Land lease agreement for a solar farm in Poland – key provisions and legal risks

How exactly should the subject matter of a lease agreement be defined?

Pursuant to Article 693(1) of the Polish Civil Code, under a lease agreement, the lessor undertakes to make an item available to the lessee for use and enjoyment for a fixed or indefinite period, and the lessee undertakes to pay the lessor the agreed rent. The provision therefore uses the term ‘thing’, which should be understood to mean immovable property, including land.

In practice, this means that the subject of the lease may, in particular, be land which, under the lease agreement, is made available to the lessee for use and to derive benefits from, subject to the obligation to pay rent to the lessor.

A lease agreement for agricultural land for a photovoltaic farm should, above all, specify in detail what the parties understand by the subject of the lease and what area forms the basis for calculating the rent.

How to determine the lease rent for land for a photovoltaic farm?

It may be important for the farmer (the lessor) to specify in the lease agreement that the rent is payable for the entire area of the leased property, regardless of the area that will actually be used by the investor, i.e. the area on which the installation components are situated.

It may turn out that, due to technical constraints, the photovoltaic installations will not be located across the entire plot, but only on a designated part of it, for example in the centre of the plot. The lessor’s aim will therefore be for the lessee to pay rent for the entire property.

On the other hand, during negotiations, the investor may seek to narrow the lease area as much as possible, thereby reducing the amount of rent. This approach will allow for a reduction in the area actually excluded from the current use of the land, and consequently reduce the amount of rent, which is linked to the size of the land covered by the lease agreement.

How should the lease area be precisely defined in the agreement?

The lessor should, however, be aware that where the lease agreement covers the entire property, they generally lose the right to use it for agricultural purposes, including in respect of that part of the land which has not actually been occupied by the photovoltaic installation.

Any different arrangement regarding the rules for using the land may only arise from explicit contractual provisions which precisely permit further, limited use of the property by the owner.

In the event of any doubt between the parties regarding the area leased and the area which the lessor may use, it is recommended that a survey map be included as an annex to the lease agreement, precisely defining the leased area. This will protect both parties to the agreement and, consequently, minimise any risks associated with differing interpretations of what is actually the subject of the agreement.

It should also be borne in mind that any verbal agreements between the parties should be reflected in the text of the land lease agreement for the construction of a solar farm. It often happens that the parties agree verbally that the investor will lease several hectares of land on which to install a solar farm, whilst the subject of the written agreement covers the entire area of the property.

Access to neighbouring properties – what should be regulated in the lease agreement?

Lease agreements for land intended for photovoltaic farms often also include provisions under which the investor has the right to use land adjacent to the plot on which they plan to build a photovoltaic installation, for example for the purpose of carrying out construction work or accessing the plot.

However, it should be borne in mind that the landowner cannot freely dispose of neighbouring land (unless it is their property); consequently, such obligations on the part of the lessor require, in each case, the conclusion of an appropriate agreement with the owners of the neighbouring land, or the submission of declarations by them in the land lease agreement being concluded. Otherwise, without the neighbour’s explicit consent, the lessee may infringe upon the neighbour’s right of possession of the neighbouring land.

How long should a lease agreement for a solar farm last?

Article 693 of the Polish Civil Code provides that a lease agreement is to last “for a fixed or indefinite period”.

A fixed-term lease refers to a contract with a duration specified by the parties in a manner that is clearly defined in advance and can be determined at the time of its conclusion. This could, for example, be a period of 10, 20 or 29 years and 11 months. An indefinite term, on the other hand, means that no end date for the contract has been specified. The lease therefore lasts for as long as the parties wish, and it terminates upon the expiry of the notice period. In other words, at the time the contract is concluded, the parties do not know how long it will last.

If the parties do not specify the duration of the contract in its terms, then such a contract must be deemed to have been concluded for an indefinite period (J. Sadomski, in: W. Borysiak, M. Grochowski, J. Sadomski, Contracts for the Use of Property, p. 113).

If, however, the parties conclude a contract for a period exceeding thirty years, then upon the expiry of that term, the contract is deemed to have been concluded for an indefinite period (Article 695 § 1 of the Polish Civil Code).

Lease rent in a contract for a photovoltaic farm

Leasing land for a photovoltaic installation also inherently involves an obligation to pay rent. The Polish Civil Code does not specify how the rent should be determined; therefore, this matter may be agreed between the parties in accordance with the principle of freedom of contract. Of course, it will be in the interests of both parties to define the method of calculating the rent with sufficient precision so that the interpretation of the provision leaves no room for doubt.

Rent and the stages of investment in a photovoltaic farm

In this context, the lease period should be divided into four stages.

The first of these is the stage preceding the implementation of the investment, and thus the preparatory stage. At this point, no construction work is being carried out on the property subject to the lease. The lessee focuses on obtaining the necessary administrative decisions and approvals so as to be able to commence operations in accordance with the law.

The second stage involves carrying out construction works related to the installation of the solar farm on the plot, and thus preparing the plot technically for use.

