Understand wind energy leases
According to the American Wind Energy Association, more than 31% of Iowa’s in-state electricity generation came from wind in 2015. The Iowa Utilities Board has reported this is the first time wind has ever supplied a state with more than 30% of its yearly electricity. Sustaining this increase in wind energy output is an increase in wind farm development. When wind farm developers approach landowners about constructing wind turbines on their property, many are left with questions. Below provides a brief overview of several key legal issues landowners should consider when evaluating wind energy agreements.
It’s all in the contract
The backbone of any wind farm is the wind energy agreement. Every landowner who sells an easement or leases property to a developer does so pursuant to a detailed contract drafted by the developer. It is important that landowners fully understand the rights and obligations detailed in these contracts before signing them. With many of these agreements dictating land usage for the next 50 years or so, it is well worth the expense of hiring an attorney experienced in these matters to review the paperwork before signing.
Given the voluntary nature of these projects to date, there may not be a lot of room for negotiation. Even so, landowners should not be afraid to ask for terms that better meet their needs. And landowners should not hesitate to walk away from negotiations if they are not comfortable with the terms offered. Because these contracts often contain a confidentiality clause, landowners usually don’t know the terms of their neighbors’ agreements. As such, it is sometimes difficult to evaluate the fairness of a financial offer.
• Fully understand wind energy agreement before signing it.
• Energy easements are often for a term of 30 to 50 years.
• Agreement should include liability insurance for landowner.
Lease vs. easement
One possibly confusing element of an agreement is the interest being conveyed. Sometimes the agreement will use the term “lease,” and sometimes it will use the term “easement.” Many times the agreement conveys a combination of both.
While the two terms are similar, an “easement” conveys a right to use a landowner’s property for a specific purpose. Title to the property remains with the landowner, but the purchaser obtains a limited property interest. Because this is an ongoing interest, an easement is recorded in the county land records. It remains binding upon future owners or occupiers for the term of the easement.
Although an easement can be perpetual, wind energy easements are often for a specified term, between 30 and 50 years. Developers often buy easements to secure various rights, including those for ingress and egress, installing transmission lines and facilities, and accessing unobstructed wind. Called “unobstruction” easements, the latter easement restricts landowners from building or conducting activities on their property that would impact the amount of wind reaching the turbine.
An easement is usually nonexclusive, meaning the landowner may continue to farm or otherwise use the land, subject to the rights conveyed by the easement. Some easements may be temporary. Construction easements, for example, usually allow the developer to travel over a larger portion of the property to build the turbine, but end when the construction phase of the property is complete.
A lease, on the other hand, is a conveyance of an interest in land for a term of years in exchange for a rental payment. Without special language in the lease agreement, a lease typically conveys an exclusive right of possession to the tenant. Developers often seek long-term leases for the small parcel of land on which the turbine is located.
Tax treatment of payments
The nature of the interests conveyed and the way the payments are structured impact the tax treatment of the payments. Often, if a landowner receives a payment in exchange for an easement in place for 30 or more years, that transaction (for taxes) is treated like a sale of the impacted property.
If the price does not exceed the basis (the cost) of the impacted property, the basis is reduced by the amount of the easement payment, and the landowner recognizes no income from the sale. If the payment exceeds the basis, the excess payment is taxed at capital gains rates if the landowner has owned the property for more than one year.
Payments for short-term easements are taxed like lease payments. Both are taxed at ordinary income rates, not subject to self-employment tax. Payments to compensate farmers for crop damages are taxed as ordinary income, subject to self-employment tax. Because these transactions can be complicated, landowners should consult with their tax advisers on the specific tax implications of any agreement.
Another key issue for landowners to consider is liability stemming from the construction and operation of wind towers on their property. Landowners should ensure developers agree in the contract to indemnify them for damages. This should include defending landowners in future lawsuits and compensating them for legal damages incurred because of the wind farm.
The agreement should also require the developer to maintain sufficient liability insurance to protect the landowner. Landowners should review potential tort liability arising because of a wind farm, including nuisance, negligence and trespass, with their legal advisers and insurers.
In addition to these issues, landowners must consider other legal issues beyond the scope of this article. They must always negotiate with lenders or tenants before signing to ensure they are not compromising third-party rights. They must also consider property tax liability, the agreement’s impact on farm program payments, removal of the tower at termination, and the impact of the wind turbines on farming, such as GPS technology or aerial spraying.
Wind energy agreements can provide a stable source of income over many years, but landowners must understand the long-term consequences of the agreements, which will impact them, successive owners and tenants far into the future.
This article published in the June, 2016 edition of WALLACES FARMER.
All rights reserved. Copyright Farm Progress Cos. 2016.