Farm owners’ property as security for wind farm financing: what owners need to know

Ontario Farmer, May 5, 2015

by Garth Manning and Jane Wilson

Wind-Turbines-and-cornfield-2It came as a surprise to many in Ontario when it was revealed that the multi-national power developers behind the K2 wind power generation project near Goderich had secured $1 B in financing, and that this arrangement is now registered on title for the 100 farm properties involved as lessors.

The arrangement is between K2 Wind Ontario Inc. and Mizuho Bank Ltd. Canada Branch. It secures a revolving credit facility of up to $1 billion at 25% on a number of items, including the contracts between landowners and K2 for land and road agreements with municipalities.

Another, smaller example has also come to light: a wind power project south of Ottawa in Eastern Ontario, where the five landowners leasing land for a 30-megawatt, 10-turbine project now have charges on their properties for $70 million.

Immediately, questions arise as to what would happen if the power developers were to default on their loans: would the lender then own the farm properties? How would that affect road use agreements with municipalities?

The fact is, this is a common practice. Property owners can refer to the leases imposed by the developers to review this potential situation, and many others that may affect operation and ownership of their land while leasing land for the power projects.

In an Invenergy standard contract, for example, is this clause: “In connection with the Lessee’s financing of the Project, the Lessee….is hereby given the right by the Lessor…to mortgage its interests in the Lease…and to assign this Lease, or any part of parts thereof, and any subleases as collateral security…”

The proper term for this is a “Charge of Lease” but may also be referred to as a “Demand Debenture.” What it means is, the present value of the wind power contract (i.e., the Feed In Tariff or FIT contract with the Ontario government) is greater than the present value of the lease amount. The difference between those two amounts is security for the loan to the power developer. It is a charge against all contracts favourable to the wind power developer, which may also include road use agreements.

It is like a line of credit for the developer and typically, advances against the amount are tied to certain milestones such as stages of construction.

The critical factor, however, is what it means for the lessors, in other words the farm owners who have leased their land for wind turbines, access roads, substations, transmission lines, etc. The importance lies not so much that the farmer lessors might on default lose their land (the farm land itself is not mortgaged, just the turbine contract on that land) but the damage it does to that property owner if he/she wants to sell, or to renew an existing mortgage, or place a new one, or in any way borrow money for which the lender would want security on his/her land.

Let’s assume a farm owner wants financing for farm operations or improvements. That might now pose difficulty: lenders do not like to be second in line, as they would be where a charge of lease is in place.

If the farm owner wishes to sell, similar difficulties arise: the lawyer for a purchaser in the case of an agreement to purchase will do a title search and discover the Charge of Lease on title, then immediately advise his or her client that the client is entitled to get out of the deal unless the registration of the Charge is removed from title. A purchaser is not expected to assume any risk of this nature.

In the case of renewing an existing mortgage or placing a new one, the lawyer for the bank or other lending institution would take the same position — no renewal or new mortgage unless the customer sees that the Charge disappears from title.

This is one of several important characteristics of signing a lease to have wind turbines, and needs to be thoroughly considered. Other legal issues to be carefully considered may include potential liability for the substantial cost of “decommissioning” turbines at the end of the lease, difficulty obtaining insurance on property with wind turbines, loss of autonomy over building on the property and carrying out regular farming practices, and, last, the potential for nuisance suits from neighbours affected by noise or property value loss.

Property owners should consult with a lawyer before signing any agreement.

Garth Manning is a retired lawyer and former president of the Ontario Bar Association, who lives in Prince Edward County. Jane Wilson is president of Wind Concerns Ontario; she lives in North Gower.

via: Wind Concerns Ontario

Related article: K2 Wind Energy Responds To Mortgage ConcernsBy Bob Montgomery on May 5, 2015.

One thought on “Farm owners’ property as security for wind farm financing: what owners need to know”

  1. Re: Ontario Farmer Page 7A Tuesday May 5, 201
    This is similar to what pipeline companies  have done when they construct their pipelines (for example, natural gas, crude oil, refined petroleum products, or water).  This may also be true for other types of activities requiring easements or other similar agreements with third parties related to your Lands, such as utility corridors (electrical, telephone, etc.)

    Since 1958, TransCanada (and quite probably other pipeline and utility companies) applied a Deed of Trust to Landowners’ property titles of many lands crossed by their natural gas lines in Northumberland County when they were constructed.

    Landowners have attempted to mortgage or sell some of these Lands, only to find that their titles were not clear, as TransCanada’s mortgages from its initial pipeline construction were still not discharged on numerous Lands/deeds, by 2014.  For those affected, this resulted in costly legal fees, real estate/mortgage issues, and avoidable delays in transactions.

    When TransCanada came knocking on Northumberland Landowners’ doors in 2014 to discuss their newest proposed gas pipeline, the Eastern Mainline Project (an adjunct of the massive Energy East Project), Landowners insisted they get all of these mortgages cleared from their titles at TransCanada’s expense.

    TransCanada expressed surprise that these mortgages were still registered on Landowners titles!  Did they even care until Landowners found out and complained?

    Warning to those who own or may buy Lands similarly and/or potentially affected:
    Check what it all means with a lawyer whom is familiar with the possible impact of these companies’ past, present and future actions, and how it affects your Lands and your property rights, among many other things!

    The National Energy Board Act certainly ensures that Landowners lose control of their Lands “in the public interest”.

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