The third stage is when the solar farm supplies energy to the grid, and thus the lessee begins to generate profits from the operation. 

The fourth and final stage is the period during which the installations are dismantled, the property is restored to its original condition, and the site is reclaimed.

The amount of the lease rent can therefore be linked to the above periods and thus to the stage at which the investment currently stands. The amount of the rent may therefore be:

• relatively low during the preparatory stage, when the farm is not generating any financial returns,
• increase during the second stage of works,
• ultimately reach its highest level during the operational phase, i.e. when the leasee is generating income from the investment,
• be reduced again upon dismantling and decommissioning of the installation.

How to determine the lease rent for land used for a photovoltaic farm?

In many lease agreements for land used for photovoltaic farms, the rent depends on the area of the property occupied by the infrastructure. Frequently, the parties to the agreement include a provision stating that:

“Rent shall be payable for the area occupied by the photovoltaic infrastructure. The rent amounts to PLN 12,000 per year per hectare.”

However, this provision is not sufficiently precise. First and foremost, it does not specify a minimum area for the development, and so it is possible that in reality the infrastructure will occupy (for example) 0.5 hectares. In this situation, the lease rent will not amount to PLN 12,000, but PLN 6,000 (PLN 12,000 x 0.5 hectares), thereby halving the project’s profitability for the lessor.

For the lessor, a more cost-effective solution would be to stipulate a minimum lease rent, payable regardless of the area occupied by the investor for the construction of the installation. The contractual provision cited above could therefore read as follows:

“Rent shall be payable for the area occupied by the photovoltaic infrastructure and shall amount to PLN 12,000 per year per hectare, provided that the annual rent shall not be less than PLN 12,000, regardless of the actual area used by the tenant.”

When does the obligation to pay rent arise under a lease agreement for a photovoltaic installation?

It is also important to specify precisely the date from which the lessee will be obliged to pay the lease rent. The parties may, for example, specify that this date will be the date on which the property was handed over, or the date on which construction work to build the farm commenced. It is in the lessor’s interest for this date to be as close as possible to the date the lease agreement is signed and for the rent to be paid in advance, for example for the entire duration of the agreement.

Rent indexation in a solar power lease agreement – how does it work?

Land lease agreements for solar farms are entered into for long periods. These periods must be considered alongside the time value of money and the occurrence of inflation in the economy, i.e. the decline in the purchasing power of money.

The lessor certainly cannot underestimate this issue. For example, in June 2022, inflation in Poland reached 15.5 per cent year-on-year. With inflation at this level, this means that the purchasing power of a rent set at PLN 10,000 in 2021 would be significantly reduced. Put simply, to maintain the same real economic value of the payment in 2022, the rent should amount to approximately PLN 11,550 (PLN 10,000 × 1.155).

It is therefore in the lessor’s interest to ensure that, in each year of the lease agreement, the rent is indexed to the consumer price index published by the President of the Central Statistical Office.

Otherwise, the return on investment for the lessor will effectively decrease each year, and the longer the period of high inflation lasts, the less profitable the investment will be. As a result, after a few years, the business venture may cease to be profitable.

How can rent payments be secured in a solar farm lease agreement?

However, entering into a lease agreement for a plot of land for a solar farm is not an entirely risk-free business venture. For the landowner, the key factor determining the profitability of the venture will be the receipt of regular and timely lease payments. In practice, there are several options for legally securing payments to the lessor, and legal solutions analogous to those used in tenancy agreements will apply.

The most common forms of security include:

• the tenant paying a deposit, i.e. a sum of money paid into the landlord’s bank account in the amount specified in the lease agreement. In the event of late payment of rent, the lessor may use the security deposit to satisfy their claims.

• A declaration of voluntary submission to enforcement is a declaration made in the form of a notarial deed, in which the tenant submits to enforcement in favour of the creditor, i.e. the landlord. In the event of non-payment of rent, the lessor may use this deed, which significantly shortens and simplifies the recovery of the debt and helps to reduce the costs and duration of the debt recovery proceedings. As a result, with this deed in hand, the lessor can proceed with bailiff enforcement in a highly effective manner.

• A bank guarantee is a document issued by a bank at the tenant’s request, entitling the landlord to demand payment from the bank (rather than the tenant) in the event of non-payment of rent. The legal relationship of the bank guarantee arises between the lessor, as the beneficiary of the bank guarantee, and the bank, as the guarantor. It will be crucial for the tenant that the bank guarantee meets all relevant legal requirements, i.e. that it is irrevocable, divisible, unconditional, transferable and payable on the lessor’s first demand.

What obligations should an investor have under a lease agreement for a solar farm?

One of the fundamental issues that should be clearly set out in a solar farm lease agreement is the investor’s obligations regarding the construction of the solar installation.

These obligations should relate to:

• the costs of constructing the photovoltaic installation,
• regulations arising from building law, environmental law, energy law and administrative decisions enabling the conduct of business activities,
• providing civil liability insurance towards the lessor and third parties in connection with the operation of the photovoltaic farm,
• the process of carrying out construction works and restoring the leased land to a condition no worse than its original state (more information on this below).

