Milestone 8: Establish Legal Contracts and Closing
When all relevant stakeholders have been engaged and their terms of engagement are clarified as much as possible, this is the time to develop the legal contracts and close the deal. This stage is last because legal fees are expensive, and it is generally advised to determine as much as possible in previous stages before
Note: The information in this Milestone does not constitute any form of legal advice but instead serves as practical advice on how to manage engagement with lawyers and the process of contract development.
The Green Finance Institute is not a firm of solicitors or connected in any way with the courts. The information and opinions we provide in this section and across the Toolkit do not address your individual requirements and are for informational purposes only. They do not constitute any form of legal advice. We recommend that appropriate legal advice should be taken from a qualified solicitor before taking or refraining from taking any action.
This milestone contains three subsets of considerations or ‘themes’ that project developers may want to explore at this stage. Click on each of these themes to the right in order to read more.
You can also read case studies of projects that have successfully completed this Milestone of development and view a summary of the common activities undertaken at this stage below.
Outlining resources for contract development
Before formally starting the contract development, consider what legal services you require and what firm would be best placed to engage.
The most appropriate choice of legal advisor will often come down to two criteria; do they have the requisite expertise for your project, and are their fees in line with your budget?
As to budget, a common best practice is to approach three or four law firms and obtain quotes for the work, in order to make a more informed choice. Environmental markets in the UK are nascent in development, and many of the current projects are relatively small, innovative in nature and funded by government or philanthropic grants. You will therefore need to think carefully when you want to appoint legal advisers and how you might negotiate a fee structure (see next Consideration) to fit your budget.
As to who you decide to approach, you may decide to approach larger, national law firms that have several teams focused on different areas of law, and that offer pro-bono or low bono legal services.
If you are confident that this scale is not required, you may approach regionally based law firms in the projects area, or look through directories of law firms that focus on those that serve the agricultural and landholding sectors, such as Legal 500, or the CLA directory.
The best firms to approach will also depend on what contracts you are seeking and what area of law these are based in. For example, if your project does not involve land acquisition or leasing, you may not require a lawyer with a focus on Commercial Property or Land law.
If you are unsure on who to approach, you can speak with your key stakeholders – your sellers, buyers, investors and delivery partners – as to which law firm they recommend engaging with. However, it is important to note that each of these parties will most likely have their own lawyer at this stage and thought should be given as to whether all parties would be more comfortable having separate legal representation.
Otherwise, if some of your parties do not have a lawyer, such as small landholders, it is possible to appoint a joint legal advisor to develop the contracts and act as a neutral party, assuming the commercial terms of agreement have been set out.
Legal services are usually provided through a formal letter of engagement that sets out the agreed scope of services and the fee structure. The engagement letter will be between the legal firm and either the lead organisation managing the project or the project’s legal entity (see Milestone 6), if this has been established at the time of appointing a lawyer.
It is important to consider the scope of services, to ensure that you can obtain fee quotes and manage your legal costs. One way of doing this is to draw up a Legal Specification document that explains the basis of your project, listing out the required role of the legal adviser and the contracts that will be required. You can then use this legal specification to discuss the project with one or more legal firms and secure a range of quotes before you select your preferred advisers.
Legal firms are often prepared to charge for their work in different ways, including:
- Time based fees – whereby they will provide a list of hourly or daily charge out rates of different staff members in the engagement letter and you will be charged based on time spent on the project by different staff. This type of engagement can make it difficult to manage costs as the more complex the project, the more time your legal advisers may spend on it and the more you get charged.
- Fixed fees – whereby the firm commits to either an overall fixed fee for the work or fixed fees for certain elements of work, such as specific contracts. This approach means it is easier to control costs, but the law firm may set conditions around this such as up to three versions of a certain contract, or a time limited quote that assumes the transaction is completed by a certain date.
