Written By Michael Chow, Alixe Cameron, Thomas McInerney, Chris Porter and Sydney Olsen
The Province of Alberta will become the Canadian leader for utility-scale wind and solar capacity in five years, according to a recent analysis by Rystad Energy. A flurry of renewable projects in Alberta would increase installed capacity from 1.8 GW of wind to 6.5 GW, and 0.1 GW of solar to 1.8 GW, by 2025. This would overtake Ontario as Canada's leading jurisdiction for utility-scale wind and solar says Rystad, an independent energy research company based in Oslo, Norway.
This rapid growth has brought a greater focus on understanding the legal aspects of land leases for renewable energy projects in Alberta for both land owners as lessors and project developers as lessees. Here are some of the key issues to consider for a new project.
Issues for Land Owners
- Subdivision or No Subdivision: Will the project developer be leasing all of the land or only a portion of the land? If the amount of the land being leased is only a portion of the land, this may be considered a deemed subdivision by the applicable governmental authority depending on the other terms of the land lease. If so, in certain circumstances, the land lease may be considered invalid or void.
- Third Party Rights: Does the land lease affect or is the land restricted by third party rights on the lands? These may include utility right of way holders, easement grantees or other lessees that may hold prior land rights on the lands which may prohibit or restrict the development and operation of the project by the project developer. This may also include third party lenders which the landowner may require approval from prior to any development on the lands.
- Rent: What rent or compensation structure will be used? Will the landowner be charging basic rent and additional rent or will there be a more custom compensation structure required? Landowners need to consider if rent will increase on a fixed amount or base any increase on applicable consumer price index (CPI). Landowners need to consider whether the project developer will be responsible for rent plus all costs and expenses of the landowner in relation to the lands during the term of the land lease. These costs and expenses may include property taxes, landowner’s insurance and maintenance and security costs.
- Insurance: What policies of insurance should the landowner maintain and require the project developer to maintain? Landowners should ensure that the landowner and the project developer maintain adequate insurance, including property loss and damage and commercial general liability insurance. Landowners also need to consider course of construction insurance during the construction of the project and also review whether environmental liability insurance is required.
- Surrender and Restoration: What surrender and restoration obligations should be placed on the project developer at the expiry or early termination of the land lease? In most cases, the land lease will be for a lengthy term of likely twenty years or more. In many cases, the project may be obsolete by the time the term expires. Landowners should ensure that there are obligations on the project developer to surrender, remove and decommission the project and restore the lands to the condition at the commencement of the term. The landowner should also consider whether it should require any security to guarantee the removal, decommissioning and restoration obligations such as a letter of credit from a financial institution satisfactory to the landowner. Other types of security include: decommissioning funds (trusts or escrow accounts) or performance bonds. The performance bond value may be determined by the total cost of decommissioning and reclamation (D&R) for the entire system. Although D&R of the site may not occur for ~20-50 years, the operator can proactively estimate such costs through evaluation by a qualified professional engineer. Periodic review and adjustments of the D&R costs and associated renewal or replacement of the bond should completed throughout the project's lifetime.
- Guarantors: Should the landowner be requesting a parent company or affiliate company of the project developer to guarantee the obligations of the project developer under the Lease? In many instances, a project developer will incorporate a single purpose entity for each renewable energy project. This potentially leaves the landowner exposed in the event of default by the project developer under the Lease. By requiring a guarantor under the land lease, this may mitigate risk for the landowner.
Issues for Renewable Energy Project Developers
- Due Diligence: Is the land suitable for the project? Is the project permitted under applicable zoning and land-use bylaws established by the applicable governmental authority? When executing a land lease, the project developer needs to consider whether to structure the land lease by way of an option to lease or a conditional land lease to allow the project developer to complete proper due diligence of the lands to ensure feasibility and many other issues prior to proceeding with the project.
- Permitted Use: Is the language in the land lease broad enough to permit all of the intended uses of the project developer? The project developer should ensure that the land lease allows for all aspects of the project’s intended development, construction and operation.
- Regulatory Issues, Governmental Approvals and Incentives: What approvals will the project require from applicable governmental authorities? Project developers need to review and assess these issues amid the developing industry and resulting government laws and regulations surrounding the industry.
- Foreign Ownership of Land Regulations (FOLR): Is the project developer a Canadian controlled corporation or Canadian limited partnership? If so, if the land lease is for a term of more than 20 years and/or for more than 20 acres (either separately or in consolidation with other parcels held by the project developer in Alberta) it will, at the time of registering its land lease interest at the Alberta Land Titles Office, be required to prove that Canadian citizens hold at least 51% or more of the ultimate beneficial interests of its shareholders or limited partners. If the project developer is foreign controlled it will have to ensure that the project lease is for a term of less than 20 years or is for a parcel less than 20 acres. If not, the use under the land lease must satisfy an exception under FOLR such as the construction of a "power plant" or “electric distribution system” as defined under applicable legislation, otherwise approval from the applicable governmental authority through an Order in Council will be required.
- Termination Rights: Does the project developer need a right of termination? The project developer should consider a right termination of the land lease without cause in the event the project does not meet the initial project plans or goals.
- Assignment and Leasehold Title: Does the project developer need the flexibility to assign the land lease, either fully to a third party operator or partially to a joint venture partner? Does the project developer need the flexibility to finance the project by a third party lender and therefore require a leasehold title? The project developer needs to consider whether it requires this flexibility to meet its business goals and increase the likelihood of success of the project.
Bennett Jones' Commercial Real Estate, Power & Renewables and Climate Change teams are actively engaged with solar and other renewable projects in Alberta. If you have any questions about the real estate aspects of a project or development in the renewables sector, please contact us.