The Louisiana Legislature’s 2023 Regular Session begins on April 10th, and last Friday, Louisiana Senator Allain of District 21 filed SB 154 proposing to enact a statutory framework directly governing the rights and obligations of parties to renewable energy leases.
The bill defines a “renewable energy lease” as a lease entered into for the purpose of producing “wind, solar, hydroelectric, or geothermal energy.” This definition further includes any lease pursuant to which the primary activity of the lessee is the production of wind, solar, hydroelectric, or geothermal energy.
Although the bill expressly provides that “[a] renewable energy lease is not a mineral lease,” the proposed legislation contains a number of provisions that are either identical or substantially similar to the Louisiana Mineral Code articles governing mineral leases. Such parallels include:
- Parties to a renewable energy lease would have a correlative obligation to “exercise their rights with reasonable regard for those of the other.” (compare to La. Min. Code art. 11);
- The lessee of a renewable energy lease would not be under any fiduciary obligation to its lessor, but is bound to perform the contract in good faith (compare toLa. Min. Code art. 122);
- The lessee of a renewable energy lease would be “bound to . . . operate the property leased as a reasonably prudent operator for the mutual benefit of himself and his lessor.” (compare to La. Min. Code art. 122);
- The lessee of a renewable energy lease would have the right to assign or sublease the lease in whole or in part (compare toLa. Min. Code art. 127);
- An assignee or sublessee of a renewable energy lease would become directly responsible to the original lessor to the extent of the interest acquired (compare to La. Min. Code art. 128), and the lessor would have to accept performance by the assignee or sublessee (compare to La. Min. Code art. 131); and
- When the renewable energy lessee makes an assignment or subleases the lease, the lessee lease is not relieved of his obligations under the renewable energy lease unless the lessor has discharged him expressly in writing (compare to La. Min. Code art. 129).
The bill further states that a renewable energy lease will terminate at the expiration of the agreed upon term or upon the occurrence of a resolutory condition. An identical provision exists in the Mineral Code. See La. Min. Code art. 133. In the context of mineral leases, this article has been interpreted to mean that a mineral lease terminates by operation of law according to its terms, notwithstanding the conduct of the parties to the lease after its expiration. This can sometimes cause problems for unwary parties who continue conducting their business as if the lease were valid, even though it may have already expired and is unenforceable.
Lastly, the proposed law largely adopts the written notice requirements found in the Mineral Code for violations of a mineral lease, as well as many of the same remedies for violation of the lease. The lessor of a renewable energy lease would be required to give the lessee written notice and allow a reasonable time for performance by the lessee before any suit may be filed (compare to La. Min. Code art. 136). When the dispute involves the nonpayment of royalties, the renewable energy lessee would be afforded 30 days to pay the royalties or respond in writing stating a reasonable cause for nonpayment (compare to La. Min. Code art. 138). The remedies provided for failure to pay or provide reasonable grounds for nonpayment largely mimic the damages provisions of the Mineral Code, with the notable exception that the bill does not include the Mineral Code’s express aversion to dissolution of the lease in a case involving a failure to pay royalties. See La. Min. Code art. 141 (providing that dissolution of a mineral lease is not a favored remedy and should only be granted in cases where “the remedy of damages is inadequate to do justice.”). In other words, the bill would more readily permit judges to dissolve a renewable energy lease for failure to pay royalties, which presents a significant risk to renewable energy lessees and the capital they have invested in a given renewable energy project.
Renewable energy projects are not entirely new to Louisiana, and thus far, parties to contracts in Louisiana that would be classified as “renewable energy leases” under this bill have entered into those contracts outside of any directly applicable framework. However, the articles of the Mineral Code from which SB 154 appears to be derived have created some of the most frequently litigated oil & gas issues in Louisiana. Accordingly, it is imperative for businesses in the renewable energy industry to be aware of this potential new framework and be prepared to structure their business processes accordingly.
Liskow & Lewis attorneys will be monitoring this bill through this legislative session.
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