- Pro-bono or low-bono fees – whereby the law firm will heavily discount or exclude fees because they want to support a particular project or new sector. There may be several reasons why a law firm would enter into this sort of arrangement, including exposure to a new sector, staff training, or as part of a CSR strategy. Pro-bono or low-bono offer is widely considered to be the most attractive offer. A legal firm’s decision to offer pro-bono or low-bono services generally will have been decided internally beforehand. You should not attempt to convince a law firm that does not offer these services to extend this to your project.
In addition to selecting the best fee structure, there are different ways to manage your legal costs.
One approach is for the project team to develop non-binding commercial agreements, such as Memorandums of Understanding (MoUs), between all of the main counterparties in advance of appointing legal advisers. Through this approach, lawyers can be brought in later in the process to convert these non-binding agreements into legal contracts. This is a more efficient use of legal time than involving lawyers in commercial negotiations at an earlier stage. This approach is not failsafe and legal advisers may identify important issues that have not been covered in an MoU, but as a general rule this is a form of best practice when it comes to developing legal contacts.
It is also important to be clear on what is up to the project team to decide versus where lawyers should advise. You will know your project best and so are able to make many decisions in an informed and rational way without the need for legal advisors.
For example, at one point you may decide to set up a Special Purpose Vehicle to host the project’s operations and balance sheet (see Milestone 6). With a relatively developed business plan and governance structure, you can use the wealth of online information to decide what legal entity type would be best, who should be appointed as directors or trustees, and what articles are needed in its formation. Bringing in a legal advisor to set this up once a decision has been made can take as little as one day, whereas consulting legal advisors without a clear understanding on this can take several months.
Ideally, your appointed legal firm would be provided with signed non-binding agreements, such as MoUs, Letters of Intent and term sheets between all counterparties for the contracts required to execute a transaction.
In the absence of this, a legal firm would want to see a term sheet detailing the principal commercial terms relevant to a particular contract, as a basis for creation of a legal agreement.
As a general rule, the more information you can provide to your lawyers up front, the better. You can even share the business plan to give them a fuller view of the project.
It makes sense for both the legal firm and the project team to appoint one or more individuals from their side to be the principal contact in contract development. The legal firm may request the names of one or more individuals from the project team under whose instructions it is authorised to act, and then include this in its engagement letter.
As a project therefore, you will need to ensure that you identify one or more members of the team who are authorised to make commercial decisions and instruct lawyers accordingly.
The person(s) authorised to make commercial decisions and instruct lawyers should naturally be party to contract negotiations. The lawyers ideally will be advising you as client – not leading negotiations on your behalf, unless the negotiation is relating to a technical or legal point. Failure to make decisions or manage your lawyers decisively is a likely way to end up with a longer timescale and larger legal bill.
In terms of managing contact with other parties, you may consider asking for larger groups, such as farmer clusters and buyer groups, to nominate representatives that can manage negotiations on their behalf. Ideally these representatives will have sufficient commercial and legal knowledge, as well as incentives that are aligned with the stakeholders they represent.
Below is a list of contract types that have been used or played a role in nature-based projects with an element of private finance. This list is iterative and will be expanded regularly as more projects reach this stage.
If you have a contract type that fits this description but has not been included in the below, please feel free to contact us at hive@gfi.green to let us know your thoughts on this, or indeed the wider Toolkit.
Seller side contracts
An agreement to purchase the freehold of the land in its entirety, whether for the purchaser’s own use or as an investment, usually under the Land Acquisition Act 1984.
Sometimes called a land lease or a ground lease. The leasehold is granted for a finite period of time and gives the tenant exclusive possession of the land. This period of time can be fixed or may be periodically extended. Land leases are given with the intention for the tenant to create an ‘estate in land’ – an interest in the land, that can be transferred, sold or licensed, such as productive farmland or new buildings.
A licence gives permission for the licence holder to do something specific on the land and occupy it alongside someone with an interest in the land, such as the owner or tenant. It does not grant exclusive possession, as with leasehold agreements. For example, grazing licences are created for the purpose of grazing horses, cows or other animals. They are not usually longer than 12 months, and if they are extended, these can sometimes be legally interpreted as Farm Business Tenancies, if other ‘lease like’ conditions are included.
