Natural Capital projects: what documents might I have to sign?
15 May 2023
You are a landowner entering into a Natural Capital project. You have spoken to your agent and a set of Heads of Terms have been agreed. It is up to the lawyers now to put pen to paper and document the mechanics of the project to ensure that it works within the legal framework. What might you end up signing?
Biodiversity Net Gain (“BNG”) projects
In the main, we are currently seeing three methods of delivery of BNG projects, which we refer to as the Direct Model, the Third Party Delivery Model and the Self Delivery Model.
If you, as landowner, proceed down the Direct Model route, then you can usually expect to have no involvement with the management of the land, but rather to simply allow the developer (or someone on its behalf) to manage the land. You should expect to enter into an Option Agreement (or a conditional contract) with the developer under which they may elect, within a specific timeframe (an Option Period), to purchase or take a lease of your land for the purposes of establishing a new habitat or improving an existing one.
The Option Agreement will set out how and when the developer may exercise their option to buy or lease the land and may include provisions about certain activities which they may carry out (such as preliminary surveys on the land and other works) prior to buying or taking exclusive possession of it. If you sell to them, you will need to sign a contract and then also a transfer deed. If, instead, you are going to let the land to them then you will enter into a lease which will allow whoever is to manage the site to do so, usually meaning you have no further significant rights over the land for the lifetime of the lease.
The Third Party Delivery Model normally involves leasing your land to a habitat bank company which funds the capital costs of enhancing an existing habitat or establishing the new habitat. The habitat bank will then sell the units onto developers. For this model you may choose to provide the ongoing management of the habitat and so will usually take a lease back from the habitat bank. This means that you will be signing a head lease and a sub-lease which may have beneficial taxation consequences for you. It is also commonplace for habitat banks to require the landowner to enter in to a “habitat management and monitoring plan” with them. This document governs how, in practical terms, the habitat is to be established in accordance with a live document known as a Habitat Management Agreement and then managed and monitored throughout the minimum 30-year term of the project. We include an indicative diagram of how the third-party delivery model typically works below.
The Environment Act 2021 requires habitats established for a BNG project to be in place for a minimum of 30years, so any leasehold structure will also need to be in place for a term of at least 30years to comply with this statutory requirement. You, as landowner, will also be obliged to enter into an agreement which is protected by a local land charge against your property typically in the form of either a section 106 agreement with a local authority or a conservation covenant with a responsible body for the duration of the project. Conservation covenants are explained in greater detail in this article. In a nutshell, and in the context of BNG projects, you will be legally bound pursuant to the terms of these documents to ensure that the newly established or enhanced habitat is maintained as such for at least 30 years and that nothing is done to interfere with or damage it.
Alternatively, the Self Delivery Model will be right for you if you intend simply to create a habitat yourself and find a developer to whom to sell the units directly. In some instances, you can find a developer first and then use the revenue from the sale of units to generate the habitat. Once you have found a developer buyer for your units you will enter into a unit purchase agreement under which you agree to sell, and the buyer agrees to buy, the units. You may also enter into a Habitat Management and Monitoring Plan with the developer, under which you agree to continue managing the site in a particular way to ensure that the units hold their value for the period of time required for the developer to fulfil their statutory obligations and for all parties to meet their obligations under the planning agreements by which the supply of the units is secured.
There are also brokers in this marketplace who are offering promotion agreements (to promote your units for sale), exclusivity agreements (taking exclusivity on the sale of your units, but finding the buyer) and straight brokerage agreements (akin to selling a house). As this market matures, the documents you might need to enter will evolve and we strongly recommend taking advice from Natural Capital specialists at Birketts before entering into any such documents.
Carbon capture projects
As a landowner, a conventional carbon capture project would involve selling or leasing areas for the purposes of planting woodlands. As with BNG projects, you may find yourself signing a form of management agreement which determines how the woodland is to be operated; a conservation covenant; or covenant with the Forestry Commission that obliges you to manage the site in a particular way for a defined term. Note that, for carbon capture projects, there is no minimum timeframe for which an area of land must be subject to such a covenant. However, for practical reasons, most carbon capture projects will routinely last for decades and this will be reflected in the term of any lease into which you have entered and any form of covenant.
Nutrient neutrality projects
The nutrients within domestic and commercial wastewater (which commonly arise as a by-product of new development sites), slurry and agricultural fertilisers are making their way into watercourses, causing the overgrowth of harmful algae and aquatic plant life. This can result in the oxygen supply to the water being depleted and the waterway becoming degraded and into what is known as an ‘unfavourable condition’. Adding wastewater from new housing developments can make the condition of waterways already in an unfavourable condition far worse. The intention is to mitigate the impact of new developments so that there is a neutral impact on the relevant waterways. There are several methods of mitigating the harmful effects of such an imbalance in our waterways and often a nutrient neutrality scheme will be delivered in such a way as to incorporate more than one of these mechanisms.
If, as landowner, your property has been identified as an appropriate site for a nutrient neutrality project, there are two key options available.
First, you may agree with the developer, who is trying to create a satisfactory nutrient neutrality plan, to enter into a planning agreement in return for payment for either maintaining the relevant waterway or ceasing agricultural activities which otherwise would impact on the waterway.
Secondly, you may enter into an Option Agreement to sell your land to the relevant developer to carry out or cease whatever activity will mitigate the nutrient burden on the waterway. Alternatively, where the land is to be let, you may enter into an agreement for lease under which you agree to grant a long lease (likely to include a term upwards of around 80 years) to a third party who will be responsible for paying for and delivering the mitigation solution. These solutions may include, for example, works to upgrade or replace private drainage systems, installation of new sewerage treatment facilities and/or creation of wetlands which are carefully designed to use certain vegetation to remove the nutrients from the water flowing into the waterway. You may enter into an agreement to cease an activity (for example cease putting fertiliser on various parcels of land) or an agreement to require you to carry out an activity (to plant cover crops). Depending on the complexity of the project, it may be commercially sensible to set up a joint venture between you and the other party so that you may deliver on it together. Conservation covenants or other planning agreements (such as a s.33 or s.106 agreement) may be used to ensure that, once set up, these sites are retained in a specific condition for a specific term and that they deliver the mitigation solution as intended.
Any Natural Capital project is likely to involve entering into a suite of documents that will be tailored to each set of circumstances and will include technical and bespoke drafting. We have given a very high-level taster overview here of how such projects might be structured on paper but as with any transaction, the devil is always in the detail. If you would like to discuss the specifics of how these projects might work for you then please do not hesitate to contact our Natural Capital Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at May 2023.