Farm owners’ property as security for wind farm financing: what owners need to know

fineprint

Ontario Farmer, May 5, 2015

by Garth Manning and Jane Wilson

It came as a surprise to many in Ontario when it was revealed that the multi-national power developers behind the K2 wind power generation project near Goderich had secured $1 B in financing, and that this arrangement is now registered on title for the 100 farm properties involved as lessors.

The arrangement is between K2 Wind Ontario Inc. and Mizuho Bank Ltd. Canada Branch. It secures a revolving credit facility of up to $1 billion at 25% on a number of items, including the contracts between landowners and K2 for land and road agreements with municipalities.

Another, smaller example has also come to light: a wind power project south of Ottawa in Eastern Ontario, where the five landowners leasing land for a 30-megawatt, 10-turbine project now have charges on their properties for $70 million.

Immediately, questions arise as to what would happen if the power developers were to default on their loans: would the lender then own the farm properties? How would that affect road use agreements with municipalities?

The fact is, this is a common practice. Property owners can refer to the leases imposed by the developers to review this potential situation, and many others that may affect operation and ownership of their land while leasing land for the power projects.

In an Invenergy standard contract, for example, is this clause: “In connection with the Lessee’s financing of the Project, the Lessee….is hereby given the right by the Lessor…to mortgage its interests in the Lease…and to assign this Lease, or any part of parts thereof, and any subleases as collateral security…”

The proper term for this is a “Charge of Lease” but may also be referred to as a “Demand Debenture.” What it means is, the present value of the wind power contract (i.e., the Feed In Tariff or FIT contract with the Ontario government) is greater than the present value of the lease amount. The difference between those two amounts is security for the loan to the power developer. It is a charge against all contracts favourable to the wind power developer, which may also include road use agreements.

It is like a line of credit for the developer and typically, advances against the amount are tied to certain milestones such as stages of construction.

The critical factor, however, is what it means for the lessors, in other words the farm owners who have leased their land for wind turbines, access roads, substations, transmission lines, etc. The importance lies not so much that the farmer lessors might on default lose their land (the farm land itself is not mortgaged, just the turbine contract on that land) but the damage it does to that property owner if he/she wants to sell, or to renew an existing mortgage, or place a new one, or in any way borrow money for which the lender would want security on his/her land.

Let’s assume a farm owner wants financing for farm operations or improvements. That might now pose difficulty: lenders do not like to be second in line, as they would be where a charge of lease is in place.

If the farm owner wishes to sell, similar difficulties arise: the lawyer for a purchaser in the case of an agreement to purchase will do a title search and discover the Charge of Lease on title, then immediately advise his or her client that the client is entitled to get out of the deal unless the registration of the Charge is removed from title. A purchaser is not expected to assume any risk of this nature.

In the case of renewing an existing mortgage or placing a new one, the lawyer for the bank or other lending institution would take the same position — no renewal or new mortgage unless the customer sees that the Charge disappears from title.

This is one of several important characteristics of signing a lease to have wind turbines, and needs to be thoroughly considered. Other legal issues to be carefully considered may include potential liability for the substantial cost of “decommissioning” turbines at the end of the lease, difficulty obtaining insurance on property with wind turbines, loss of autonomy over building on the property and carrying out regular farming practices, and, last, the potential for nuisance suits from neighbours affected by noise or property value loss.

Property owners should consult with a lawyer before signing any agreement.

Garth Manning is a retired lawyer and former president of the Ontario Bar Association, who lives in Prince Edward County. Jane Wilson is president of Wind Concerns Ontario; she lives in North Gower.

 

Comments

Parker Gallant
Reply

And don’t think you can sever even a small part of your property!

Joe
Reply

Greed put these landowners in this position.

Andre Lauzon
Reply

….and do not you think the ON gov’t should have informed “farmers/landowners” of these possible problems?

Wind Concerns Ontario
Reply

No. This is a straightforward business practice but attention-getting because the numbers are so high. What it does mean is, farm owners may not be aware of all the implications of signing a lease.

Barbara
Reply

Under Ontario law, when does “property” that belongs to a tenant and abandoned/left on the landowner’s property before it becomes the property of the property owner?

What’s the time frame for abandoned IWTs and solar panels left behind?

Khris
Reply

Plus the land owner needs to find out who will cover the cost to remove the concrete base. $50.000 to $100.000 is todays price. This could reduce the land value to ZERO. It looks like a long term bond is required.

Sommer
Reply

In the case of K2 Wind, there are some very significant issues with residents who are experiencing adverse health impacts already and who are unable to sell their property at the appropriate price because their neighbour and K23 wind allowed turbines and substations to be placed too close to their home.
K2 Wind will have to be forced to remedy these situations rapidly or face lawsuits. A class action would be the least expensive for this number of victims.
It would be in K2 Wind’s and the leaseholders interest to avoid the latter by shutting off the turbines that were placed too close to homes nearby.
These victims are not willing to ‘roll over and play dead’…nor should they be.

Leave a comment

name*

email* (not published)

website