An agreement between a landowner and a “responsible” body, such as a conservation charity, government body or a local authority. A covenant sets out obligations in respect of the land that will be legally binding not only on the landowner but on subsequent owners of the land. This might be, for example, an agreement to maintain woodland and allow public access to it, or to refrain from using certain pesticides on native vegetation. On 30 September 2022, Part 7 of the Environment Act 2021 came into force. This means it will now be possible in England to enter into a “conservation covenant”. The main use-case expected is for the delivery of Biodiversity Net Gain units, which will come into force in September 2023.
A contract pioneered by the Wyre Catchment NFM project between a project delivery vehicle and landowners or land managers, whereby the latter agree to host and maintain certain nature-based interventions (such as NFM interventions) on their land in return for a periodic revenue payment e.g. an annual fee. This is a commercial contract, not a lease agreement and there are no land rights accruing. The services provided under this contract would typically attract VAT.
The project team of the Wyre Catchment NFM project have offered a copy of its template MoU (Memorandum of Understanding) between the Wyre CIC and the land managers. You can also find this in our Useful Links section.
An agreement for the buyer to take something from another person’s land. This could be part of the land itself, such as peat; something growing on it, such as timber or grass (which can be taken by the grazing of animals); or wildlife killed on it, for example by shooting or fishing. The thing taken must be capable of ownership, so a right to use land in some way, or to take water from a natural feature, cannot be included. It is essentially an agreement to buy a crop and a grant of access to take it.
Delivery Partner Contracts
A commercial contract between the project’s legal entity and a main contractor, whereby the latter commits to deliver capital interventions in a particular geographic area or landscape in accordance with the project plan. In some cases, the contractor can remain responsible for their continued maintenance through management of relationships with landowners. Examples of these interventions include peat restoration, tree planting, delivery of natural flood management interventions or river restoration. The main contractor might be an environmental NGO or a private sector civil engineering firm, for instance.
A contract between the project’s legal entity and a third party, whereby that third party agrees to provide financial, administration and company secretarial services to the project’s legal entity. These services may include investor relationship management and other services such as marketing, PR or community outreach depending on the project. Many nature based projects will involve the establishment of a special purpose vehicle and this type of Agreement is essentially a contract to operate this vehicle on behalf of the shareholders or stakeholders.
The project team of the Wyre Catchment NFM project have offered a copy of its template asset management contract. You can also find this in our Useful Links section.
A guarantor agreement is an agreement of a third party, called a guarantor, to provide assurance of payment in the event the project in the transaction fails to live up to their end of the bargain. They are common in real estate and financial transactions. An individual (personal) or a legal entity (corporate) can provide a guarantee, and this can be for some of the obligations, such as an investment, or for the obligations of the project’s legal entity overall.
Buyer side contracts
A contract between the project’s legal entity and a buyer of ecosystem services, whereby the latter agrees to make payments for provision of those services. Services might include natural flood management, water stewardship, water quality improvements, biodiversity gain, carbon credits. There are a wide variety of potential contracts ranging from the sale of (for example) carbon credits in the form of Pending Issuance Units from a peat restoration project to payments for provision of NFM services provided through a flood mitigation project.
The project team of the Wyre Catchment NFM project have offered a copy of its template MoU (Memorandum of Understanding) between the Wyre CIC and the buyers. You can also find this in our Useful Links section.
Legal contracts between Local Authorities and developers; these are linked to planning permissions and can also be known as planning obligations. Section 106 agreements are drafted when it is considered that a development will have significant impacts on the local area that cannot be moderated by means of conditions attached to a planning decision, including environmental impact. This obligation can often be met through payments, usually paid in instalments at key stages during the construction and/or occupation of a development, these are known as ‘trigger points’.
A contract under which a third party (the Offtaker) agrees to buy a certain amount of the product produced by a project at an agreed price, provided the project has met production timelines. The product is often a commodity such as oil, gas, mineral, but increasingly carbon credits are being sold through offtake agreements. Offtake agreements are typically used to help the project acquire up-front financing.
