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 starting to draw up contracts in earnest.
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 which firm you decide to approach, a simple internet search of ‘natural capital lawyers’ can give you a list of names to consider. You can then combine their speciality with other factors that are important to you, such as regional presence, experience representing farmers or a focus on a particular nature market.
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. It is also worth noting that some buyers of natural capital services will offer to pay your legal and accountancy fees, especially if they have approached you with the opportunity.
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. If it does offer these services and you think your project delivers on the legal firm’s criteria, then naturally it’s worth pitching your project and asking!
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 [email protected] to let us know your thoughts on this, or indeed the wider Toolkit.
| Contract Type | Summary |
| Option Agreement – for Land Acquisition or Leasing | An Option Agreement is a contract between the owner of a property and a potential buyer/leaseholder. The Option Agreement gives the potential buyer/leaseholder the right to buy or lease the property either at an agreed price or at its market value.
In nature markets, project developers typically use Option Agreements when they intend to purchase or lease land to develop a habitat. The Option Agreement will set out how and when a buyer/leaseholder may exercise this option, and may include provisions about certain activities which they may carry out (such as preliminary surveys on the land and other works) prior to buying or taking exclusive possession of it.
The period of time where the potential buyer/leaseholder has this option is called the Option Period, and the landowner may face restrictions around the land use (such as no actions to significantly alter the habitat) during the Option Period.
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| Land Acquisition / Sale Agreement and Transfer Deed
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An agreement to purchase the freehold of the land in its entirety, whether for the purchaser’s own use or as an investment and is the contract which binds the seller and the buyer to sell and buy the land on a specified date.
The Transfer Deed is the legally binding document which will transfer the legal title in the land to the Buyer in consideration for the agreed payment.
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| Lease Agreement | Sometimes called a land lease or a ground lease. The lease is granted for a finite period of time and gives the tenant exclusive possession of the land.
This period of time can be fixed and then may be extended. 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, charged or licensed, such as productive farmland or new buildings. In nature markets, land can be let to a third party to deliver an environmental project such as a new woodland, a nutrient mitigation wetland or a species rich grassland.
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| Leaseback
(Head Lease and Sub Lease) |
Land can be leased from the landowner to the buyer / third party through a Lease Agreement. In the case of a leaseback model, this first lease is called the Head Lease.
If both parties are amenable, the third party / buyer can then lease back the land to the landowner on a Sub-Lease, usually for the landowner to maintain the habitat that the third party / buyer has created or enhanced, in consideration for an extra fee in addition to the payment due under the Head Lease.
As this type of arrangement keeps the landowner as an active manager of the land, it can have beneficial tax implications. It is advisable for the landowner to explore these with your land agent or accountant.
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| Contract Type | Summary |
| Habitat Management Agreement
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A Habitat Management Agreement is a services agreement between two parties – someone taking legal responsibility for managing a habitat (such as a farmer or a third party that has leased land) and someone that has interest in the habitat’s condition (a buyer, or in the case of a leaseback model a third-party project developer).
In nature markets, a Habitat Management Agreement is usually signed alongside a sales agreement for ecosystem services, namely for carbon credits and Biodiversity Net Gain units.
In the case of Biodiversity Net Gain, this is often accompanied by a Habitat Management and Monitoring Plan (see below), which is a more flexible document that can change depending on ecologists’ instructions.
A Habitat Management Agreement will likely reference the Habitat Management and Monitoring Plan so that it can capture this flexibility without changing the legal agreement itself.
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| Habitat Management and Monitoring Plan | A Habitat Management and Monitoring Plans is self-descriptive and sets out the management and monitoring practices for a habitat.
It is required in Biodiversity Net Gain projects, though its general purpose can be applied to other nature restoration projects.
You will need a Habitat Management and Monitoring Plan to register Biodiversity Net Gain units on the Biodiversity Gain Site Register, which is a prerequisite to creating biodiversity units that can be sold onwards.
The Habitat Management and Monitoring Plan ensures that not only will the habitat be managed appropriately, but also that suitably frequent monitoring takes place during the lifetime of the agreement (with BNG a minimum 30 years) by qualified personnel.
Note: a Habitat Management and Monitoring Plan is not in fact a contract or legal agreement. However, it may get appended to contracts or referred to in relevant contracts, such as Biodiversity Unit sales agreements. It has been included in this table as it is often confused with a Habitat Management Agreement.
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| Hosting and Maintenance Contract | A contract 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.
Note: this contract was developed and pioneered by the Wyre Catchment Natural Flood Management project in 2023. It is currently being explored for other uses by the project developer (the Rivers Trust).
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| Licence Agreement | A licence gives permission for the licence holder to do something specific on the land and occupy it alongside someone with possession of 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. However, if care is not taken, these can sometimes be legally interpreted as Farm Business Tenancies – for instance, if exclusive possession is given in practice.
In nature markets, licence agreements can sometimes be used on habitats that deliver sellable environmental improvements. For example, species rich grassland that delivers Biodiversity Net Gain units can also host non-intensive livestock grazing, which can be licenced to another farmer.
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| Contract Type | Summary |
| Conservation Covenant | A conservation covenant agreement is a private, voluntary agreement to conserve the natural or heritage features of the land.
