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Bankability issues with Solar PV leases in emerging markets

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In any solar PV development in emerging markets (whether in Africa, Latin America or elsewhere) attention is immediately drawn to project revenues. Government or utility tender packages focus on mark-ups to power purchase agreements with the offtaker, the strength of any government support agreement, and the terms of any other credit support. It is not uncommon for a project to be well advanced before the developer turns to the “less exciting” project agreements, with land rights frequently one of the most problematic. The site may be split over dozens of parcels of land (many of which are either stuck in probate or not properly registered), the model form of lease may be unintelligible, or the land sporadically crossed by grazing animals.

Most project stakeholders are either invested and actively interested in the success of the project (e.g. the offtaker), or experienced and sophisticated counterparties (e.g. EPC contractors) – the lessor(s) of land rights may be less equipped to quickly agree the required documents.

Recently we have been working on a number of solar PV projects across Africa in jurisdictions with a limited track record of international project finance. Key areas in which we often find that a landowner’s model form of lease does not provide sufficient protection for the project are listed below. Although we have used terminology that will be familiar to lawyers used to common law systems, the same issues arise – and should ultimately be capable of being resolved – in any legal system.

Term 

The term of the lease should be sufficient to cover the asset life of the project, the term of key approvals (e.g. the generation licence, planning permission) and any decommissioning period (whether after an early termination or expiry of the term).  If asset life is extended then ideally the lessee will also have the option to extend the term of the lease.

Pre-conditions/early obligations 

The lease rental payments are ideally structured in such a manner that they are not payable until all government authorisations and permits and third party consents required for the development and operation of the project have been obtained. If early works are required (e.g. an environmental impact assessment) in order to be granted the necessary permits then the lease will need to cater for this or such works will need to be authorised under a separate lease, lease option or licence.

Easements  

If the route of the cable connecting the project to the grid is not included in the site and the Lessor has rights over the relevant land, the Lessor should grant the Lessee and any third party nominated by it easements over the land as required for the connection of the solar PV plant to the relevant electricity transmission lines. Similar rights may also be needed to allow a route from the site to the public highway for construction and maintenance. For these purposes it is critical to confirm that all local land which may be required for an easement is in the control of the Lessor.

Permitted Use  

The Lessee should be allowed to carry out activities related to, in connection with, or for the purpose of, the design (including site appraisal), construction, operation (including export of power), maintenance and decommissioning (and handover, if applicable) of the solar PV plant.

The site subject to the lease should also be sufficient for project use, i.e. it should cover the solar PV panels, ancillary equipment (including e.g. inverters, CCTV and substations).

Lessor’s covenant  

The Lessor should not do or permit to be done any act which has or may have the effect of reducing or interfering with the capability of the power station to generate its maximum potential of electricity. This may extend to limiting rights to cross the site, including prohibiting the grazing of livestock (to the extent not needed by the Lessee to avoid grass cutting), and providing assurances that neighboring land will not shadow the site (e.g. with new buildings or trees).

To the extent that the Lessor is a government agency it may also be reasonable for it to provide assurances that third parties (e.g. local farmers) will not attempt to access the site, possibly alongside local content and/or community benefit provision to ensure local support.

Pre-existing liabilities 

The Lessor should be liable for, and should indemnify the Lessee against, any pre-existing liabilities associated with the site (e.g. environment liabilities). Where possible the Lessor may also need to do its own property searches and title checks (e.g. to check there is no compulsory purchase order affecting the site).

Termination 

Ideally the Lessor shall either have no right to terminate the lease, or its termination rights should be restricted to failure to pay rents (if not cured within a reasonable period upon notice) – remedies for other breaches by the Lessee should be compensation rather than termination.

Direct Agreement

The Lessor will need to covenant that it will at the request and reasonable cost of the Lessee enter into a direct agreement with any lender providing financing for the project such that the lender has a right to step in and novate before the Lessor exercises its rights under the lease, including any right to terminate the lease (if any) or re-enter the site.

The authors are grateful to Gillian Goldsworthy, Senior Associate in the Real Estate team of Dentons’ London office, for her assistance with this piece