Investment Side Contracts
A revolving loan facility is a form of credit issued by a financial institution that provides the borrower with the ability to draw down or withdraw, repay, and withdraw again. A revolving loan is considered a flexible financing tool due to its repayment and re-borrowing accommodations.
A type of financial instrument evidencing a loan agreement between a borrower and lender, specifically where the investor can benefit from Social Investment Tax Relief (SITR). The loan note document will set out the amount of the loan, details of any interest payments and the date upon which the loan must be repaid.
Closing Contracts
Finally, you will have a set of finished contracts that are ready to be signed, often called the contract ‘closing’ or completion phase. This is often a significant moment for any project that moves it from development to implementation. Below are some considerations to make this process smoother.
This is a seemingly simple question, but an important one to clarify in terms of authority. For example, with larger organisations you may have a list of people who are authorised to sign the contract. It is advisable to be clear of who is on this list and who is best to approach to prevent any single points of failure or confusion at the ‘finish line’ of signing.
Likewise, the representative involved in contract development may not necessarily be the person to sign the contract, such as the Sustainability Officer versus the CEO or CFO of a company. While it is the responsibility of the representative to negotiate in the full interests of their company, you may need to prepare or anticipate some last-minute questions or reviews requested by the person that is signing their name and may not be as familiar with the project as the representative. For example, double checking any VAT implications of the project with the organisation’s accountant or adding ‘boilerplate’ clauses that are part of its standard policy.
Depending on your project’s design, you may have several contracts to sign that each place certain liabilities on the signatories, which can leave people feeling ‘on the hook’ until all contracts are signed. For example, buyers committing to a fixed payment schedule may not feel as inclined to sign until financing from an upfront investor is legally secured through a contract.
To remove this tension, your lawyer can play a key administrative role in the completion phase. The project’s law firm will often be responsible for collecting all signatures from counterparties, which is now almost always done electronically with software such as DocuSign or Dropbox Sign. If there are several contracts that are inter-linked, lawyers will often offer to retain or ‘hold’ contracts signed by counterparties, so that the project team can sign all contracts in one session, therefore completing the contract phase without lags between contracts.
On the side of the project team, you may consider taking the approach of the Wyre Catchment Natural Flood Management project, which convened two meetings with its CIC Board when contracts were ready to be signed.
The first meeting was held to sign all contracts, which only required signatures from the two directors registered with the CIC at the time (for expediency – see Milestone 6). The second meeting was held to approve the appointment of the further five directors and to agree the immediate next steps. Using the structure of these two meetings can be a good way for project teams to finish the project’s contract completion phase and ‘look forward’ to its delivery.
Lawyers will send out virtual copies of the fully signed contracts to the relevant counterparties, including what some call a ‘contract bible’ pack of all contracts to the project team. In case there iss a need to review these later, it is important to save these down in an accessible way to the project team and other key stakeholders, while preserving any confidentiality that the contracts require.
This access may come in handy when it comes to various critical moments of the project’s implementation phase, or if amendments to contracts are requested after signing and a separate law firm is engaged for this work.
There may be even minor details that all parties are happy to leave unresolved at the time of contract signing, but are nonetheless important to keep track of and resolve afterwards.
For example, specifying the details of the bank account that accepts investor and buyer payments, which may not be set up at the time and cause logistical problems later due to its lack of financial history (some organisations have automatic controls in place to stop payments going to new bank accounts).
While these issues are difficult to anticipate, you may consider how to address any unresolved details in the plan immediately after signing (see below).
When the major contracts have been signed, this can signify a shift of the project from development to delivery phase. At this point you will have a clear view of the project’s timeline across the coming months and years, but you may consider using a shorter term planning tool, such as a 90-day plan, that ties up any loose ends from development and launches the project’s operations.
Examples of such tasks include authorising payments to delivery partners to start site work, issuing communications to notify local communities, and formally registering new directors that will form part of the project’s core management team.
