrical substations, transformers and meteorological masts. The landowner continues to operate the agricultural production activities on the remaining land. There is typically significant disruption during the turbine construction phase and ongoing access to the wind farm assets will be required by the operator during normal operations.

Landowner Compensation

Host landowners are generally compensated on a fixed amount per turbine per year under a long-term agreement that mirrors the life of the wind farm – a term of 25 years is common. The fee paid to the landowner may be a flat annual fee per turbine, regardless of size or capacity, or a fee based on the generating capacity of the turbine. The latter arrangement reflects the reality that modern day turbines have much greater capacity (in the order of 4 MW-5 MW) compared with turbines available previously and, therefore, can result in less turbines being hosted by the landowner than originally envisaged with smaller capacity turbines.

An issue that has emerged relates to agreements that may have been entered into a number of years ago with a fixed annual fee per turbine, where the turbine capacity may have been in the order of say 1.5 MW to 2 MW. Some agreements did not contemplate the significant change in turbine capacity that has occurred in recent years. As a result, the agreement fee payable to the landowner (based on the smaller capacity turbine) may not reflect the fee that may be more appropriate for say a 4 MW to 5 MW capacity turbine. Landowners may wish to check their existing agreements in this regard as well as ensure new agreements have provision to adjust the fees in the event of capacity increase and the ability to escalate fees for changes in indicators such as CPI.

There can also be a variety of arrangements regarding when the payment of fees commence and end. While this is a matter for negotiation between the developer and the landowner, it would appear that a fair and reasonable approach would be for payments to commence no later than the start of project construction and cease no earlier that the completion of decommissioning and restoration at the landowner’s property.

Other fee arrangements/agreements may also be required for transmission easements, road access, transportation of blades and towers across property boundaries, location of substations, location of project offices and the like. Landowners for these arrangements may or may not be turbine hosts.

An emerging issue is ‘blade trespass’, where a blade may need to traverse a landowner’s property as it is transported around a corner. The recent increase in blade lengths has increased the possibility of this occurring. Developers need to be cognisant of this issue and ensure they have appropriate agreements in place with landowners prior to submitting any transport management plans.

Development Process

Potential host landowners are typically approached by a developer very early in the development phase of a wind farm project to obtain their agreement to host turbines in the event that the project goes ahead. Landowners will typically enter into an initial agreement (often referred to as a ‘License Agreement’) that documents their willingness to host turbines and the commercial arrangements that would occur in the event that the development proceeds. Generally, these initial agreements provide the developer with exclusive rights over the landowner’s property for a defined or undefined period of time.

There is a wide array of developers active in the industry, with a variety of skills, resources, experience and business models. Many developers will develop the project to a stage where it is eligible to secure (or has secured) a planning permit, and then sell the project to another entity to take the project forward. Currently, developers are not licensed to prospect wind farm projects nor do they require approval to prospect a location for a potential wind farm site.

As the development process progresses, it is not uncommon for a developer to propose more turbines than will be finally approved or installed. As a result, the developer often seeks and enters into preliminary agreements with landowners who may ultimately ‘miss out’ on hosting turbines or be asked to host a reduced number of turbines. Further, even once the final number of turbines is confirmed, the planned locations of turbines may be adjusted which can also result in landowners hosting less turbines than expected.

There are many reasons why a proposed wind farm may reduce the number of turbines during the development phase. These may include increases in turbine capacity, transmission constraints, environmental and planning considerations and requirements, financial constraints along with changes to policy, legislation or planning guidelines.

These various scenarios, observed in the Australian industry to date, can create a ‘winners and losers’ situation for landowners that may have had expectations of hosting wind turbines. For instance, a landowner expecting to host say 10 turbines (and expecting to receive the compensation associated with such hosting) may become aggrieved if the final approved wind farm has significantly reduced or eliminated the number of turbines to be hosted, thereby significantly reducing or eliminating the potential income stream to that landowner.

The landowner not only may miss out on a significant expected income stream, but may also experience many of the potential impacts of turbines located on neighbouring properties, including changes in amenity, audible noise, construction disruption and other effects of the wind farm. The fact that the landowner’s neighbours were still successful in hosting turbines and receiving compensation can further aggravate the situation for the landowner that missed out.

This situation can also be exacerbated by developers conducting confidential, individual discussions and negotiations with specific landowners, creating a level of distrust amongst neighbouring landowners and the developer from the outset.

The consequences of these scenarios can be severe, both in terms of fracturing support for the wind farm within the community as well as dividing the community in economic and social terms. Developers need to be mindful of the consequences arising from their conduct in landowner negotiations and the magnitude of impact on landowners with regard to changes in the number of turbines and turbine layouts.

