Since 2010 many leases of land for the development of solar projects have terms of around 20-30 years (including options to renew), as the term of these leases were designed to mirror the condition contained in the planning permission limiting the operational life of the installation, which was in turn based on the government policy and subsidies available.

We have been approached by developers and landowners wishing to extend the life of the existing solar farm and this two-part article will consider each of the items listed in the paragraph below.

There are a number of items to consider when extending the term of the original lease, not least of which are:

  • should you extend the existing term or enter into a new option for a lease upon expiry of the existing term,
  • how and when to extend the planning permission,
  • Stamp Duty Land Tax (“SDLT”) consequences,
  • extensions of the terms of any cable easements and substation leases.

In light of the growing demand for renewable energy, particularly as people react to the climate crisis, it is likely that many developers will want to repower the solar farms past the term of the original lease. It is clear that the need for clean electricity is not going to diminish and accordingly the UK will need to see the repowering of many of the existing installations, especially given all the infrastructure is already in place.

Landowners of solar project sites should also consider carefully whether agreeing to extend a lease term is the right option for them and what financially is the extension worth, what would the rent be upon entering into any extension/new lease given there are currently no subsidies available to the developer.

How to Extend the Term

  1. Extending the original term

On the basis all parties have agreed to an extension, a Deed of Variation can be used to vary the term of a lease. Whilst an obvious option, by virtue of the law, this will take effect as a surrender of the original lease and the creation of a new lease, known as a surrender and re-grant. The new lease will be on the same terms as the surrendered lease, but with the extended term length. Accordingly this have SDLT implications, consent will be required in relation to any pre-existing charges on the land and there will be requirements to register the Deed of Variaitonwith the Land Registry. It is important to be aware of the effect of a surrender and regrant and ensure the necessary steps are taken. The implications of a surrender and re-grant are explored in more detail below.

  1. Extending the option to renew term

The lease of land for a solar development often contains an option to renew. This is a clause in the lease allowing the developer to exercise the option, during a certain period, to renew the lease for a further term. Rather than extending the term of the lease itself, which would operate as a surrender and re-grant of the lease, a Deed of Variation could be entered into to amend the term of the new lease proposed within the option to renew. It appears that this would not operate as a surrender and re-grant, since it would not be extending the term of an existing lease, but operating akin to an agreement to lease.

There is also the option to extend the amount of times the option to renew clause may be exercised. This is usually limited to two occasions.

If a lease does not contain an option to renew clause, the parties could:

  1. enter into a new option for lease. This would give the developer the ability to enter into a new lease with the landowner on the expiry of the existing lease, if they choose to exercise the option; or
  2. Vary the terms of the existing lease in order to build in an option to renew clause.

If an option to renew is used, in either of the methods set out above, then a surrender and re-grant can be avoided. It is important to note that the renewed lease should not include a further option to renew, because a perpetually renewing lease is not permitted and will be converted by the law into a lease with a 2,000 year term. An option to renew will be void if the term of the renewed lease exceeds 60 years. Following the exercise of the option and the expiry of the original lease there will be a new lease. Issues such as SDLT, charges, and registering the lease with the Land Registry will have to be addressed.

Stamp Duty Land Tax

Stamp Duty Land Tax will be a relevant consideration on entering into a new lease. If the new lease is entered into following the expiry of the original lease (under an option to renew) then SDLT will be calculated based on the lease premium and the rent that will be payable under the new lease.

If the existing lease term is extended, which has the effect of surrendering the existing lease and granting a new lease, the surrender and regrant is treated as a disposal and acquisition for the purposes of SDLT. The surrender of the existing lease means that the landowner acquires a chargeable interest. The regrant of a lease means that the tenant acquires a chargeable interest. Both of these may be subject to SDLT. The surrender and regrant themselves are not chargeable consideration that would be subject to SDLT, however SDLT will be payable on the rent due under the new lease (and any premium).

Overlap relief could be available on a surrender and regrant, to cover the period of the lease where SDLT has already been paid (because there was an overlap with the existing lease term) to avoid being charged SDLT twice. Overlap relief requires:

  • a lease to be replaced or followed by another lease
  • over substantially the same premises; and
  • there is an overlap between the respective lease periods so that the rent for the overlap period would otherwise be subject to a double charge.

When calculating the net present value (NPV) in relation to the new lease, any rent which is within the overlap period is deducted. There are some limitations to overlap relief, e.g. the original lease must have been subject to SDLT, or had the benefit of an extension.

Legal Charges/Mortgages

Landowners and developers will need to take care if there are existing legal charges/mortgages registered against or affecting the landowner’s freehold or developer’s leasehold title and check the terms of the charge carefully.

When varying an existing lease to extend the term, which would operate as a surrender and regrant, landowners should check whether they need the mortgagee’s consent to surrender the lease. Failure to obtain this consent, if required can make the surrender and regrant, and therefore the new lease, ineffective and it would not be capable of registration at the Land Registry and would potentially put the landowner in breach of his mortgage conditions.

If the developer has granted a charge over the lease to a funder/third party, the charge will need to be transferred to the new lease. If a surrender and regrant occurs, the funder/third party’s consent is likely to be needed. This can take effect either through a deed of release in respect of the existing lease and a new charge over the new lease, or a deed of substituted security.

Land Registry Requirements

It is important that the appropriate documents are registered with the Land Registry. The requirements vary, depending on which method is used to extend the lease term.

Extending the Term of the Lease by Deed of Variation – Surrender and Regrant

Leases of more than 7 years must be registered at the Land Registry. The developer must register the lease within 2 months; otherwise it will become void as regards the legal estate and take effect as an agreement for lease. Both parties will need to make sure that the necessary information is provided to the Land Registry to ensure a successful registration. This means that an application will have to be made to the Land Registry to register the deed of variation, with the appropriate SDLT certificate. When processed by the Land Registry the existing lease title will be closed and a new title number for the new lease will be generated. If any charges affect the existing leasehold, then an application must be made at the same time as registering the lease to either discharge the existing against the old title and register a fresh charge against the new title, or have the existing charge transferred by a deed of substituted security.

Varying the Existing Option to Renew

When an existing option within the original lease has been amended by a deed of variation the Deed of Variation will need to be registered against the titles of the landowner and the tenant by making the appropriate application citing both title numbers.

Entering into an Option

Where a new option for a further lease is created the appropriate form (Form AN1) must be lodged at the Land Registry with a copy of the Deed creating the option and include any RX1 application in order to register a restriction against the landowner’s title.