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Strategies: Getting out when the wind changes

With the attention that wind energy is generating in Indiana, we will continue our discussion on the topic. Rod Eagleson, from EHS Energy, advises landowners on wind energy issues. He has been kind enough to assist with this month’s article.

At the start of this year, there were a total 626 large-scale U.S. wind projects scheduled for development. However, the current commercial banking climate and the world financial situation have also lead to a downturn in the wind power market. Throughout the world, wind turbine orders fell by 50 percent in the first half of 2009 as compared to last year. Current economic pressure has also forced many large wind manufacturers to slash jobs (e.g. Vestas Wind Systems is laying off about 1,900 employees and LM Glassfiber, the world largest maker of turbine blades, is laying off more than a 1,000 workers).

In addition, the largest voice for wind energy - Mr. T. Boone Pickens, has scraped his largest wind energy farm in the U.S. due to a tight financial market and cheap natural gas prices.
The “Pickens’ Plan” was to invest $12 billion for wind power throughout 200,000 leased acres in northern Texas.

As a result, farmers must be aware of the current trends within the wind industry. Just like the wind itself, the wind industry is always changing directions, especially related to capital investment. Therefore, it is essential that farmers negotiate their wind energy contract carefully before a signature appears on an option contract/lease agreement. Key elements must be in place that best represent the interest of the landowner. Signing a contract without negotiating any exit provisions is ludicrous and may lead to undeveloped land use and no future income potential for the landowner.

Therefore, establishing a wind farm exit strategy offers the best opportunity (tool) that can be used to insulate the farmer from the loss of land rights to productive ground. This countermeasure is designed to make the wind developer perform a site-specific arrangement within a mandated time frame or the contract is null and void.

In short, this type of performance-based approach offers the landowner the greatest “get out of jail” free card, so to speak, if the developer fails to develop the land for wind power. There are numerous ways to implement these types of various exit strategies; a short list of examples is as follows:

First of all, it is wise to counter the original agreement with protective clauses that can shorten the life span of the written contract offered by the wind developer. Farmers must protect their wind rights that tie up land rights. For example, it is best to include a clause in the contract that terminates the written land lease agreement if the wind project is not in commercial operation within 3 years.

Secondly, farmers should also be aware that some states set mandatory time limits on wind option contracts or wind easements. For example, North Dakota State law terminates wind option agreements if wind development has not occurred within 5 years after the agreement commences.

Finally, farmers need to be careful of wind energy “checker boarding”. There may be many wind developers offering wind power contracts within the same locality. Situations can arise whereas developer X erects wind turbines on certain properties that are adjacent to property leased by developer Y. Since wind turbines require a certain amount of separation, developer Y is unable to erect wind turbines. This creates a checkerboard pattern that is worthless to the landowner who exercises his contract with developer Y.

In summary, there are a lot of issues associated with option contracts and lease agreements related to wind energy. Just like the wind itself, the wind industry, the political climate and the financial market system always change directions. Landowners must protect their assets with proper negotiating tools and expert advice so as to accommodate these changes.

John J. Schwarz, II, is a farmer and attorney in Steuben County, Ind. He focuses his practice on agricultural law and legal issues important to farming communities. He can be reached at 260-665-9779 or jschwarz@cresslaw.com
These articles are for general informational purposes only. If you have a specific legal question, you should consult an attorney.

The views and opinions expressed in this column are those of the author and not necessarily those of Farm World.

9/9/2009