Avoiding Project Development Pitfalls, Part 2
This month’s Sustainable Bottom Line edition is the second in a Q&A series with guest expert Jonathan S. Klavens, Principal of Klavens Law Group, P.C., which has a unique clean energy practice that addresses the “A to Z” legal needs for renewable energy project development and finance. Jon is joined this month by KLG Senior Counsel Sarah Matthews, who handles commercial real estate matters.
Let’s focus on site control. What are common pitfalls that you’ve seen renewable energy developers encounter in securing and maintaining site control for their projects?
SM: There are four things that come to mind: relying on a skimpy site control document; flying blind on title; not preparing for title insurance; and not keeping your eye on the site control ball.
What do you mean by a skimpy site control document?
SM: It is very tempting for a renewable energy developer to rely on a letter of intent (LOI), memorandum of understanding (MOU), or lease/purchase option as an initial site control document, even if it is short on material terms. A shortcut approach can help economize on early project development costs and may make a lot of sense. But we’ve seen many projects where a developer takes that approach, waits until much later in the process to circle back to the landowner for a full lease or purchase and sale agreement, and then gets bogged down in a lengthy negotiation process where the landowner can have a lot more leverage. It can also be critical to know not just whether a project’s financial incentives require evidence of site control but also the regulatory requirements for a particular government incentive program regarding what constitutes “evidence of site control” and the law regarding enforceability of initial site control documents such as MOUs and options. We’ve found that a happy medium at an early stage is often a lease option agreement that attaches a fully-negotiated form of lease or a purchase option that contains all the material terms of a purchase and sale agreement.
What about flying blind on title?
SM: Many developers defer real estate title diligence until later in the development process and then belatedly discover title issues that can delay or derail a project. Title diligence involves obtaining a title search, and typically a commitment for title insurance from a title company, to confirm who owns the land and whether the land is subject to any encumbrances that could get in the way of the project. Title diligence also involves obtaining a survey of the project site, though developers frequently defer this step until later in the project because of the cost involved. We see instances where an option is granted or MOU signed by someone who doesn’t own the parcel or is only leasing it, the parcel of land doesn’t actually provide access to a public way, paths used by snowmobilers crisscross the portion of the land on which the developer intends to build the project, the site is subject to an agricultural preservation restriction, and so on. Frequently a landowner will have granted a mortgage against the property that will need to be discharged, if the property is being purchased, or subordinated if it is being leased. There is a misperception that title issues are much less of a concern in the case of rooftop solar projects but we’ve also seen a good many rooftop projects stymied by title issues. For example, buildings that are condominiums where the rooftop is not owned by the unit owner with which the developer is negotiating, or commercial buildings where existing tenants have roof rights. Learning about these issues late in the process can be a very unpleasant surprise. It is important to know that there are some strategies for moderating title diligence costs early in the development process – such as focusing first on a title search, and at a minimum, obtaining a copy of the deed conveying the property to the current owner and copies of any documents recorded since that deed, or getting hold of any existing title insurance policy that may have been issued to the landowner (or landowner’s lender).
Why is it important to think about title insurance and a survey early on?
SM: Most investors in a renewable energy project, and any lender providing debt financing for the project, will require issuance of a title insurance policy to the project entity or lender (or both) and will want to review and approve any exceptions to title reflected in the policy. Investors and lenders also frequently require that specific endorsements be added to the title insurance policy, such as an endorsement insuring access from a public right of way and a zoning endorsement, and will invariably require a field-based survey so that the title company will remove the standard title policy exception for any unrecorded matters a survey might reveal. A survey is important for all parties involved because it pins down the boundaries of the landowner’s parcel of land as well as the project site, which is often only a portion of the larger parcel, and shows whether there is access to the site to be purchased or leased as well as reflecting matters affecting title that don’t appear of record. The title insurance company will require what is known as an ALTA (American Land Title Association) form of survey in order to remove the standard survey exception from any issued title policy. This will involve the title company’s providing the title commitment to the surveyor so that the surveyor can plot as many of the exceptions to title as possible on the survey plan. It is a good idea for renewable energy developers to strike up a relationship with a title insurance company early on and obtain a title commitment for their project site, followed by engaging a surveyor to conduct a survey of the project as soon as they are comfortable that the project will move forward.
How do developers fail to keep their eye on the site control ball?
JK: As a developer proceeds to juggle many other things in the course of a complicated development process – permitting, interconnection, qualification for financial incentives, offtake contracting, construction contracting, financing, and more – it can be easy to lose sight of the site control situation. Over the years we’ve encountered some situations where developers discover late in the game that a lease or purchase option has expired, a lease was executed without finalization of a formal plan depicting the leased area, nothing was ever recorded at the registry of deeds, or the landowner sold the property (or got a new mortgage or died) after a lease LOI was signed, and so on. As hard is it can be, it is important to ensure that site control rights are properly documented and don’t lapse.
Please note that this Q&A, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Klavens Law Group, P.C. or its attorneys. Please seek the services of a competent professional if you need legal or other professional assistance.
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