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Landfill Purchaser Must Pay Unexpected Royalties to Former Owner

Landfills contain significant amounts of gas that can be used to generate energy.  Occasionally, the original landfill developer will sell the landfill operation in exchange for long-term royalty payments.  Renewable energy developers seeking to develop a landfill gas operation should carefully draft these royalty contracts, as problems could affect profit from the operation over many years. 

The landfill industry is subject to both state and federal regulation.  Several terms used in the industry are defined by statute, though not everyone uses the statutory definitions.  For instance, in one recent Georgia federal court, two litigants debated whether state regulations should be incorporated into a royalty contract to help define key terms.

Background

A landfill company purchased property and obtained the necessary permit to operate a landfill (“original landfill”).  Eventually, it sold the original landfill to Defendant in exchange for a royalty payment to Plaintiff.

The royalty contract required payment of $1.00 for each ton of waste delivered to the landfill or to an expansion on any property within one mile of the original landfill.

A few years later, Defendant acquired an adjacent landfill (“adjacent landfill”).  In fact, it shared a common boundary with original landfill.

The Lawsuit

Plaintiff filed a lawsuit alleging that Defendant failed to make royalty payments for (i) reusable or recyclable material delivered to original landfill and (ii) material deposited in adjacent landfill.  Defendant replied that (i) recyclable and reusable material is not “waste” under the royalty fees contract and (ii) adjacent landfill is not an expansion of the original landfill within the meaning of the royalty contract.

The Court’s Ruling

In support of its defense, Defendant first argued that, in defining the term “waste” in the royalty contract, the court should look to the Georgia solid waste statute’s definition of “solid waste.”  The court rejected this argument reasoning that if the parties intended this meaning, they would have said so in the contract.  Thus, Defendant should have made royalty payments to Plaintiff for such materials.

With regard to the issue of “expansion,” the court against ruled against Defendant.  Evidence demonstrated that Defendant purchased the adjacent landfill for the purpose of moving the original landfill’s operation and customers when the original landfill reached capacity.   And evidence showed that the two landfills shared the same address, front entrance, scales, and internal roads.  Based on these facts, the court ruled that the adjacent landfill was an expansion of the original landfill.  Accordingly, Defendant should have made royalty payments to Plaintiff for waste deposited to the adjacent landfill.

Defendant raised other arguments on appeal, but the court ruled that such arguments were waived because they did not raise them before the trial court.

Conclusion

Developers need to carefully consider landfill royalty contracts.  They make assumptions of long-term profit based on the quantity of payments due under such contract.  Because royalty contracts can significantly impact a project’s profitability, they should be drafted with care, and with knowledge of the terms and definitions established by Georgia’s regulatory system for solid waste.

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