By SHELLY STRAUTZ-SPRINGBORN
Michigan Correspondent LANSING, Mich. — As more farmers consider entering into agreements allowing wind turbines to be installed on their farms to generate renewable energy, it is important to be sure they are getting a fair deal.
To help determine if a proposed lease is a good option, a group of Michigan State University educators have developed a worksheet to help lead landowners through an evaluation of a proposed lease. It covers all the bases of wind leasing, including basic details of a lease agreement, length of term, payment options, assignment clauses, liability issues and more.
David Schweikhardt, professor with MSU’s Department of Agricultural, Food and Resource Economics and document co-author, said the worksheet was developed to help guide farmers through the process of evaluating a potential lease agreement. He warns producers, however, that the worksheet is only one tool that should be used when going through the evaluation process.
“People need to be cautious,” he said. “This is not something that I would sign without consulting an attorney. This is a legal document that deserves some inspection.”
Schweikhardt said the worksheet was developed in part due to increasing demand from farmers for such a tool.
“We also were hearing a lot of stories that some people were taking these contracts very casually,” he said.
Wind energy production leases may be long-term agreements and some have clauses that allow for automatic extensions of the terms of the contract. Schweikhardt said it is not uncommon for a lease agreement to be for a term of 20-30 years, and maybe as long as 99 years. In addition, some contracts allow for the automatic extension of the contract without further consulting the landowner.
“We’re not saying these leases are bad,” he said, but when signing a lease landowners “have to understand that the lease could outlive them.
“Anyone taking over the land is going to have to live by that lease. If it’s a bad lease, you’re tying your hands.”
Schweikhardt said there are key factors landowners should consider. A lease can have several timeframes defined in it – an evaluation phase, a production phase and an option for extension of the production phase. The sum of these phases can be lengthy. Schweikhardt cautioned landowners to be aware of the total time commitment for their property under the lease. Also, landowners should be aware if a proposed lease contains an assignment clause, which permits the wind developer to sell or transfer the lease rights to another party. A lease with this clause means that a different company could own the rights to the lease in the future.
Schweikhardt said landowners may want to consider a couple of options when negotiating a lease with an assignment clause. First, they may want to negotiate a higher rate of pay as compensation for the risk they face in dealing with another party in the future.
Second, they may want to negotiate a provision in which the developer is liable if the lease is assigned to a third party and the third party fails to satisfy the terms of the lease.
“What is important is that the landowner either has some right of approval of a third party, or the developer remains liable for the contract in case of the default of the third party,” Schweikhardt said. “Then, the developer has a desire to find a legitimate third party to assign the contract to.”
He also cautioned landowners to carefully consider the contract’s compensation clause. Because there are many payment options, Schweikhardt said a landowner must “understand precisely on what basis you’re going to be compensated.”
He said one consideration is how much electricity could be generated off a single turbine and negotiate compensation that is appropriate. He said careful attention must be paid to the payment method’s impact on the landowner’s returns for the entire length of the lease.
Finally, Schweikhardt said landowners also should consider potential liability issues in the negotiation of a lease. He suggested considering liability of the landowner if a wind turbine is damaged, liability of the developer for damages to the property, which party would be liable for damages that occur to a third party and whether the lease requires the developer to carry insurance on the turbine and associated facilities.
“You are going to get what you negotiate, not what you deserve,” Schweikhardt said.
With wind energy emerging as an alternative energy source, Michigan Farm Bureau (MFB) is supportive of the worksheet and is recommending it to its members.
“We think this worksheet is a very good tool for our members to use when approached by a company that wants to lease an easement for a potential wind turbine,” said MFB Land Stewardship Specialist Matt Kapp. “We want everyone to be informed, because there likely will be more and more companies popping up, and caution is always the best way to go.
“And, remember that some companies are buying up easements to keep other companies out, and a wind turbine may never be built on your property. In that case, the situation is quite similar to gas and oil leases.”
To date, Farm Bureau members have reported at least five companies actively working to secure wind leases in Michigan’s Thumb region.
“Those are the companies we’re aware of,” Kapp said. “There are probably a lot more companies working Michigan, and each one may have a slightly different proposal.
“Farm Bureau encourages and supports wind development. We just want to be sure that farmers are educated and consider things carefully before entering a legal agreement that involves their land.”
A copy of the worksheet is available at http://web1.msue.msu.edu/wind |
