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With the government aiming to achieve a fivefold increase in the UK's solar power capacity to 70GW by 2035, many agricultural landowners are considering solar photovoltaic developments on their land.
This commercial property blog looks at the benefits of solar leases for landowners and matters to consider when agreeing on lease terms.
The solar market
According to the latest update from the International Energy Agency (IEA), global renewable power capacity additions are expected to jump by a third in 2023 as growing policy momentum, higher fossil fuel prices, and energy security concerns drive strong deployment of solar PV and wind power.
The IEA reports that solar PV additions will account for two-thirds of this increase in renewable power capacity and are expected to keep growing in 2024, with the expansion of large-scale solar PV plants accompanied by the growth of smaller systems.
The UK is a leading global market for renewable energy investments, and ground-mounted solar farms have been at the forefront of this investment since the first round of government subsidies was introduced over a decade ago.
Research by Solar Media Ltd shows that as of July 2023, new solar sites being scoped and planned have reached a total planned capacity of more than 85GW across 1,257 sites.
Submitted plans are now at record levels, exceeding even the height of the "solar boom" era, with many sites that were previously refused planning permission now securing approval at the appeal stage.
Benefits of solar leases
The industry widely quotes around £1,000 per acre returns for renting land for large solar photovoltaic (PV) developments, a figure that clearly exceeds agricultural returns.
Leases often last between 25 and 40 years, and the landowner will have an increased, guaranteed source of income from the land for the term.
Rents are generally index-linked, meaning that rents keep up with inflation throughout the lease term.
Turnover rents offer another incentive for landowners, with many achieving percentages of around 4-6%.
This means that where the specified percentage of the developer's revenue exceeds the acreage-based rent, the landowner is paid a top-up between the two figures.
Achieving these rates will depend on the amount of solar radiation the site receives (we are seeing lower rents in the north of the country where solar radiation levels are lower) and cost considerations, including grid connection, planning and installation.
Solar farms have minimal ground-level impact, meaning landowners can continue to graze livestock (usually sheep or poultry) on the land.
Raising the height of PV panels is not generally necessary to accommodate sheep grazing because the vegetation is accessible to sheep beneath the panels at standard heights.
Grazing can also benefit solar operators by reducing site mowing and other vegetation management needs.
Alternatively, the land underneath the panels could be sown with grass mixes and wildflowers to attract bees and pollinators and increase diversity.
Solar farms have a much lower visible impact than other renewable energy technologies.
They can also be screened and do not emit any noise.
Considerations for landowners
Landowners interested in leasing their land for solar power generation will need to find out if they have a grid connection located on their land or in the vicinity with surplus power in the local area.
Landowners will usually be required to grant the renewable energy developer an option over their land for a period of between 3 and 5 years while the developer secures planning permission for the project.
Landowners must seek legal advice when agreeing heads of terms for the option agreement and lease.
Although not usually legally binding, it is difficult to negotiate a departure from the heads of terms once signed and dated.
Some of the key considerations are explored further below.
Locked in
Entering into an option and lease with a renewable energy developer will mean that the land is "locked in" to that use for a long period.
In addition to the initial lease term, solar panel leases often contain an option to renew for a further term.
During the lease term, landowners will be unable to use the land (or any adjoining land) for other opportunities that would obstruct or affect the operability and efficiency of the solar project.
Restrictions on use and development
For obvious reasons, solar panel leases will grant the tenant a right of free, uninterrupted and unobstructed passage of light to the solar panels.
As a result, the landowner cannot do anything on the land or its adjoining land that would restrict the light flow to the solar panels.
The lease is also likely to contain covenants (which will bind the solar panel land and any adjoining land in the ownership of the landlord) not to do anything which could damage any electric cables or wires and not to deal with the land in any way that could be detrimental to the solar project.
Landowners should carefully consider any potential future changes of use they may want to implement, for example, the development of farmyard buildings for residential purposes, and agree to carve out from the use restrictions with the developer.
Developers should be amenable to this, provided that the height of adjacent buildings will not be significantly increased as part of any work.
If landowners intend to graze their livestock or grant a grazing licence to a third party, this should be specifically provided for in the lease.
Bear in mind that the land will need to be vacant during the development stage, but developers will generally not have a problem with this once the solar project is operational.
Reinstatement
One of the most important aspects to be agreed upon is reinstatement, which cannot simply be left to the developer's goodwill in the lease's final years.
Many of the renewable energy companies involved are special purpose vehicles (SPVs) with few or no assets.
The SPV could easily be dissolved, exposing the landowner to the liability of having to dispose of panels, cabling, etc. and reinstate it.
Landowners should ensure that the lease includes arrangements for a decommissioning bond. This can be accumulated throughout the lease or set aside from day one.
It is common for developers to pay a percentage of the reinstatement cost into a bond, guarantee, insurance policy, escrow account or other security from year 10 or 15 on an annual basis until the total reinstatement cost is secured.
The value of the decommissioning bond required is determined by the mechanism in the lease, usually by assessment by a third-party surveyor.
The landowner would be entitled to withdraw from the security if the developer failed to comply with its yield-up and reinstatement obligations within a reasonable period after the end of the lease.
Landowners should also ensure developers produce an agreed schedule of conditions before the commencement of works to install the solar facility, and the lease should provide that once the project ends, the developer is obliged to return the land to this condition.
Suppose there are any underground works or cables that the developer is not required to remove.
In that case, the lease should oblige the developer to leave those works in a safe condition, free from hazardous structures and materials, and comply with environmental laws and all other relevant statutory obligations.
The lease should also contain an indemnity from the developer regarding all environmental damages and liabilities in respect of hazardous materials brought onto or disposed of on the land by the developer that migrate from the land onto neighbouring land.
Forfeiture
If the landowner validly forfeits the lease due to a breach of covenant or non-payment of rent, consider whether the tenant should be required to leave the solar panels on the land until all monies due to the landlord have been paid.
Solar panels are a valuable asset and could be used to offset any debt owed to the landlord.
Tax implications
Landowners considering granting a solar panel lease of their land should engage with their accountants and tax advisers to consider the tax implications.
Letting the land for solar PV will mean that it is no longer used for agricultural purposes, so eligibility for Agricultural Property Relief (APR) from inheritance tax will be lost.
Expert advice should be sought to ensure that regulations are followed and profits are maximised.