Over the past 12 months there has been a dramatic increase in the development of greenfield renewable projects in Australia. Victoria's recent announcement that it will set a renewable energy target of 40 per cent by 2025 together with the ARENA large scale solar tender closing on 15 June 2015, Queensland's announcement of 'Solar 120' and the ACT government's latest large scale wind and solar auction, means the development of renewable energy projects in Australia is set to keep on rising. This has resulted in increased competition between developers and private investors looking to secure land rights early for their solar and wind projects.
Most early discussions with landowners and the entry into options to lease are appropriately conducted at a commercial level without the involvement of professional advisers. Developers should, however, keep front of mind the key regulatory and legal risks in acquiring land interests over development sites for solar and wind renewable projects in Australia.
Note that while these considerations apply specifically to solar and wind renewable projects due to the nature of their footprint and use of agricultural land, developers should consider these implications for all renewable projects, particularly where land will need to be acquired for the purposes of new transmission lines.
Investors and developers looking to secure land rights and interests for a project site need to be aware of:
- the potential application of Australia's foreign investment regime that may apply to the acquisition of land interests, including options to lease and long-term leases; and
- the potential need for subdivision in certain States if the lease term is over a certain period.
This article will look at the relevant regulatory regimes in Australia, and offer a practical guide on how to mitigate some of the risks that commonly arise.
- Application of the agricultural land regime under Australia's foreign investment regime
From March 2015, a new Australian government regime for the acquisition of agricultural land and agribusiness by foreign investors has been in operation. The screening threshold for agricultural land was substantially reduced from that date from A$252m to A$15m, calculated on a cumulative basis.
This new regime is centred around the national concern of "selling the farm", including the potential impact on food security and competition in Australia.
Unfortunately, the application of the new regime also has the consequence of catching most solar and wind renewable development projects in Australia due to the need of those projects to acquire rights to use small parcels of land which are themselves part of much larger rural holdings.
Agricultural land is defined broadly under the foreign investment regime (see further explanation below) and captures most of the land that would usually make up the development site required for solar or wind renewable projects. Accordingly, the developer should be aware that if one or both of the following circumstances apply, it will need to obtain prior approval from the Foreign Investment Review Board (FIRB) before entering into any long-term leases with the landowners:
- if the developer is a foreign government investor, then any acquisition of interests in Australian land irrespective of value will require prior approval. Foreign government investor is defined very broadly and includes any developer that has at least a 20% government interest from a single foreign country or at least a 40% government interest from multiple foreign countries. This includes indirect foreign government interests such as investments from government or municipal super funds, state-owned enterprises, and other semi-government entities at any level of the equity structure; or
- if the developer is a non-foreign government investor (i.e. a privately funded foreign investor), then the A$15m cumulative threshold for the acquisition of interests in agricultural land will apply. The cumulative threshold looks at all existing interests in Australian agricultural land held by the foreign investor. This means that if the foreign investor already holds interests in agricultural land in excess of A$15m, any new acquisition of interests in agricultural land (including long-term leases) will require prior approval from FIRB irrespective of value.
The most problematic aspect of the agricultural land regime is how the value of the lease arrangements (being both the options to lease and the long-term leases themselves) should be calculated in determining whether the A$15m threshold is reached.
Entry into leases will be deemed to be an acquisition of an interest in the underlying agricultural land if the lease term exceeds five years and gives the lessee a right to occupy the land. The consideration for the deemed acquisition is calculated as the aggregate amount payable over the entire lease term, including any extensions or renewals.
As most leases for renewable projects run for 10 to 25 years, with one or more extension options, this can add up very quickly to reach the A$15m threshold. For example, a single lease with an annual rent of A$10,000 can be deemed to have an acquisition value of up to A$750,000 under the foreign investment regime1. Based on this, most land programmes for mid-scale and all large-scale solar and wind development projects will exceed the A$15m threshold and therefore trigger the requirement for prior approval from FIRB2.
The application fee payable to FIRB depends on the acquisition value, and is generally A$10,000 per A$1m up to a maximum of A$100,000. Given the manner for calculating the acquisition value for long-term leases, most applications for mid-scale or large-scale solar and wind projects will attract the maximum A$100,000 fee under the foreign investment regime.
Finally, all acquisitions of interests in agricultural land by foreign persons regardless of whether they require approval from FIRB and regardless of value, must be notified to the Australian Taxation Office Register of Foreign Ownership of Agricultural Land within 30 days of entry into the lease.
Case study - Wind Farm Project
We recently acted for a foreign investor looking to acquire a large-scale greenfield wind farm project in NSW, with completion of the acquisition to occur on financial close.
The acquisition triggered the requirement for prior FIRB approval on two grounds:
- on financial close, the developer will enter into lease agreements with landowners over the project site. The project site had a footprint of approximately 1,500 hectares, and the total rent payable amounted to over A$100m for a 25 year lease with two extension options. This easily exceeded the A$15m FIRB threshold for agricultural land acquisitions; and
- on closing, the acquisition transaction, the development premium payable by the foreign acquirer is likely to exceed the A$55m FIRB threshold for an Australian land entity that holds interest in sensitive land being used for the generation of electricity.
- Will an option to lease be captured?
While the actual lease for a solar or wind project is commonly entered into on financial close of the project, it is usual for the rights to the underlying land to be secured very early on in the project's development through an option agreement. Importantly, the entry into this option to lease with landowners during this preliminary phase of the development may of itself trigger the requirement to obtain prior approval from FIRB. Alternatively, this requirement may not apply where the exercise of the option is conditional upon the receipt of approval from FIRB.
