Ask These 7 Questions Before Signing an RNG Contract
On this week’s Uplevel Dairy Podcast, a power panel representing the legal, operational and financial perspectives shares their insights on this topic:
Susan LaCrosse, LaCrosse Law Offices
Dr. Bob Nagel, West Wynd Solutions
Jay Joy, Bridgeforth LLP
Attorney Susan LaCrosse walks us through the questions a dairy farmer should ask before signing on the dotted line for an RNG project.
References, please. The RNG company is doing their due diligence by asking the farmer a lot of questions and requesting access to their financials. “The farmer should be asking those exact same questions of the RNG company,” she says. Ask for other farms they have worked with and give those farmers a call.
Who is my long-term contact person? Determine whether your point of contact is a sales person who will disappear once the ink is dried, or if you are dealing directly with the decision maker. “Think of it as a marriage,” Susan suggests. “You want it to be built on mutuality and trust.”
What are the intentions of this company? Susan also says to ask the company what their long-term plans are: Are they going to be selling this project, or are they going to be keeping it for the long term? Not to say the intention to sell is a deal breaker, but most importantly, is the transparency on both sides and clarity on the front end. “When you do get your attorney involved to help you with the project, you're building in language into that contract to protect you because you now just spent all this time looking at the financial viability of this particular company and talking to references. Now if they go to sell it to somebody else, you want to make sure you have that opportunity to do the same thing with that other company.”
What is the length of the contract? In some cases, Susan has seen draft agreements that don’t even mention the duration of the contract between the farm and the company. “A lot of times, the farmers sign the contract and they think this is a 20 year contract, it starts day one when I sign the agreement,” but Susan warns, that may not be true. “It starts when the facility is operational so making sure that you understand when that operational start date is,” she adds. A general rule of thumb right now is probably 22 to 24 months of lead time until that facility should be operational. “As an attorney, I would build in a date into that contract that if the facility is not operational by that date, it's an out for the farmer,” she says. “And I'm not saying that the farmer is actually going to get out at that point in time but it's at least giving the farmer control and that opportunity to if they see that the RNG company is working in good faith to get this facility operational.”
How can you get out of the contract? Susan also encourages farmers to look for provisions to get out of a contract without being penalized. For example, if the farm is going to have to produce a certain amount of manure for the RNG facility and for some reason the farmer can no longer keep that herd size, whether it be for economic reasons or for regulatory reasons, the farmer has to make sure that they have an ability to get out of contract.
When will the farm receive its first payment? Most often, Susan sees contracts where the farmer is either going to be paid a royalty, upfront payments or a combination of both. “In the contract, you have got to make sure that you understand when that payment is actually going to be made and then, too, when it comes to the royalties, making sure you understand when those royalties are going to start.” Also, make sure any clawback provisions that the RNG company can get those payments back is laid out in the contract.
Who owns and maintains the equipment? A contract should clarify who has ownership of the equipment and then maintenance of the equipment going forward: Who is putting in the equipment; who owns it; who is responsible for maintaining it. Farms with multiple sites must pay careful attention to the language here, as to what infrastructure might be needed to bring in manure from another location, and who will pay for it.
One more point to ponder from Susan: “Your attorney is going to build the farmer's language to protect the farmer so that the RNG company is not going to just be able to sell that facility without the approval of the farmer. But I also think the other side also holds true,” she explains. “What if the farmer wants to get out, what if the farmer wants to sell the facility? Make sure there's language built into that contract that permits the farmer to do that because as a general rule of thumb, your assignment language is going to say that the RNG company can assign the facility that contract without approval from the farmer. And then they're going to say that the farmer cannot assign the contract period.”
