Q. What issues should be considered in negotiating lease agreements with developers for non-farming commercial activities?
A. Many farmers are blessed with a resource much sought after by third party developers of commercial projects such as cell towers, wind turbine farms, and natural gas wells – large amounts of isolated, undeveloped land. For this reason, developers often approach farmers with proposed lease agreements by which the developer seeks to secure access to the farmer’s land to site their project in exchange for the payment of stipulated rent over the duration of the agreement. Rent derived from such non-farming leases can often provide a welcome supplement to ordinary farm revenues.
As with any other contract, however, the terms of these lease agreements require careful negotiation. It’s a wise idea to consult a real estate attorney, too, to ensure that your best interests are being served. Lease agreements affect significant property rights and can last far into the future. For this reason, it is important that all material terms and conditions be identified and negotiated, that the parties’ agreement be carefully detailed in writing, and above all, that both sides have the advice of a qualified real estate attorney. While each transaction is unique, the purpose of this article is to highlight some of the more common issues involved in lease negotiations.
An Option to Lease versus Right of First Refusal
The lease agreement may not actually be the first agreement entered into between the parties. Once suitable land for a project is identified, a developer may want to “preserve” the short-term availability of the land while it continues to explore the feasibility of the project or evaluate other potential sites. This “preservation” is usually accomplished by one of two types of agreements: an option to lease, or a right of first refusal. An option agreement removes the property from the market while the developer decides whether to proceed with the project. During the option period, the owner cannot lease or sell the property to anyone other than the developer, even if a better offer comes along. A right of first refusal, on the other hand, simply gives the developer the right to match any other offer to buy or lease the land which might be made during the specified period. Under either type of agreement, the length of the “preservation” period and some amount of payment should be negotiated to compensate the owner for limiting what would otherwise be his or her unrestricted right to freely market and transfer property interests.
If the parties proceed to an actual lease agreement, key terms obviously include the duration of the lease and the rent to be paid to the owner. Given the significant investment associated with such commercial projects, most developers will seek long term leases with one or more options to renew the lease for additional periods. The lease should, however, carefully define the circumstances under which either party may cancel the lease before the end of its stated term, usually based on one or more stated events of “default.”The owner will also want to explore different options for defining the “rent” to be paid during the lease. While negotiating a flat monthly or annual rent payment is an option, there may also be more creative ways to define the amount of the lease payments. For example, many cell tower lease agreements state a “base rent”, and then provide for “additional rent” if the tower owner “co-locates” one or more additional cellular antennas on the tower. In any event, given that most lease agreements will remain in place for many years (if not decades), any flat rent amount should be subject to automatic annual percentage increases to reflect inflation.
Know What Land is Affected By the Lease
The lease agreement should also carefully identify the amount of land which is subject to the lease, and owners should ensure that nothing in the lease agreement limits their right to use the remaining land for other purposes. Specific provisions should be included in the agreement to clearly define the developer’s obligation to remove all improvements and restore the property to its original condition at the end of the lease. The owner may want to negotiate bonding or escrow provisions to guarantee that there will be funds available at the end of the lease for site restoration. Landowners should also generally require a clause in the agreement which obligates the developer to defend and hold the owner harmless from any claims for losses or damages which might arise from the developer’s use of the property under the lease.This obligation should be accompanied by a requirement that the developer secure and maintain insurance (with the owner named as an additional insured) to protect against any damages to persons or property.
Don’t Accept a Boilerplate Lease Agreement
Owners should be wary of “boilerplate” lease agreements which are offered by developers on a “take it or leave it” basis.Such lease agreements may not address all important issues, or may do so in a way which heavily favors the interests of the developer. Above all, owners should not rely on oral statements or promises offered by the developer – most Courts will not enforce obligations which are not documents in the parties’ written agreement.
Have you been approached by a third party developer about your land? Make sure you have an attorney who understands the important issues involved with these arrangements. Get in touch with our office today to schedule a free consultation with a real estate attorney.