Heads of Terms: Think Before You Sign

Year Published: 2016

Renewable energy schemes have offered farmers an important and, in the past, profitable way to diversify and protect their income stream in the face of falling prices for traditional farm produce.

Stewart Smith, Associate Solicitor in the Property team at SAS Daniels Chester

Stewart Smith, Associate

However, it has become commonplace for some renewable energy developers to pressurise landowners into signing heads of terms before the landowner has received professional advice from a land agent/surveyor or a solicitor. The landowner may also be asked to give his consent to the developer applying for a grid connection in respect of his land. Landowners often fail to appreciate that if the developer obtains a grid connection offer it may be in the name of the developer rather than the landowner. This means that the landowner cannot offer it to another developer and has effectively tied himself to the first developer until the offer expires.

It is important to note that a developer is not acting for a landowner and is therefore not obliged to offer the best terms available in the market, or even reasonable terms. A landowner should obtain professional advice on the terms proposed by a developer before signing any documents. If not a landowner may regret signing the heads of terms or giving consent to a grid connection application and lose out on the opportunity to get the best terms.

Are heads of terms legally binding?

Heads of terms are not usually legally binding. Instead they set out the important terms of the deal and any detailed drafting issues are resolved at a later date when the contract(s), which are intended to be legally binding, are prepared.

Whilst landowners are not usually bound by the terms set out in the heads of terms document, there are three important points to bear in mind:

  1. It is more difficult to renegotiate the ‘agreed’ terms, which were originally set out in the heads of terms, than to secure good terms at the outset of negotiations.
  2. Heads of terms often include some provisions that are intended to be legally binding for example provisions which concern confidentiality, exclusivity and costs. These terms will bind the landowner even though they are set out in heads of terms that are otherwise meant to be non binding.
  3. It is possible for heads of terms to bind the parties and landowners need to take care to ensure that they do not inadvertently create binding heads of terms when they did not intend to do so. The use of the words ‘subject to contract’ is not always conclusive and, to avoid doubt, it is best to include a statement that reads, ‘these heads of terms are not intended to be legally binding between the parties except as specifically set out in this document’.

What if the heads of terms include an exclusivity agreement?

If the heads of terms include a binding exclusivity agreement, the landowner will not be able to negotiate or agree terms with any other developers for, say, 12 months from the date of the heads of terms. If the grid connection offer is not in the landowner’s name the landowner may not be able to deal with anyone else until the offer expires or the person with the benefit of the offer agrees to transfer it, which may be in return for a substantial payment.

The renewable energy market is dynamic with Feed-in-Tariff (FIT) rates digressing each year and, in the case of solar, four times a year! If the landowner is locked out of the market for a year, the income stream from the renewable energy project may be significantly lower and this may make the project unviable for both the developer and the landowner.

Also, landowners may find that in the intervening 12 months the grid capacity that made the scheme viable on the landowner’s farm is no longer available and the developer cannot obtain a grid connection offer. Again, this is a particular problem with solar developments.

This could mean that the landowner is forced to accept poor and unreasonable terms to ensure that the project can proceed.

Should you sign a heads of terms agreement?

Landowners should never sign any document produced by a developer or their representatives without obtaining professional advice, irrespective of what the landowner is told by the developer. Developers often tell landowners that the terms are non binding or that it will be possible to look at the terms again after the heads of terms have been signed. As explained above, such statements are misleading and landowners should not allow themselves to be pressurised into signing heads of terms without obtaining professional advice from experienced advisers.

If developers are showing interest in a landowner’s property, the landowner may be able to improve their negotiating position significantly if they hire their own consultant to assess the viability of a renewable energy development on their land. The consultant will be able to help them obtain the necessary consents including, in the case of a solar development, a grid connection offer and planning consent. With these documents, the landowner will be in a strong position to negotiate the best possible terms and to select the best developer to take the project forward. The additional value that the landowner will extract from the project in approaching it in this way will more than compensate for the costs the landowner has incurred in hiring his own consultant to obtain the consents.

For more information on negotiating heads of terms or any other renewable energy matters, please contact Stewart Smith in our Commercial Property team on 01244 305919.

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