With the support of the Renewable Electricity Support Scheme (RESS), 4,000ac of solar panels successfully received 15-year funding in the first round of the auction. In total, 63 solar farms received funding in the first round and will be built over the coming year. Four more auctions are expected to take place until 2025 to deliver on our 2030 renewable electricity targets.

While some farmers are developing their own solar farms, for many farmers the opportunities will come from entering long-term agreements with solar developers to lease their land.

Generally, if you’re approached by a solar farm company looking to develop a solar project on your land, they have already done the background work to assess your site for generation potential, access to substations, transport access, proximity to neighbours, etc.

Teagasc recently held an online meeting where James Staines of Staines Law, James McDonnell of Teagasc and Declan McEvoy of ifac went through the key legal and tax considerations when approached by a solar developer.

The most important take-home message was, before signing on the dotted line, farmers need to obtain independent legal and taxation advice about any agreement.

There are long-term consequences with any deal which can have significant tax implications when not properly planned.

What is an option agreement?

Usually, a solar farm developer will ask you to sign an “option” allowing them access to your land to carry out site assessments for surveying and planning.

When you sign the option agreement, you also agree to enter into a lease agreement with the developer once the conditions are met, ie planning permission, grid connection and finance.

In exchange for entering into an agreement with the developer, typically the landowner will receive an up-front non-refundable payment, anywhere from €3,000 to €5,000, with additional annual payments for the period of the option agreement, generally three to five years.

Subsequently, if the developer secures planning permission, the landowner may receive a further payment.

Then, if the developer exercises the right to enter into a lease there may be another payment along with annual rent.

What are the heads of terms?

The heads of terms of an option agreement is a one- to two-page document which sets out the details of the agreement including the amount and location of land involved, agreed rents, bonus payments, etc.

It’s not binding but generally the details of the agreement should be settled before drafting the heads of terms.

Will I be taxed on an options agreement payment?

The option is an unusual one from a tax point of view in that it is not taxable from day one. The ultimate treatment depends on whether the option is exercised or not, ie whether the lease agreement is initiated.

If the option is exercised, the payment merges with the lease and is subject to capital gains tax.

However, if the option is not exercised, the landowner will be liable for capital gains tax on the amount received at the date the option agreement was entered into. This may result in interest and penalties accruing on the landowner’s tax liability. While the amount of tax is not huge, it does mean that there is an outstanding tax liability for the duration of the option agreement.

What is the term of the lease and right to renew?

Land is typically leased for periods of 25 to 35 years with various options to renew. In most leases, the developer reserves the right to terminate the lease on six to 12 months’ notice. However, landowners do not have this right.

How will the lease agreement be taxed?

If the option is exercised, the upfront payments are treated as a premium and are liable to capital gains tax while rent received under the leasing agreement is liable to income tax at the landowner’s marginal rate including PRSI and USC.

How will solar farms affect farm transfers?

When transferring land through gift or inheritance, agricultural relief reduces the taxable value (capital acquisitions tax) of the land being transferred by 90%.

The Finance Act 2017 extended eligibility for agricultural relief to include lands used for solar as long as the area of the solar farm does not exceed 50% of the total area of the land being transferred. Therefore, it is vital that the amount of land (ie map area) used by the solar farm is under half of the total land area being transferred in order to qualify for agricultural relief.

What about VAT?

As the solar company will carry out work under the option/lease agreement, it will be responsible for any VAT liability arising from that work. The landowner, however – whether VAT-registered or not – could be liable for VAT if they transfer or sell the land within five years of the development.

How will solar farms affect my Basic Farm Payment (BPS)?

There hasn’t been clear guidance issued yet on the implications of developing solar farms on your land and your eligibility to claim BPS. This is anticipated to change next year.

Can we put the leased land under a separate title so it’s not part of the farm?

That would mean the land wouldn’t be eligible for agricultural relief and would incur a big tax penalty when transferring under a succession plan.

What is the typical rent for solar farm developments?

Typically, between €1,000/ac to €1,100/ac but preferential rates may be given to land with better access, land located close to substations etc.

How are these developments normally initiated?

Most landowners are generally approached by developers. If you are a landowner who is interested in developing a project, approach a developer and begin the conversation.

Are rents index-linked?

There is generally a review clause included in lease agreements ranging from every one to five years to review the upward revision of rents based on the CPI index.

Are there additional rents available for maintenance agreements?

Not all developers agree to maintenance agreements. However, some developers do pay between €50/ac to €200/ac for landowners to maintain hedges and roadways, cut grass, etc.

What about decommissioning the site at the end of the lease?

The developer who you deal with today may not be the developer you deal with in 30 years’ time as the project could be sold. It is vital that, as part of any lease agreement, a decommissioning bond is put in place to ensure there are funds available to decommission the development at the end of the lease.

If the developer breaks planning regulations, who is liable?

Within the lease, you need to include a clause which states that the developer will comply with planning law and develop the site in accordance to the planning permission. The landowner may be able to terminate the lease if the developer fails to remedy any planning breaches.

Should groups of farmers work together to negotiate rental prices with developers?

Yes, there is power in numbers.

Can we add battery storage to the site?

Battery storage is increasing in popularity among developers. Battery storage should be dealt with separately to the solar farm as there are various insurance and risk implications.

What about substations?

If a substation is required for your land, you will have to grant a long-term lease of up to six acres in some cases. Many developers are now paying substantial sums for this type of land.

Who pays for the legal and tax advice fees?

The developer should help to cover the cost of professional fees such as tax advice and legal advice.

Note: This article should be used for information purposes only. Please seek legal and tax advice before proceeding with any solar farm agreement.