Windfarm clawbacks

LEGAL MATTERS

Windfarm clawbacks

Brodies LLP partner Graeme Leith, who specialises in forestry, answers some common questions about windfarm clawback agreements and what to expect when involved in sale negotiations.

These agreements have become an increasingly regular feature in UK forest sales over the past decade. It is now the case that most landowners considering the sale of forestry or even land for tree planting will at least consider making a windfarm clawback arrangement part of the sale contract.

WHAT IS A WINDFARM CLAWBACK AGREEMENT?

These agreements are entered into at the point of sale between a seller and purchaser and are essentially a means of ensuring that the seller will secure a share of any income if the land is used in the future for windfarm purposes. That may include use of the land for access, cabling or wind protection for a windfarm on adjoining land. Clawback arrangements have been a common feature in the sale of rural land for decades and are essentially ‘antiembarrassment’ arrangements to protect the seller in circumstances where land was sold for a price based on bare land, only for the purchaser to subsequently procure a planning consent for development. That consent will generally result in a significant increase in the land’s value.

As windfarms have become a more common form of land use, many sellers of land and forests have been successful in making such arrangements part of a sale agreement.

WHAT CAN A SELLER EXPECT TO RECEIVE?

The particular percentage is always open for negotiation but will typically be between 20% and 50% of qualifying income. In most cases this will be the percentage share of rental received from a windfarm developer, but a well drafted clawback agreement will also ensure that the seller is similarly compensated if the purchaser builds its own windfarm. Clawback agreements will usually provide either for a share of all qualifying income during a particular period after the date of sale (20 years being a standard period), or else a share of all qualifying income during the whole lifetime of the windfarm project that is commissioned within an agreed period from the date of sale. If you also factor in potential windfarm extensions then this might, in effect, result in a clawback arrangement spanning up to 90 years from the sale date.

A purchaser will always want to ensure that any income that they receive from a windfarm developer by way of compensation for lost timber or worked stone will be excluded from the clawback entitlement. The rationale is that the removal of trees will erode the value of the capital asset and compensation for that ought therefore to be paid in full to the landowner and excluded from the clawback arrangement.

SHOULD A SELLER ALWAYS SEEK A CLAWBACK ARRANGEMENT AS PART OF ANY LAND SALE?

The strength and competitiveness of the forestry market has meant that many sellers are in a strong negotiating position and can often secure a windfarm clawback entitlement as an extra incentive on sale. However, any clawback agreement will need to be negotiated and will therefore increase legal fees for both parties as well as add an extra layer of complication to the title, which is likely to be an issue if a purchaser is granting a charge over the asset to a funder. It is therefore only worth pursuing if there is a realistic prospect of a windfarm income at some point in the future.

Conversely, if windfarm development is very likely (perhaps where there is already an option to a developer), then a purchaser is likely to have factored the windfarm income into its financial appraisal and accordingly if it is required to share such income with a seller, then that may reduce the price that it is prepared to pay for the asset. The seller should also consider tax treatment of any future clawback income, as well as the logistical challenges of passing the benefit of the agreement to future generations.

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