Understanding Solar Facility Options and Leases: A Guide for Landowners

Across Virginia and much of the country, solar development has expanded rapidly over the last decade. As developers search for suitable land, many property owners—particularly owners of farmland and other large rural tracts—are being approached by developers about entering into solar option agreements and long-term leases.

For some landowners, these projects can create meaningful long-term income opportunities. For others, the prospect raises understandable questions about property rights, future land use, and community impacts. Developers negotiate these agreements regularly and often begin with form documents drafted heavily in their favor. By contrast, many landowners encounter these agreements for the first time with limited information about how the development process works or what they should realistically expect.

This article provides a practical overview for landowners considering whether to move forward with a solar project.

How Solar Development Typically Works

Landowners may understandably assume that if a solar developer approaches them about developing a project on their land, the developer has already decided to build a solar facility on the property. In reality, that is usually not the case.

Solar developers commonly secure rights to multiple potential sites while evaluating which projects are ultimately viable. A developer may pursue numerous properties while expecting that only a smaller number will ever reach construction. Solar projects involve uncertainty and often require years of development work. Before construction can begin, a developer may need to:

• Review zoning and permitting requirements, and in many cases obtain legislative approvals from the local governing body, including a rezoning or special use permit;
• Evaluate available electric infrastructure and the feasibility and cost of interconnecting the project to the power grid;
• Conduct environmental, wetlands, cultural-resource, and other site studies;
• Assess engineering, topographical, grading, access, and stormwater constraints;
• Coordinate with electric utilities and participate in the applicable interconnection process;
• Secure project financing and other commercial arrangements; and
• Coordinate with state and local agencies.

Even projects that initially appear promising may ultimately be delayed, redesigned, sold, or abandoned. For that reason, developers typically seek an option agreement first rather than immediately committing to a fully vested long-term lease.

What is a Solar Option Agreement?

An option agreement gives the developer the exclusive right, but not the obligation, to lease the property later if the project moves forward. During the option period, which typically lasts several years with the option to extend, the developer investigates the property and determines whether the project is economically and operationally feasible in comparison to its other potential projects. In exchange, the landowner receives option payments, which may be annual payments, lump sums, or a combination of both.

During the option term, the landowner is often restricted from pursuing competing solar opportunities or using the property in ways that could interfere with the project. As a practical matter, the property may be tied up for several years even if construction never occurs.

Understanding the Timeline of a Solar Project

Solar facility development and operation is a long-term process, usually lasting decades. Although timelines vary, a typical project may proceed roughly as follows:

1. Site Identification and Initial Outreach. The developer identifies potentially suitable land based on acreage, topography, transmission access, zoning and other local regulations, and environmental factors.
2. Option Agreement Negotiation. The developer negotiates and enters an option or lease agreement with the landowner to secure its rights to the site.
3. Development and Due Diligence. This phase may last several years and can include conducting and drafting environmental and feasibility studies, obtaining local zoning approvals and other permits, community engagement, and project design. Developers will also apply for interconnection rights, which gives them the ability to connect the solar project to the power grid.
4. Financing and Construction Decision. If the project remains viable, the developer may exercise its option to lease and proceed toward financing and construction.
5. Construction. Construction may take many months and often involves building roads, fencing, planting trees, grading, and installing underground infrastructure, substations, and solar panels.
6. Long-Term Operations. Once operational, the facility may remain in service for 20 to 40 years depending on the lease structure, extension rights, and underlying zoning entitlements.
7. Decommissioning. At the end of the project’s life, the developer may remove the facility, restore portions of the property, or seek to upgrade and continue operating the site.

Key Terms Landowners Should Expect in Solar Agreements

Although every project differs, most solar options and leases contain several recurring concepts:

1. Option Term and Extension Rights. Developers commonly seek multi-year option periods with rights to extend the option if development efforts are ongoing. Landowners should carefully evaluate the total possible duration of the option, whether extensions are automatic, the amount of extension payments, and whether the developer has to achieve certain milestones (e.g. obtaining zoning approvals/permits, financing, or completing construction) before it is obligated to pay the landowner.
2. Lease Term. If the option is exercised, the lease itself may continue for decades. Many agreements include initial operating terms of 20 to 40 years, with additional extension rights favoring the developer.
3. Payment Structure. Compensation structures vary significantly. Projects may involve fixed annual rent, acreage-based payments, escalating rent schedules, payments tied to installed or actual capacity (i.e. how much power can be or is generated), revenue-sharing, or separate compensation for easements. Two agreements with similar payment figures may produce very different long-term value depending on the size and production of the projects.
4. Easement Rights. Solar projects usually require easements for access roads, transmission lines, drainage facilities, construction access, and restrictions against structures or trees which would block sunlight over the facility. Easements will affect portions of the landowner’s property beyond the leased area containing the solar facility. Additionally, developers may enter into easements with neighboring property owners through separate agreements.
5. Assignment Rights. Projects are frequently transferred, either internally to subsidiaries of the developer or externally to other developers buying a project. As a result, developers usually seek broad rights to assign the agreement without landowner consent.
6. Decommissioning Obligations. Landowners should understand a developer’s obligations at the end of the project, including what equipment it must remove, what restoration standards apply, stormwater and drainage requirements, whether the developer must post financial security, and what happens if the project ceases operation.

Common Concerns About Solar Development

Landowners often hear strong opinions from neighbors and other members of the community. Some concerns are legitimate and deserve careful consideration, while others may be overstated or depend heavily on the particular project, property, and location. Although all concerns merit attention, issues that may materially affect a property include:

• Long-term restrictions on land use;
• Incompatibility with the locality’s zoning ordinance, Comprehensive Plan, and other land use policies;
• Effects on future subdivision or development plans;
• Visual impacts and neighboring property concerns;
• Disruption from construction;
• Effects of needed utility substations and transmission infrastructure;
• Drainage and stormwater management;
• Decommissioning and restoration risk;
• Effects on agricultural operations and available farmland; and
• The length and complexity of the lease and related agreements.

Ultimately, the relevant question for the landowner is usually not whether solar development is beneficial or harmful in the abstract, but how the proposed facility, lease terms, local approvals, and decommissioning obligations will affect the particular property over the life of the project.

Final Thoughts

Solar development can create substantial opportunities for landowners, but the lease and option agreements governing the solar sites can be sophisticated, long-term commercial contracts that deserve careful review. Landowners should understand not only the potential benefits, but also the operational, legal, and financial implications of committing property to an energy project. Before signing any option, lease, easement, or related agreement, landowners should consider obtaining experienced legal counsel familiar with how solar developers structure and negotiate these transactions.

If you have any questions, please contact one of our Land Use & Zoning Attorneys.

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