Takeover Rights In Renewable Energy Project Development

Renewable projects are typically complex and require substantial amounts of capital.  Some parties may bring expertise; others may bring equipment components; while others may bring funds.  In any event, these multiple parties will have agreements — called development agreements — between or among themselves.  When one party fails to live up to its obligations, these development agreements should address the rights of the other party or parties.

A recent case illustrates the importance of default provisions in development agreements.  Upon the developer’s default, the other party sought to complete the project.  Without properly worded default and takeover provisions, the other party may have been faced with a complete loss on the project.

Background

A developer (Developer) and developer/supplier (Supplier) entered into co-development agreement (CODA) under which they both agreed to cooperate to construct a wind energy project using turbines supplied by supplier.

Under the CODA, Supplier agreed to lend initial advances to the project-specific LLC (Project LLC).  Developer was required to find other sources of financing for the project.

The CODA and other project-related agreements contained important provisions, including

  • Milestone dates: deadlines by which Project LLC was required to complete certain tasks, such developing a budget and completion of a system impact study;
  • Repayment Provision: Project LLC was required to repay Supplier’s loan when due;
  • Step-In Provision: in the event of default, Supplier had the right to take exclusive control of the project;
  • Attorney-in-Fact Provision: in the event of default, Supplier would receive rights of attorney-in-fact in order to exercise its rights arising under the parties’ agreements; and
  • Foreclosure Rights: in the event of default, Supplier would be entitled to possess and foreclose upon Project LLC’s rights in the project.

 Problems of the Project

The project encountered significant problems.  The parties were unable to complete a budget milestone.  The system impact study was late.  And when the study was eventually issued, Supplier contended that the interconnection cost rendered the project uneconomical.

At various times in the development of the project, the parties contended that each other breached agreements.  But when Developer failed to make a payment on a promissory note, Supplier filed a lawsuit.  In addition to several other claims, Supplier sought an injunction prohibiting Developer from interfering with Supplier’s ability to take over the project.

Granting of Injunctive Relief

One of the remedies sought by Supplier was an injunction that precluded Developer from interfering with Supplier’s completion of the project.  In making its determination, the court asked: (i) would Supplier likely be successful at trial, and (ii) is there a public interest in favor of granting the injunction?

After reviewing the project agreements, including the provisions listed above, the court concluded that Supplier would likely be successful at trial in establishing that a default occurred.  It was undisputed that amounts under the loan were not paid by the deadline, and the Developer did not establish a waiver or cure therefor.  Thus, the default provisions of the CODA, the security agreement, and other agreements were invoked.

Among the default provisions upon which Supplier relied were:

  • The attorney-in-fact provision;
  • The step-in provision;
  • Rights of possession and foreclosure of all rights of Project LLC in the project; and
  • Right to complete the project.

In addition to Supplier’s likelihood of success on the merits, the court based its decision, in part, on the state’s public interest in completing the project.  It cited a state statute, which reads

it is in the interest of the people of the state to promote the state energy policy … by … [s]upporting development of renewable energy and related planned energy industries in [this state], and the jobs and economic benefits associated with such development, while retaining and supporting existing renewable energy infrastructure.

Upon concluding that the public interest favored completion of the project, the court issued an order enjoining Project LLC and Developer from interfering with Supplier’s takeover rights.

Conclusion

The case illustrates the importance of default and takeover provisions in development agreements.  Without these provisions, the project likely would have been a complete failure and Supplier would have been unable to recover its losses.

Though Supplier could have relied on its breach-of-contract claim to seek damages, such a claim would have yielded much less than Supplier’s true losses and damages, especially if Developer was insolvent or underfunded.  To avoid these potentially devastating situations, development agreements should contain clear default and takeover provisions.

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