Source: https://www.mcafeetaft.com/wind-law-and-negotiations-from-a-landowners-perspective/
Timestamp: 2019-04-24 15:56:32+00:00

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As a result of environmental concerns over the growing consumption of fossil fuels and the implementation of incentives for alternative energy sources, “wind farms” have been sweeping the plains. State and federal tax credits and other incentives for renewable energy helped drive financial resources to support and grow the wind energy industry in the United States. Indeed, the United States has now surpassed Germany as the world leader in installed wind energy. Despite a dismal national economy in 2009, the wind energy industry has continued to grow.
Wind farms generally require 3 acres of land per turbine and a location that can be dedicated to the long-term development of tens to hundreds of turbines. The majority of United States wind turbines are found in the Midwest, Great Plains and Western states (See www.awea.org and www.seic.okstate.edu for wind energy facts). Oklahoma’s geographic location, topography, demographics and abundance of wind resources provide Oklahoma landowners with the opportunity to play a vital role in this growing industry. (See www.eia.doe.gov for map showing Oklahoma’s wind resource potential).
In 2002, Oklahoma had virtually no presence in the industry, but by the end of 2003, two commercial wind farms began producing renewable energy. Today, Oklahoma is reported to rank in the top 10 among states with installed wind power. As a result, wind energy developers have and will continue to approach landowners across Oklahoma seeking to utilize their land for wind farm developments. While western Oklahoma has the most abundant wind resources, other areas of the state have opportunities with “less” wind because or their relative proximity to metropolitan areas. For example, wind companies have approached landowners in the Arbuckles, central Oklahoma and Osage county regarding potential development of wind farms.
While many Oklahoma landowners are familiar with the concurrent use of their land with oil and gas production, contracts presented by wind energy companies raise a myriad of issues for landowners to consider. Most contracts exceed 25 pages and include complicated provisions that impact landowner’s use of their land during tiered multi-year terms while placing significant use restrictions and liability concerns on the land. This paper discusses some of the issues that a landowner should consider when approached by a wind energy company.
Is Wind Development Right for the Land?
When approached about wind energy development, a landowner must first determine whether the impact and intrusion of a wind farm operation outweighs the current and future use of the land. The answer is not always yes. While wind energy leases provide a new source of income from the land (which during development terms can be fairly lucrative) there are many factors to consider before agreeing to bind one’s land for potentially the next 30 to 50 years.
The changes to the rural environment and associated development, operational and maintenance activity may not be the right fit for the landowner. Wind turbines are massive structures that significantly change the scenery. These structures require constant maintenance and work which creates a steady flow of traffic in, out and around the landowner’s property. The electricity created by the turbines must be transported to transmission lines. As a result, distribution lines, substations and other electric conveyance structures and appurtenances must be built on the land to accommodate energy production activities. To some landowners, the potential economics for wind development simply do not outweigh the added activities on and across their land as well as the risk of having distribution lines, transmission lines or substations located in or near sacred areas of their property.
However, the location of turbines and access roads on the leased land should not be the sole consideration. Wind energy contracts grant wind companies with the exclusive right to capture the wind flowing across the land. As a result, the construction of improvements on leased land is generally prohibited without the express consent of the wind company. Residential development of leased land will generally be out of the question. In addition, potential plans for irrigation, construction of grain bins or even wind breaks could be prohibited. Land encumbered by a wind lease may also be less attractive to an oil company because of potential disputes between the wind company and oil company over the location of drilling sites, wells, tank batteries and pipelines in relation to wind energy facilities.
Landowners should carefully evaluate short-term and long-term plans for their property before signing on the dotted line. While many concerns can be resolved through negotiation of the contract, there are situations when the potential financial benefits do not outweigh the added burdens on the land.
Once the issue of whether the land is right for wind development is resolved, there are a multitude of other details to closely consider. These include (i) the scope of the agreement, (ii) the length of the agreement, (iii) financial considerations, (iv) allocation of rights to the land and site development, (v) liability allocation, (vi) assignment/financing issues, and (vii) restoration after expiration.
Reservations By Lessor. Except as otherwise provided herein, Lessor reserves the right to use the property for any purpose (including farming, ranching, hunting, and oil/gas production), and may lease the property and grant easements and other rights to other persons.
