The binding 1.5-degree climate protection target of the Paris Climate Agreement and the recent look at Germany’s lack of energy independence have sharpened the senses in politics and society for the expansion of renewable energies. German lawmakers reacted to this by adopting the so called “easter package”, which was of course only passed in mid-summer. Within the easter package, the German lawmakers confirmed the overriding public interest of the expansion of renewable energies (§ 2 EEG 2021):
“The construction and operation of renewable energy facilities and the associated ancillary facilities are in the overriding public interest and serve public safety.”
Considering the fact that the ambitious expansion targets adopted with the easter package, namely to already cover up to 80% of the electricity consumed in the year 2030 by renewable energies and to achieve a completely climate-neutral electricity supply in Germany by 2035, the demand for professional project development in Germany will significantly increase. Project Developers have a key role for the energy transition to succeed and thus a pioneering role for the future of all of us.
A fundamental component of the implementation of the political aim is to accelerate the development of renewable energy projects. Even after the easter package, the excessively long approval processes in Germany remain a bottleneck for many projects. Particularly considering the fact that larger projects – which we need for the rapid implementation of the energy transition- usually have an impact on the landscape, whereas land planning concerns must be considered.
Effects of the regional development plan on project development
Germany’s land development plans are currently under review in almost all planning regions; however, the typically lengthy planning procedures are in conflict with the expansion targets that have been set with the easter package and lead to significant challenges in project development.
Therefore, a good, well thought-through land securing has a key role in project development, at an early stage. In light of the increasing competition for land, it is and will become even more important to effectively bind land owners as early as possible, often many years in advance before construction start. Nevertheless, land securing should obey the typical requirements of future buyers. Irrespective of the very time-consuming work of having to approach landowners with requests for changes of already existing land lease agreements, errors or inadequacies in the context of land securing often lead to re-negotiations with potential investors, which regularly result in price reductions.
Last but not least, skilled investors easily identify a sound land securing. A professional land securing is key element a project’s quality – a factor that affects the purchase price.
In the following, the essential topics of a professional land securing are presented from today’s point of view.
Written form of the land lease agreement
Compliance of the land lease agreements with written form requirements is an essential element of professional land securing. Although the topic of written form has been discussed extensively and in detail for many years in numerous newsletters and should therefore be known by project developers, we still note that the written form requirement is often not treated with due care in practice.
Typical errors are ambiguities in the definition of the subject matter of the land lease agreement, in particular in the definition of partial areas of a land plot, as well as the absence of contractual annexes or the incorrect reference to contractual annexes. Even though the requirement of a firm connection has been overruled, we still recommend to firmly connect the deed and the annexes.
The extensive and detailed case law regarding written form requirements should not be underestimated.
If the written form requirement continues to test the patience of project developers in the future? Probably yes, since previous legislative initiatives have been repeatedly rejected.
Easement could come by using qualified electronic signatures, which can also be used to digitally sign land lease agreement. However, due to the high requirements for such a qualified electronic signature, this has hardly been used in practice of land securing to date.
Compensation arrangements and termination
Another frequently occurring case of violations of the written form requirements are unclear remuneration regulations or regulations that are not comprehensible to an objective third party.
In addition to objective comprehensibility, the start of payment obligation and the amount of the remuneration owed should be well considered.
It is therefore advisable, both from an IRR point of view as well as for legal considerations, to select the commissioning of the respective plant as the starting point for the payment obligation. In the case of long-term reservation or waiting periods, which are often unavoidable in the case of early securing of land, reasonable payments during such periods should be agreed on, in order not to jeopardize the existence of a land lease agreement user contracts. IRR considerations are particularly significant since all costs that cannot be covered by income must be paid in as equity. Unproductive costs long before commissioning in particular have a major impact on the profitability of projects.
With increasing runtime of the plants and the corresponding long-term business cases of investors, the land lease agreements should provide for a term of at least 30 years.
By means of fitting contractual provisions, premature ordinary termination of the land lease agreements should be excluded. Even though many readers may take this for granted, recent rulings have brought the importance of precise clauses regarding term and termination of land lease agreements back into focus.
However, the risk of an ordinary termination can only be completely excluded for a period of 30 years from the handover of the respective property (Section 544 of the German Civil Code); in the case of terms plus 30 years, corresponding contractual and in rem security rights must be agreed on.
Due to the expected development of terms of more than 30 years, the acquisition of land or the securing of land via hereditary building rights may also become attractive (again). Here, however, the tax implications for the contracting parties should be precisely identified and weighed up, especially with regard to the property tax reform.
Requirements from financing banks
Finally, we would like to highlight the requirements of financing banks. This topic, as well as the applicability of consumer revocation rights, has become less burdensome by the latest rulings of German courts.
Nevertheless, the requirements of financing banks remain very high and are therefore of significant importance for the financing of projects; here as well is a risk of unpleasant extra loops if the requirements are not met from the outset. In addition to accession rights for the project-financing bank, the waiver of the landlord’s lien and the regulation of accompanying information rights, the securing in rem of usage rights by corresponding entries into the land register constitutes a core element of so-called “bankability”. In this context, project developers should in particular pay attention to the insolvency resistance of the aforementioned security rights in rem.
More core elements
In addition to the topics discussed above, a number of other core elements characterize a high-quality land securing – or how shall a project developer easily and without considerable additional expenses transfer land lease agreements to a new project company?
Based on our consulting experience, we often find that the task of land securing, which is required at the beginning of a project development, is carried out without the assistance of a lawyer, presumably in order to save supposedly high lawyers’ fees.
However, the avoidable mistakes and inadequacies in the context of land securing can often only be corrected at great expense and immediately bring economic uncertainty – possibly even renegotiations. Regularly, a euro saved at the beginning in consulting costs has to be spent several times over elsewhere. Therefore, we advise you to seek professional advice in a manageable amount at an early stage.
Authors: Dr. Gerhard Schwartz and Maximilian Amrhein are lawyers at LPA-GGV in Munich. The firm’s Munich office specializes in advising project developers and investors on all aspects of renewable energy.