On this basis, it is recommended that all options to lease entered into by a developer that is, or may in the future be, backed by foreign investors include FIRB approval as a condition precedent to the exercise of the option. If inclusion of a FIRB condition is not commercially feasible, then the developer will need to consider whether:
- the land can be excluded from the agricultural land regime;
- it should apply to FIRB for prior approval before entering into the option to lease; or
- it should apply to FIRB for an exemption certificate to cover its land acquisition programme.
- Can a lease be excluded from the agricultural land regime?
Agricultural land is defined broadly under the foreign investment regime to include land in Australia that is used, or that could reasonably be used, for a primary production business. As most solar and wind greenfield projects are situated on rural or grazing land, the developer should assume that most of the project sites will be deemed to be agricultural land for the purposes of the foreign investment regime unless there is strong evidence to the contrary. The most obvious exception to this is land that is used for an existing substation but a more complicated scenario can arise in relation to land which is to be used for biodiversity offsetting purposes.
Other exemptions include:
- land that has not been zoned to allow for any primary production use;
- land that is used for mining operations or is the subject of a mining or production tenement; or
- land that is less than one hectare in size.
If an exemption does not apply, then the developer can look to reduce the likelihood of land being classed as agricultural land by the provisions of the lease making it clear that the lessee cannot use the land to carry out any primary production business during the lease term and that the lessor does not intend to operate any primary production business on the land after the end of the lease term. Other factors, such as remoteness of the land from goods transport and other infrastructure, will also be relevant in determining whether the land is "agricultural land" under the foreign investment regime.
The inclusion of these provisions in the lease will not, however, provide a "safe harbour" for the developer, and most foreign entities investing into a solar or wind renewable development project will want the legal certainty that the transaction cannot be unwound in the future by the Australian government for a potential breach of the Australian foreign investment regime, in which case prior FIRB approval should be sought.
Note that even if the developer is comfortable that the project site falls outside of the agricultural land regime under the Australian foreign investment regime, land used for solar or wind projects (including land under transmission lines for these projects) are likely to be deemed "sensitive land" used for the generation, transmission, distribution or supply of electricity to the public3. For this land a threshold of $55m applies. Again, for reasons described above, the aggregate rent payable for mid-scale and large-scale renewable projects are likely to exceed that threshold when calculated over the entire lease term (and assuming the extension options are exercised at the end of each term).
- Annual acquisition program
If the developer requires certainty regarding the foreign investment position of the project and wishes to avoid any delay in obtaining FIRB approval, the developer may apply to FIRB for an exemption certificate (EC). Once issued, an EC will allow the developer to acquire interests in land within the conditions set out in the certificate.
FIRB will usually grant the EC where the application satisfies all of the following matters:
- the applicant (being the lessee) is clearly identified. Any change of control of the applicant after the EC has been granted will require re-application to FIRB;
- the project area that is the subject of the potential acquisitions is clearly defined. FIRB is open to including multiple sites or areas within the EC provided there is clear commercial rationale (e.g. feasibility studies have been carried out to identify the potential sites);
- the purpose of the acquisition is clearly defined (e.g. land acquired or leased will only be used for the purposes of constructing and operating renewable energy projects and not for any other purpose);
- the total acquisition value is set. Care should be taken in valuing long-term leases to include all aggregate rent payable, including under any extension or renewal periods; and
- the applicant agrees to provide FIRB with regular updates (usually quarterly) on its acquisitions.
An EC is usually valid for between 12 to 18 months, but can be renewed after expiry of that period. Although the application process for an EC is relatively established, developers should allow two to three months processing time by FIRB. A fee is payable to FIRB on an application for an EC.
- Planning requirements
Developers for solar and wind projects should also be aware of the potential need to seek planning approval for subdivision of the leased sites, in addition to planning approvals for a change of use and building works.
Subdivision approvals will be required if the area of the leased land for the project is to comprise only part of an existing title, and in many jurisdictions, if the lease term is greater than a specified period (for example, more than 5 years in NSW and 10 years in Queensland. Note that South Australia amended its regime in June 2015 to exclude leases for wind turbine generators and associated infrastructure from this requirement). For that reason, the option to lease and the lease documentation should provide sufficient flexibility to allow the developer to seek the required planning and subdivision approvals, and ensure that contract arrangements take account of the time frames required to obtain approvals, including time to deal with objections and appeal processes.
- Concluding remarks
The agricultural land regime under Australia's foreign investment regime has had unintended consequences for the development of solar and wind projects. Based on our dealings with FIRB there is some acknowledgment that the new regime has caused significant issues for the usual conduct of business by foreign persons in Australia and there have been significant policy submissions made to FIRB seeking further changes. We understand that amending legislation is being prepared but it is unclear whether it will exempt renewable and other greenfield projects from the agricultural land regime.
Unfortunately for now, this onerous regime will continue for solar and wind projects. We recommend that developers seek early advice on any proposed land acquisition or lease arrangements to ensure they comply with the current Australian foreign investment regime before any arrangements are entered into.
1 This is assuming the lease will have an
initial 25 year term, and two further options of 25 years
2 There are limited exemptions for non-foreign government investors form Chile, New Zealand, Singapore, Thailand and the United States. However, in our experience, these exemptions rarely apply as the lease documents are usually entered into with a developer company which is an Australian company or SPV entity (rather than a foreign developer company).
3 There are some exceptions, including if the electricity generated from the solar or wind project will not be fed into the National Grid, but used for a private company (e.g. micro-grids).