No Interference/Quiet Enjoyment. Neither Lessor, or anyone else, shall interfere with Lessee’s operations or its rights under this Lease. During the term of the Lease, Lessee shall have peaceful and quiet enjoyment of the property, without hindrance or interruption by Lessor or any other person.
Technically speaking, any activity on the land could potentially interfere with the wind flow across the land. One wind company representative explained that an object 4 feet tall can affect the flow of wind 12 feet above the object. Accordingly, the representative explained that the landowner would need to obtain prior approval before constructing any new structure on a 6,000 acre ranch covered by a wind energy agreement.
Accordingly, construction of a temporary wind break to protect cattle from winter winds would need to be approved in advance by the wind company. Likewise, the construction of a water windmill by the landowner would technically encroach on the wind company’s exclusive right to harness the wind across the property.
Notwithstanding the foregoing, Lessee understands that (i) this Agreement is subject to existing oil, gas and mineral leases granted by Lessor that affect the property and that those existing interests are not subordinate to the rights of Lessee under this agreement.
Of course, the landowner may not even know whether the land is subject to an oil and gas lease if the mineral estate has been severed from the surface and is owned by a third party. In Oklahoma, the mineral estate is the dominant estate which means that the surface owner (or his lessee) must allow the mineral owner (and his lessee) to have reasonable access to develop minerals in or under the land. Wellsville Oil Co. v. Carver, 1952 OK 108, 242 P.2d 151 (holding that “When the mineral rights in lands have been reserved prior to the lease of the lands for pasturage purposes, the holder of an oil mining lease owns a dominant estate in the land for the purpose of exploring for oil, and possesses exclusive right to use so much of the leased premises as reasonably necessary to the operation of drilling for oil and said oil lessee owes no legal duty to lessee of surface to fence off tanks, machinery, etc., to prevent livestock from having access thereto; but oil lessee owes the duty to not intentionally, willfully, or wantonly injure livestock, and after discovery of their peril to use reasonable care to avoid injuring them.”).
Notwithstanding the foregoing, Lessee understands that (i) this Agreement is subject to existing or potential oil, gas and mineral leases involving the mineral estate underlying the Property and that those existing interests are not subordinate to the rights of Lessee, and (ii) Lessor may not have any control over a third-party’s willingness to enter into a subordination, non-disturbance agreement, consent or other agreement.
Every wind company that we have dealt with has assured us that they understand these issues and are not concerned with their ability to work with oil companies. We are unaware of a situation where a drilling rig has been placed in close proximity to a wind turbine, or any litigation between an oil company and a wind company. While proactive drafting is recommended to protect a landowner’s rights, the case of Liery v. Tidewater Petroleum Corp., 2006 OK 47, 139 P.3d 897, may provide some protection. In Liery, an oil company sought an injunction allowing it to access its leased property from a new location even though it had access through another property. The request for injunction was denied. The Court noted that a mineral lessee, although possessor of the dominant estate, may not conduct operations without regard to the needs of the surface owner, even if the proposed action by the mineral lessee is reasonable. While the term “accommodation doctrine” was not used by the Court, the effect of the ruling appears very similar.
The Liery decision could be extended to resolve a future dispute between wind rights vs. access for oil/gas production. It would appear that both the wind company and the oil company have incentives to avoid conflict over development. The wind company should be concerned with the dominant nature of the mineral estate. On the other hand, the oil company would not want to create the litigation where the accommodation doctrine was formally recognized or be faced with a surface owner’s argument in a surface damage case that his wind income was diminished because of oil/gas activities.
Wind agreements are generally divided into three (3) phases: (i) the testing phase, (ii) the development/operations phase, and (iii) the decommissioning phase. Most agreements provide a period of time for the wind company to test the wind resources, negotiate leases with neighboring landowners, arrange for transmission capacity and ensure that development is economically feasible in that location. Wind agreements typically provide for a 5-10 year term for this initial phase. Except for potentially being the site of a meteorological tower (“Met Tower”) to gather wind data or the subject to environmental reviews, little activity is conducted on the land during this phase. Wind agreements provide that in exchange for small per acre fees (usually between $3 and $9 per acre), the wind company has access and control over the property, but can cancel the agreement at any time depending on the outcome of its due diligence. Often, agreements provide that the acreage subject to the lease can be reduced as the wind company refines where wind turbines and other facilities will be located within its project.