Of course, the above obligations are merely examples, and all of the investor’s obligations should be determined on a case-by-case basis in relation to the specific facts of the matter.

Taxes and costs associated with leasing land for photovoltaic installations

Given the rapid growth of the photovoltaic industry in Poland in recent years, it cannot be ruled out that new tax burdens affecting the industry may be introduced in the future. It therefore seems to be in the lessor’s interest to specify explicitly in the lease agreement that the lessee (investor) will be obliged to pay all public law liabilities.

This provision should cover both charges in force on the date the agreement is concluded and those that may be imposed in the future. Consequently, the lessor’s income from rent will remain at the same level, regardless of the introduction of any further financial burdens.

It is also important to precisely clarify the issue of liabilities arising from property tax or agricultural tax. The tax liability rests with the landowner; however, there is no reason why the investor should not reimburse the landowner for the equivalent of the tax together with the lease rent. In this context, it should be borne in mind that a change in the use of land from agricultural land will significantly increase the tax rate.

Termination of a lease agreement for agricultural land used for photovoltaic installations

A key issue relating to lease agreements for land used for photovoltaic installations concerns the provisions regarding the possibility of terminating the agreement. It should be borne in mind that, as a general rule, lease agreements are concluded for a fixed term and can therefore only be terminated in accordance with the terms set out in the agreement. However, if the parties have not provided for the possibility of termination in the lease agreement, the legal relationship arising from it may not be capable of being terminated before the end of the agreement’s term (which may be 29 years and 11 months).

It should be the landowner’s intention to include provisions under which they may terminate the lease agreement, for example in situations where the tenant:

• is in arrears with the payment of rent or other charges arising from the lease agreement,
• uses the land for purposes other than those specified in the lease agreement,
• fails to commence the development within the timeframe specified in the lease agreement.

On the other hand, the tenant should seek to secure the right to terminate the lease agreement, for example in situations where:

• a favourable administrative decision permitting the construction of the facility has not been issued,
• as a result of a relevant decision by a public authority or a change in technical or legal conditions, requirements are imposed on the lessee that reduce, limit or eliminate the profitability (profitability) of the installation, or where its factual or legal environment changes in such a way that the construction or operation of the solar installation becomes impossible or unprofitable.
• in the event of force majeure, as a result of which the continued operation of the installation becomes impossible, significantly impeded or unprofitable.

Obligation to return the land upon expiry of the photovoltaic farm lease

As a general rule, photovoltaic farms in Poland are most often situated on agricultural land. In order to use agricultural land for the purpose of installing a system on it and subsequently operating it, it is necessary to undertake a series of practical and legal steps, the ultimate effect of which is to exclude the agricultural land from use in its previous manner. In other words, the land is stripped of its agricultural characteristics. Often, due to the extent of interference with the land, restoring its agricultural properties after the lease agreement has expired may, in practice, be impossible.

At the same time, pursuant to Article 705 of the Polish Civil Code, upon termination of the lease, the lessee is obliged, in the absence of a contrary agreement, to return the leased property in the condition in which it should be in accordance with the provisions on the performance of the lease.

The provision therefore does not impose an obligation on the tenant to reclaim the land prior to its return to the landlord; consequently, the land should be returned in a condition resulting from the normal course of the tenancy, taking into account normal wear and tear. As noted in the legal literature: “It will only be possible to require the lessee to restore the property to agricultural use or to reclaim the land if such an obligation was created by the parties’ agreement” (M. A. Panek, The Obligation to Return Property upon Termination of a Lease of Land for a Photovoltaic Farm, ‘Przegląd Ustawodawstwa Gospodarczego’, vol. LXXVIII, no. 12/2024 (918)).

However, the provision states “in the absence of a different agreement”, which should be interpreted to mean that the parties may contractually modify this rule and specify and clarify in the lease agreement the condition in which the property should be returned. Generally, the parties may specify this in any manner they choose, ranging from the dismantling of the infrastructure itself, the reclamation of the land, and the restoration of its usability in accordance with its agricultural nature (if this is at all possible).

On the other hand, the lessee may limit themselves to merely removing the infrastructure and returning the land to the lessor. This matter should therefore be subject to negotiation, and its implications should be reflected in the terms of the lease agreement.

Summary

Land lease agreements for the construction of a solar farm are often lengthy, complex documents containing a range of provisions governing the cooperation between the parties. Given that lease agreements are usually concluded for long periods (10, 15, 29 years and 11 months), it is extremely important to identify all relevant issues at the contract negotiation stage and address them in the text of the document.

The issues surrounding land lease agreements for the construction of a solar farm are complex, and the matters discussed in this article represent only a fraction of the issues which, in our view, should be addressed in a well-drafted agreement.

It is advisable to carry out a legal analysis of the lease agreement for a solar farm before signing it. The long-term nature of the commitment means that even seemingly minor provisions can have significant financial and legal consequences.