There is also a high risk that wind farm prospectors, who may not have fully considered such scenarios and/or may not be invested in the long-term benefits of community engagement, conduct themselves in a manner that result in long-term resentment within local and wider communities where the project is proposed. While these actions may lead to difficulties in relation to the success of the specific project, they also have the potential impact of creating difficulties for other wind farm developers who may be undertaking development of neighbouring projects in the region. Ultimately, these scenarios have brought and still have the potential to bring the wind farm industry into disrepute.

In cases where landowners have ‘missed out’ on turbines after a lengthy period of time of being involved with the project, the Commissioner has observed some successful methods of working with such landowners, including a level of compensation that may be based on a range of parameters, such as taking into account the number of turbines that the landowner had been expecting to host.

Host Agreements

A host landowner agreement is essentially a commercial lease. Significant time and money is spent by developers in creating draft landowner agreements, which in turn need to be reviewed by the landowner and their solicitor before executing. Both industry and landowners may benefit from a standard agreement document being produced and available for use that is fair and reasonable, complete and consistent with the relevant laws – similar to in concept, as an example, the Victorian Law Institute Commercial Lease.

Some landowner agreements observed could be clearer in a number of aspects. Agreements should provide clarity on a wide range of day to day matters, including which party is responsible for paying rates, land taxes, emergency services levies and the like. The landowner agreement also needs to be clear on termination provisions and the responsibilities regarding decommissioning of the wind farm.

Landowner agreements are not limited to hosting turbines – they may also be required to allow easements for high voltage transmission corridors, substations, construction facilities, meteorological masts as well as construction and operational access roads for the wind farm. Careful consideration of the approach and fairness to negotiating these additional agreements should also be required of the developer. Landowners should also ensure they seek suitably qualified legal and financial advice before entering into any agreement.

There may also be innovative opportunities for landowners and other community members to have an ownership stake in the project, which could be in the form of a community-owned wind farm through to equity or debt participation in the commercial ownership structure. It is understood that there are some examples of these approaches in Australia as well as in other overseas jurisdictions such as Europe.

Construction

The construction period can be a time of significant disruption for the landowner, with potential long-term effects. Typical issues can range from management of gates – gates being left open during construction activities can quickly lead to unplanned migration of livestock, often with significant consequences – through to the impact of new roads being built throughout the landowner’s property. In particular, road construction in hill and ridge terrain may lead to large roadway cuttings and embankments that make it difficult to move livestock around the remaining paddock areas. Best practice gate management is to design the road access and fencing in such a way to minimise or eliminate the need for gates. Project roads should also be designed to minimise the need for ‘cut and fill’ and vegetation removal, using the natural landscape wherever possible.

A project typically has multiple contractors and subcontractors. It is not always clear who the landowner should contact to resolve issues as they inevitably arise during construction. Developers should ensure there are clearly defined points of contact for the landowners to raise and resolve issues during construction, as well as the ability to escalate concerns that are still unresolved.

Outgoings

The addition of a wind farm to a rural property is likely to incur increases in outgoings such as Council Rates, Land Taxes, Insurances and other levies. For instance, a landowner may not be aware that primary production land may be re-assessed as industrial use land once turbines are installed, and may attract increased valuation rates and may no longer be exempt from land tax. As discussed earlier, landowner agreements should be clear on which party is responsible for payment of outgoings and any increase in the outgoings due to the wind farm. Ultimately, the landowner is usually liable for the payment of outgoings in the event the wind farm operator defaults.

Approaches to calculate and levy items such as council rates, land taxes and other levies appears to be ad-hoc across various state jurisdictions. This may result in a number of consequences, including revenue leakage and surprises in unforeseen levy charges. Some actions are being taken on these matters, such as the recently released NSW Valuer-General policy Valuation of Land Used as a Wind Farm (New South Wales Government, May 2017) but there may well be opportunities for tighter and repeatable processes to correctly calculate, levy and collect these payments as a result of the deployment of wind turbines on the land.

Decommissioning

At the end of the wind farm’s operating life, the clear expectation of all stakeholders is that the wind farm will be decommissioned and all turbines and other infrastructure will be removed from the property and the property returned to its original condition to the extent that can be done.

These responsibilities to ‘make good’ rest with the wind farm operator. However, in the event of default by the wind farm operator, the liability for decommissioning ultimately rests with the landowner. Further, the landowner typically does not have title or ownership of the wind farm’s assets and, as a result, is unable to recover the costs of any decommissioning activities by selling the assets remaining on the property. Wind farm operators/owners may also change many times during the life of the wind farm.

From a landowner’s perspective, it is imperative that any commercial agreement to host wind turbines and infrastructure clearly sets out the responsibilities for decommissioning and restoring the site. A landowner may also wish to seek ongoing evidence that the wind farm operator has the capacity to fund the decommissioning activity and that such funds are properly set aside securely for that purpose. Examples that could be considered include bank guarantees, a sinking fund, a trust fund or a deposit held by the landowner.

It should also be noted that we are entering a period where, for some of the initial wind farm projects around Australia, decommissioning activities will commence in the next few years and there will likely be increased attention in how these activities are handled.