Activity picks up during the development/operations phase. This is when the turbines and related facilities are constructed and the project is developed. A wind project consists of wind turbines which convert wind to energy via their towers, foundations and support structures; electrical transmission and distribution facilities that can include overhead and underground lines, towers, poles, cross arms, guy-lines and anchors, substations, circuit breakers and transformers, and storage facilities; roads, bridges, culverts and erosion control facilities; maintenance buildings and other facilities. During this phase, the land necessary for the development is locked into the lease in exchange for more lucrative financial terms. Generally, wind projects can be constructed in less than one year. Wind agreements provide for an extended operations term from 25-35 years, so that the costs of the project can be recouped along with the expected profit.
The third and final “decommissioning” phase seems so far removed from the present that it is hard to envision. Wind companies tend to stress the financial security of their parent company (which is more often than not a foreign based utility). Wind agreements typically provide a detailed description of how the project will be systematically taken down and the property restored to its prior condition. However, most Oklahoma landowners have either dealt with the transition of ownership of oil and gas wells from a large company to a small company that specializes in marginal wells by cutting costs and inputs into the land or watched enough OERB commercials to get a picture of a neglected or abandoned well site. Thus, the decommissioning language is typically very high on the list of issues for most concerned landowners. Landowners always want more than a mere promise of what will be done in 40 years. The ability to secure a bond or parent-company guarantee has been very difficult to obtain. Wind Companies generally want the landowner to trust them that everything will be well taken care of because of their current financial situation. Few want to discuss the fact that they might quickly flip the project to another project or concerns over what will happen when government subsidies run dry. Often the happy medium that has been reached is to add a term in the agreement that required the wind tenant to obtain a decommissioning bond at a certain point in the future.
On January 1, 2011, landowner protections on this issue will be statutorily established for landowners. The Oklahoma Wind Energy Development Act, 17 Okla. Stat. § 160.11 et. seq. (the “Wind Development Act”), was recently passed by the Legislature and signed by the Governor. Among other things, the Wind Development Act provides minimum guidelines for the decommissioning process. In passing this wind energy statute, the Legislature recognized that “[t]he prudent development of wind energy resources requires balancing the needs of wind energy developers with those of the landowners who provide access to the wind energy resource, . . .” Id. at 160.12(4). In addition, to minimum standards for proper decommissioning of a wind facility upon “abandonment or the end of the useful life of the commercial wind energy equipment in the wind energy facility,” the Act provides that after the 15th year of operation of a wind energy facility, the wind company “shall file with the Corporation Commission evidence of financial security to cover the anticipated costs of decommissioning the wind energy facility.” Id. at 160.15. A formula is established for determining the “anticipated costs of decommissioning” and the wind company is subject to a $1,500 per day fine if the proof of security is not timely filed. Id.
The Wind Development Act provides important protections to landowners and future generations of Oklahomans by ensuring that our children are not faced with rusted inoperable wind farms on each horizon should wind energy prove to be an inefficient alternative energy in the future. The Act provides a solid baseline to work from in negotiating obligations during the decommissioning. However, the requirements are minimal standards subject to further restrictions by negotiation. 17 Okla. Stat. § 160.14(D)(“A lease or other agreement between a landowner and an owner of a wind energy facility may contain provisions for decommissioning that are more restrictive than provided for in this section.”).
Financial terms in wind agreements vary by location and wind company. However, most leases provide for a small, per acre, payment during the initial testing phase and more substantive compensation if the land is held for the development/operations phase.
For compensation during the second phase, early wind agreements typically made landowners choose between a per tower payment based on the megawatt capacity of the tower or a royalty based on gross revenues generated by wind turbines located on the landowner’s property. Each option had its pros and cons. With the per turbine payment, the landowner knew how much his payments would be over the term of the lease. Payments were not dependent on the turbine being operative. However, if the wind was good and the turbines functioned properly, the set fee would likely pay less than a royalty. With the royalty payment, the landowner had the opportunity to make more if the project did well, but also had the risk of loss if the turbines broke down or the project ran into problems. While both options have been successful, there are plenty of stories of promised placement of numerous turbines that fell through, while the construction of only a handful of turbines held a large lease over an entire ranch. Likewise there are stories of placement of hundreds of turbines on land which did not operate property which caused significant delays in energy generation and much lower than expected royalties paid to the landowner.
Under either option, the payments were dictated based on towers on the land. This often created a situation of “haves” and “have nots.” The landowner who owned the ridge received the towers, while his neighbors might receive none. No wonder the neighboring landowners could not stand the sight or sound of the ominous towers that reminded them of their near-miss, while the landowner on the ridge could only hear the sound of money from his new F-350 feed truck.