A conservation covenant is an agreement between a landowner and a Responsible Body. As of July 2024, six Responsible Bodies have been registered. Responsible Bodies are likely to be Local Authorities, other public bodies, conservation charities and conservation organisations, though private companies can also become Responsible Bodies if they can demonstrate their operations relate to conservation.
The conservation 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. A conservation covenant can impose both positive and negative obligations. 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.
To enter into a conservation covenant you must either be the landowner or, if a tenant, have at least 7 years remaining on your tenancy. In the context of nature markets, conservation covenants would ensure that created habitats are maintained by legally binding the land manager and future owners of the land to maintaining the newly established or maintained habitat.
One use will be in the context of Biodiversity Net Gain in the planning system, which was made mandatory for major developers in February 2024 and small site developers in April 2024. In order to register offsite units on the Biodiversity Gain Site Register, you will need to show that you have bound your land using either a Section 106 Agreement or a conservation covenant. You can access a useful Natural England blog post relating to the legal considerations of BNG, including which agreement you use, here.
This type of legal agreement was introduced in 2021 by the Environment Act (2021). You can access a useful overview (designed for Local Authority audiences) here.
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| Section 106 Agreement
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Section 106 Agreements are legal contracts between Local Planning Authorities and the underlying landowner on which a habitat is being created or restored. This type of agreement has been used for several years now.
Section 106 Agreements are often (but not always) linked to planning permissions for new property developments and can also be known as planning obligations. In the context of nature markets, they are drafted when it is considered that a property development will have significant impacts on the local environment that cannot be mitigated by the property design itself.
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.
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| Section 33 Agreement
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Section 33 agreements are legal contracts between Local Planning Authorities and the underlying landowner on which a habitat is being created or restored which are akin, in terms of obligations and responsibilities on the landowner, to a section 106 Agreement.
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| Contract Type | Summary |
| Biodiversity Unit Purchase Agreement | These are agreements between those landowners / third parties delivering BNG units themselves and those parties who wish to buy the units which document the consideration being paid for those units. They do not create any interest in the land itself and are sales agreements for the units only.
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| Option Agreement | An option agreement for purchasing credits and units means the buyer has an ‘option’ to buy credits and units for a period of time. The terms of the sale are agreed in the option agreement and the buyer pays a ‘deposit’ or ‘reserve fee’ on signing the option (e.g. 10%). Importantly, the buyer can choose to exercise their right to buy or not.
It is anticipated that option agreements will be used often for Biodiversity Net Gain (BNG) agreements, as at the point of applying for planning permission the buyer (e.g. a property developer) may need to show to the planning authority that it has access to the relevant number of offsite biodiversity units. The option agreement enables the property developer to show it has access to the units, without needing to buy them before securing planning permission.
Note: In principle, an option agreement can be used for the sale of anything – commonly this is used for property acquisitions (see above).
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| Offtake Agreement / Credit Sale Agreement | An offtake agreement or credit sale agreement is a legal contract in which a buyer agrees to purchase a set amount of units or credits (commonly carbon credits) at set prices and defined points in the future – sometimes several years in the future.
Long-term offtake agreements can be arranged prior to the habitat being created or restored and can help the seller of these credits (either the landowner or a third party) to secure repayable finance to meet these up-front costs.
It is akin to a power purchase agreement (PPA), which is used in renewable energy projects around the world.
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| Nutrient Neutrality Unit Purchase Agreement | These are agreements between landowners and the buyers of nutrient neutrality units that document the sale of the units in consideration for a payment.
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| Contract Type | Summary |
| Contract Delivery and Management Agreement | A commercial contract between the person or entity responsible for delivering the habitat (such as the landowner, buyer or a third party), and a separate contractor, whereby the latter commits to deliver environmental interventions on the land.
In some cases, the contractor can remain responsible for the habitat’s 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.
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| Revenue Sharing Agreement | A Revenue Sharing Agreement is where a percentage of future revenues from a transaction are promised to a party outside of that transaction. For example, a farmer that leases land to a habitat bank company for the purpose of BNG units could negotiate a Revenue Sharing Agreement, so that they receive a percentage share of any sales of BNG units on top of the lease payments for the land itself.
Note: negotiating this type of agreement can mean that the third party offers a lower (guaranteed) lease payment, as the farmer has the chance to financially benefit from the agreement if revenue is made later on.
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| Promotion Agreement
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A commercial contract between a landowner and a promoter where a promoter will carry out certain processes to promote the sale of the natural capital opportunities and units on the land. The promoter will ordinarily receive a percentage of any revenue sales as their fee for being included in this process.
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| Exclusivity Agreement
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An exclusivity agreement is an agreement that gives an exclusivity for two parties (e.g., a landowner and a corporate) to buy or sell units or land and will prohibit the parties from doing deals with any other third parties during the pre-agreed exclusivity period.
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| Brokerage Agreement
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A commercial contract between a landowner and a broker where a broker will actively market the sale of the natural capital opportunities and units on the land – this would be akin to an agent selling a house. The broker will ordinarily receive a percentage of any revenue from sales as their fee for being included in this process.
Note: some nature market brokers may also provide services to support the landowner in developing and delivering an environmental project, for example by providing or procuring ecological services, or by helping to secure additional grant funding. In this sense, the broker can take on a role more akin to a third-party project developer.
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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 then look to the delivery phase.
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 is 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.