1.2. Recommendations

1.2.1. The developer should ensure that landowner expectations are properly managed from the outset of negotiations and that potential host landowners are made fully aware of the risks of potential reduction in turbines and relocation of turbines during the long development process life-cycle. Agreements that enable the developer to have the exclusive rights to the landowner’s property should have fair and reasonable provisions for the landowner to terminate the agreement if the project has not met expected milestones after a reasonable period of time. Prospective milestones set out in the agreement should have clearly stated expected dates for events such as submission of permit application, financial close, commencement of construction works and expiry of permit.

1.2.2. Where practical, developers should consider discussing the proposed project and negotiating with all potential host landowners together as a group in an inclusive and holistic manner, rather than individual discussions with landowners. A standard template agreement with consistent commercial terms should be considered by developers and supported by industry.

1.2.3. Further to Recommendation 1.2.2, developers should consider offering some level of compensation to all engaged potential host landowners if the project proceeds, regardless of final allocation of turbines on individual properties.

1.2.4. Host landowner agreements should be fair and reasonable, be written in plain English and the landowner should have access to and obtain appropriately skilled legal and financial advice before entering into any agreement. The New South Wales Government’s Wind Energy Guideline for State Significant Wind Energy Development (New South Wales Department of Planning, December 2016) provides some discussion on this topic, particularly within Attachment B of the publication. NSW Farmers’ Federation have also produced a Wind Farm Guide for Host Landowners (GHD Pty Ltd, 2012) covering a range of relevant topics related to host landowner agreements. Specific areas of agreements requiring clarity in landowner agreements include:

  • fees payable to the landowner during the project development stage (pre-permit), financial close stage (post-permit), construction and operational stages
  • timing of payment of fees and due dates for payments
  • escalation of fees during the agreement, such as a fixed annual increase or CPI increase
  • considerations if the project is cancelled or materially delayed
  • variations to fees in the event of changes to turbine layout, turbine specifications, turbine capacity and number of turbines to be hosted
  • changes to and effects of project infrastructure to the landowners property (e.g. access roads) and responsibilities for maintenance of such infrastructure
  • responsibility for payment of additional council rates levied on the landowner as a result of the wind farm
  • responsibility for payment of additional land taxes levied on the landowner as a result of the wind farm
  • responsibility for payment of additional emergency services or other levies as a result of the wind farm
  • required insurances to be taken out by the wind farm operator in respect of the landowner
  • required insurances to be taken out by the landowner in respect of the wind farm
  • responsibility for payment of the various insurances
  • landowners responsibilities in regard to renting out the property and/or residence(s) to a tenant
  • sale or transfer of the land by the landowner
  • any restrictions on further development on the property
  • provisions in the event of subdivision of the property
  • term of the agreement, options for renewal of the agreements and termination provisions
  • assurance provisions in the event the wind farm defaults (such as deposit or bank guarantee)
  • decommissioning provisions, responsibilities of the parties and arrangements to ensure funding is assured and protected
  • remedies available to the landowner in the event of default by the developer, and
  • key contacts at the developer for the raising and escalation of issues and potential breaches of agreement.

The above items could be set out in a standard template of a commercial agreement that is managed and maintained by an appropriate legal, industry or government body.

1.2.5. Councils and state jurisdictions should examine and audit current processes in place for the re-rating of properties that host wind farm turbines and related infrastructure and how those properties are valued for the purpose of calculating land taxes and council rates. A similar activity should be undertaken for the calculation of emergency services levies where applicable. The process and calculations should be transparent to relevant stakeholders and be subject to audit and be auditable.

1.2.6. Other landowner agreements (such as agreements for transmission line easements or road access) should also be negotiated and finalised with the landowners in a fair and reasonable manner, with appropriate consultations engaging affected landowners and neighbours in determining the final approach and routes to be taken.

1.2.7. In certain situations, developers may wish to consider other forms of engagement with landowners (as well as neighbours and community members) that may allow for equity and/or debt participation in the ownership of the project.

1.2.8. The project’s construction plan, transportation plan and wind farm design should be developed in close consultation with the landowners and designed so to respect the landowner’s need to be able to continue primary production operations during and following construction. Particular attention should be given to paddock/gate management and the impact of access roads to ongoing farming activities. Key contacts at the developer and/or its contractors should be provided to landowners to allow landowners to raise and escalate issues that arise during construction. Developers should also meet regularly with landowners during construction to discuss and resolve issues and keep landowners informed of the project’s status.

1.2.9. To ensure that professional conduct and standards are consistently adhered to by wind farm developers, state governments should consider licensing or accrediting developers that intend to prospect and develop wind farms. Further, as is the practice in the mining and exploration industries, state governments should consider the requirement for a developer to obtain a prospecting permit prior to commencing a wind farm prospecting activity in a given location. The prospecting permit could be time-limited and cancellable if certain milestones are not achieved.

Further information