More recently, many wind companies have offered “community based” leases designed to balance the needs of neighbors in a wind project. Under such arrangements, the wind company might lease a block consisting of several thousand acres. While the turbines are on designated areas, significant buffers are maintained to protect the flow of air and stave off competing companies. During the development/operations phase, landowners are paid on a “greater than” basis with (i) a minimum per acre rent payment (i.e. $20 per acre), (ii) a per megawatt payment, and (iii) a royalty based on revenues. Under this situation, landowners with the turbines should still receive a higher payment in exchange for higher burdens placed on their land by the wind facilities, but the landowners in the buffer zone who may not have turbines (but may have service roads or utility lines) receive at least the minimum payment, which is much more than a conciliation prize given the fact the most of the activity and burdens are on the nearby land.
Most leases also provide for compensation for turbine construction, road construction, distribution and transmission lines, and maintenance facilities. Some companies offer one-time payments for these improvements while others agree to annual payments. Signing bonuses, termination fees and reimbursement for attorney’s fees should also be discussed at the negotiating table.
It is important to remember that wind companies will only lease the land on terms that they believe they can turn a profit. Generally, wind companies will agree to raise the compensation over the life of the lease as they recoup their investment. For example, a per acre payment will increase over time from say $20 to $40, a megawatt nameplate payment may increase from $2,000 to $4,500 and a royalty could increase from 3% to 7.5% over the life of the lease. Thus, landowners should expect to receive higher rent over the life of the agreement.
Another important financial consideration is an escalation provision to account for inflation over these long-term contracts. Some agreements provide for annual escalations based on the consumer price index, while others simply provide for a flat percentage escalation. While some wind companies do not offer inflation increases, the issue needs to be raised during negotiation, and in areas where companies are competing for leases, such provisions are common.
The Wind Development Act also provides protections with regard to ensuring that proper compensation is paid to Oklahoma landowners. The Act requires that landowners be provided a written statement within 10 business days of a royalty payment with “information reasonably necessary to provide the landowner an understanding of the basis for the payment… and a means of confirming its accuracy.” 17 Okla. Stat. § 160.16. The Act also insures that any landowner with a royalty provision will have access to the wind company’s records in order to confirm the accuracy of payments. Id. at 160.17. In addition, wind companies will be required to report certain information to the Corporation Commission so that landowners can accurately determine the megawatt capacity of turbines and their exact location. Id. at 160.18.
Details regarding site development should be discussed and negotiated prior to execution of the wind agreement. In most cases, the wind company does not have enough wind data to know where turbines, lines and other structures will be located on the land. Rather, proposed agreements provide that the wind company has the discretion to determine the location of wind facilities. While landowners may be consulted regarding the location of certain facilities – such as roads, the ultimate decision is almost always left with the wind company. Accordingly, landowners should carefully consider if there are locations where they do not want wind facilities or roads. For example, a landowner may have a scenic area near a house, pond or stream where he does not want turbines, transmission or distribution lines to be placed. Such areas need to be identified at the outset and reasonable restrictions included in the lease.
Likewise, if the landowner expects to construct a house, barns, bins, windbreaks or other structures on the land (in the near or future term), these issues should be discussed prior to signing the agreement. In most cases, wind companies will agree in their contracts that such improvements can be located in designated areas. However, if these matters are not set out in the agreement, the landowner’s ability to develop leased property will generally be within the discretion of the wind company.
Wind agreements typically require that all future contracts by the landowner that impact the land include a reference to the wind lease and subordination clause. Thus, farm leases, hunting leases, oil and gas leases, right of ways and mortgages entered after the effective date of the wind agreement must address the rights of the wind company.
Landowners must remember that with the benefits of long-term lucrative lease payments comes the risk of loss. Wind companies put millions of dollars in improvements on the premises and expect those improvements to be safe from damage. A significant part of any wind energy agreement review is consideration of liability allocation. Careful review of the wind agreement’s provisions regarding indemnification, insurance requirements, allocation of taxes and environmental issues, is necessary to protect the landowner’s rights. In many cases, initial drafts of the wind agreement provide extremely broad and unwieldy indemnities from the landowner. Such provisions must be narrowed within realistic limits. For example, one would expect a landowner to be responsible if, while farming, his hired hand runs over a turbine blade that is being repaired. However, one would not expect a landowner to be responsible for actions of third-parties outside his control.
