There is a growing trend among agricultural landowners to rent a small acreage for a guaranteed income over a long period of time to supplement farming income.
This increase in leasing opportunities is likely due to two contributing factors: 1) the Ontario government has directed the Independent Electricity System Operator to acquire new electricity generation and storage resources, and 2) an increase in demand for access to telecom services for underserved communities and as a result, a need for more telecom infrastructure across the province.
Energy developers and telecom companies require land to build their projects and infrastructure. Rural landowners are being approached with a simple knock on their front door or a cold call. Before you receive that knock or call, a preliminary investigation into your property has already been conducted. The energy developer or telecom company has likely concluded that your property offers something unique. For example, you might be close to a transmission line, making it easier for the energy developer to connect its battery storage facility to the grid. Your property might be close to a poorly serviced area, which makes it more attractive than other acreage.
If presented with a potential leasing opportunity, there are a few considerations for landowners to keep in mind:
- Negotiate the Business Terms. Typically, big energy developers and giant telecommunications companies (“leaseholder”), who likely have infrastructure projects all over the world, will tell you that their lease is a “standard form agreement”, and proposed changes will not be entertained. This is not accurate. As the landowner, you have every right to negotiate the business terms of an agreement impacting your property. If your property is valuable to the potential purchaser, when push comes to shove, it will negotiate the terms if it means a lease for your property will be signed.
- Length of Terms and Automatic Renewal Terms - The length of term typically varies, but generally speaking, for energy projects, you can expect lengthy initial terms (e.g., 20 years). Given the nature of these projects and the investment dollars attached, such terms are necessary for the overall success of the project. Exercise caution if presented with a lease that contains automatic renewal terms – you want control over how long the potential leaseholder can use your land.
- Environmental Liability – Environmental regulation is stringent in today’s world, and its rigor will only increase with time. Not having the proper contractual protections in place, including indemnities relating to environmental contamination, could negate any financial benefit you may have received from the lease or leave you in a far worse-off position.
- Decommissioning and Remediation – On occasion, remediation and decommissioning obligations are either non-existent or sparse in content in a lease agreement. Failure to have these types of protections in the lease can result in the landowner assuming unwanted and unexpected decommissioning work, which is costly, time-consuming, and subject to extensive regulatory oversight. After the expiry of the agreement with this leaseholder, are you expecting the land to be remediated to a certain standard? You need to ensure that the standard is set out in the lease.
- Location of the Leased Premises - Sometimes, leaseholders do not know precisely where they want to construct their project on your land. The lease may provide for a period of time when they are allowed to complete due diligence work and testing to determine the exact area that they wish to lease. You want to maintain control over the final location of the leased area.
- Compensation for Crop Damage during Due Diligence Period and Construction – During the investigative and due diligence period, if the leaseholder impacts your property or causes any damage, they should compensate you for your loss. Imagine you are a farmer who owns a 100-acre farm, and the leaseholder conducts a number of invasive tests on your property to determine the best location for its battery storage facility and damages 20 acres of your crops. During construction, the leaseholder will need to dig beneath the soil, which could cause significant damage to the tiling system on a farm. Who will be responsible for the damages and repairs?
- Additional Access Areas and Roads – The leaseholders will need access to the leased land. This could mean a number of things. Does an easement need to be negotiated to allow the leaseholder to use any existing roads on your property? What are the terms? Can such a road be accessed 24/7 by the leaseholder, or should there be parameters on usage to limit the impact on your intended use of the property (i.e., what if your family residence is located on this property)? Who is responsible for maintenance and repair? Does the agreement give the leaseholder a right to build its own access road on the property? How will the provision of an access road impact the rent calculation?
- Change in Classification for Realty Tax Purposes – On occasion, the leaseholder’s project and use of the property impacts the property tax classification. If there is any change in property taxes that is attributable to the leaseholder’s project, such increase should be the responsibility of the leaseholder. For example, if your land was zoned for agricultural use and it is reclassified as commercial, that can have a significant impact on property taxes for which you, as the landowner, do not want to be responsible.
- General Liability and Indemnities – When negotiating a lease, it will be important to consider the liability assigned to each party. Some of these leaseholders are coming onto your property to build significant infrastructure projects, which creates a material risk to you. To mitigate such risk, comprehensive indemnity provisions should be in place to ensure that any damage to the property or personal injury will be the responsibility of the leaseholder rather than the landowner. Responsibility for the acts and omissions of third-party contractors hired by the leaseholder must also be addressed.
- Insurance – Ensuring that the leaseholder has the appropriate insurance in place is imperative. Insurance requirements should be reviewed with the landowner’s respective insurance professional to confirm that such policies offer the appropriate protection to the landowner.
- Legal Fees – The leaseholder should compensate you for legal fees that you incur as a result of any review and negotiation of the lease agreement. Oftentimes, the leaseholder will try and negotiate a cap on such fees.
As you can tell from this list of considerations, obtaining independent legal advice is imperative. Do not rely solely on the statements made by the representatives of the leaseholder. Sometimes, the leaseholder will present a Letter of Intent (LOI) to the landowner. The LOI needs to be carefully reviewed with counsel. Occasionally, it will include legally binding business terms.
A lease with an energy developer or a telecom company has the potential to be an opportunity to supplement your income. However, exercise caution and consult a lawyer before signing any documents. The Lerners Real Estate and Land Development Group is available to assist in negotiating the terms of such leases.