In conjunction with analysis of indemnity language, insurance requirements should be closely reviewed so that landowner’s risks are covered either by the wind company’s policy upon which the landowner is listed as an additional insured or on the landowner’s own policies. The agreement should specify the responsibilities for property insurance for all insurable property, including the turbines and all wind energy improvements existing or to be constructed by the wind company and landowner. Likewise liability coverage must be examined with special consideration given to any concurrent uses by the landowner or those whose rights are derived from the landowner (i.e. farming, hunting etc.). Generally, the agreement should specify requirements for applicable insurance policies typical of landlord/tenant relationships and include minimum coverage limits, maximum deductibles and waivers of subrogation. In that regard, the Wind Development Act will require that “[p]rior to commencing construction of a wind energy facility, the owner or operator of a wind turbine or wind energy facility shall obtain and keep in effect either a: (1) Commercial general liability insurance policy with a limit consistent with prevailing industry standards; or (2) Combination of self insurance in an excess liability policy.” 17 Okla. Stat. § 160.19. In addition, the wind company is required to name the owner of the land on which wind energy facilities are located as an “additional insured in the policy” and deliver a certificate of insurance or modification thereof to the landowner. Id.
While wind energy is considered “green,” the facilities and equipment used in and around wind facilities are not as green as one might believe. Wind companies should be required to comply with environmental laws and address any issues that arise. In addition, a provision requiring the company to notify the landowner of any issues (i.e. a fluid spill) so that the landowner can be assured that the problem is properly resolved and not simply covered up is recommended.
The addition of million dollar improvements on rural land will also create additional tax assessments. The wind energy agreement should specify the landowner and wind company’s respective responsibilities for property taxes assessed as a result of the improvements. While the improvements are owned by the wind energy tenant, landowners should carefully review language in the proposed agreements with regard to the allocation of additional tax assessments on the land and improvements and the landowner’s obligations to cooperate in tax protests.
Generally speaking, wind company representatives that negotiate wind agreements are salesmen. It is their job to create excitement for the proposed project and convey the prospective benefits of the development of wind facilities on the landowner’s land. Most presentations are genuine and professional. However, landowner’s should recognize that the person explaining the proposed agreement and what will happen during the subsequent phases of the project may not be around after the agreement is signed. In may cases, development companies put together wind projects, initiate development and then “flip” the project to another company or utility. In such a situation, the landowner will be dealing with someone new who only has the language of the lease to govern his relationship with the landowner. Thus, all negotiated points should be documented and made part of the agreement.
Fundamental and material to every wind agreement are the terms that allow the wind company to finance the lease. Without funding, the project will not get off the ground. Lenders require specific provisions to insure that their investment will be protected. These terms are analogous to terms found in traditional ground lease agreements and are designed to insure that no default by the wind company tenant will give rise to a termination of the wind agreement (and its related lease and easments) without a reasonable opportunity for the lender to cure the default. In many cases, the financing provisions are dictated by the lender and negotiating these terms is difficult.
The decommissioning phase was described above. However, in addition to obligations for the removal of the improvements at the end of the term, the wind agreement should provide for the reasonable restoration of the property. The extent of the required restoration should be spelled out in the agreement and specify items such as the depths that concrete from improvements will be removed, whether below ground installations will be removed in addition to above ground improvements, the reseeding of the land, and the length of time allowed for restoration activities. Guaranties, bonds or other financial assurances should be discussed for restoration of the property in addition to decommissioning of the project.
In addition, on November 1, 2010, the Oklahoma Energy Security Act will become law. See 17 Okla. Stat. § 801.1 et. seq. This law, among other things, establishes a renewable energy standard for Oklahoma and sets a goal that by 2015, fifteen percent (15%) of all installed capacity of electricity generated within Oklahoma will be generated from renewable energy sources – including wind. Id. at 801.4(D). How Oklahoma will meet that goal is yet to be determined, but from a landowner’s perspective it appears that wind energy has a place in future energy policy of Oklahoma.
Wind energy projects provide a tremendous opportunity for Oklahoma landowners. However, the implications of wind energy agreements are far reaching and should not be taken lightly. Careful consideration of the issues raised in this article as well as many other landlord/tenant and contractual matters is required to insure that promises of today survive throughout the length of the agreement.

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