The Western Australian Department of Planning, Lands and Heritage (DPLH) has released for public consultation a draft Policy Framework that will guide the use of the proposed “diversification leases” on Crown land under the Land Administration Act 1997 (WA) (LAA).

What are diversification leases?

“Diversification leases” are the proposed new form of non‑exclusive leasehold tenure; intended to support large scale clean energy projects and the expansion of carbon farming and other broad-scale uses in Western Australia (WA).

This article summarises the key aspects of the draft Policy Framework, particularly those aspects that shed new light on how the diversification lease reforms will operate upon enactment.

Key takeaways - Diversification leases draft Policy Framework 

• The Policy Framework will, once the reforms are enacted, provide vital guidance in relation to key aspects of diversification leases (including minimum considerations in granting applications and suitable uses for these new leases).  Underpinning the need for this framework is the expectation that the diversification lease head of power under the LAA will be broadly drafted and without overly prescriptive criteria (like the head of power for granting a section 79 lease under the LAA).
• Broad Ministerial discretion is preserved for the Minister for Lands (Minister) in relation to various express matters.  Combined with the guidance about how a diversification lease should be used in conjunction with other forms of tenure (including when it is more appropriate to utilise other forms of LAA tenure instead of a diversification lease), these policy positions require careful consideration when determining the role and use (or uses) of a diversification lease in a particular project.
• Further, material legal structuring implications for diversification lease projects will arise where there will be multiple:
  • uses/ activities (such as wind and solar developments to be conducted in conjunction with less-intensive uses such as carbon farming);
  • stakeholders (such as existing landholders (such as pastoralists), native title holders and developers); and/or
  • subleases to different sub-lessees for different purposes, as expressly contemplated in the draft Policy Framework.
• In our view, the approval of the areas of “substantial structures” (for example, approval of the location of wind and solar infrastructure where applicable) by the Minister for Mines and Petroleum is expected to be one of the most challenging policy aspects related to the grant of diversification leases - with the draft Policy Framework recommending early engagement with the Department of Mines, Industry Regulation and Safety.
• Based on our experience, we expect that uses associated with energy generation and transmission under a diversification lease will attract a material rental valuation.  However, for project financial modelling purposes, the draft Policy Framework does not resolve the uncertainty regarding the market rent that will be charged for diversification leases.

The LAA amendments to include the diversification lease as a new form of tenure are currently being drafted and are set for introduction into Parliament in the second half of 2022.

For further background about diversification leases and the proposed legislative reform, see our previous updates:  “Renewable energy and reusable reforms: WA’s land tenure amendments are familiar but exciting” and “WA land tenure reform bill expected within months”.

To join in a further discussion of the issues related to the diversification lease reforms, register for the “Laying the foundations for a successful clean energy project: land acquisition and assembly” session as part of G+T’s 2022 Clean Energy and Decarbonisation Masterclass series: register now.

Broad Ministerial discretion

Ever since the reforms were first announced in November 2021, the diversification lease has promised significant potential to:

• enable economic growth and development through diversified land use;
• facilitate best-practice land management and more effective administration of the WA pastoral estate; and
• provide energy producers, pastoralists, native title parties and others with greater opportunities to get involved in the growing markets for carbon farming, hydrogen production, and wind and solar energy.

Various policy statements in the draft Policy Framework are supportive of these objectives, including that:

• “[the] purpose of a diversification lease is to provide for proponents to conduct single, or multiple, land uses on a large area of Crown land, where the primary land use can coexist with other land uses.” (paragraph 1);
• “[a] diversification lease will co-exist with other rights, including mining, native title, and the right for Aboriginal people to access unenclosed and unimproved parts of the lease.” (paragraph 2);
• “[there] is no minimum or maximum allowable area for a diversification lease…” (paragraph 15);
• “[the] permitted land uses can be varied and flexible to include multiple land uses on the one diversification lease.” (paragraph 19); and
• “[the] term of a diversification lease will be considered on a case-by-case basis and granted for any length of term that is appropriate for the permitted use.” (paragraph 31).

However, key aspects of the draft Policy Framework preserve broad Ministerial discretion in relation to various express matters and guide how the diversification lease should be used with other forms of tenure – these have been outlined below. 

Generally, the preservations of Ministerial discretion in relation to specific matters have merit considering:

• the Crown is the owner of the land and there is a stated policy intention to serve proponents requiring “a large area of Crown land”;
• the expected demand for diversification leases, economy wide, as WA industry urgently positions itself to reach “net-zero”, decarbonisation and ESG goals and outcomes; and
• the expectation that the head of power under the LAA for granting a diversification lease will be broadly drafted and without overly prescriptive criteria (like section 79 leases under the LAA).

Minimum considerations for diversification lease grants

The Policy Framework sets out “minimum considerations” for determining when a diversification lease may be granted by the Minister.

Key among these is that the lease must be able to co-exist with other rights and uses (reflecting its non-exclusive nature) and that the proponent has a need for a large area of Crown land (reflecting the intention of the tenure reform to address a lack of suitable tenure for broadscale projects).

Other stated considerations include whether a proposed use provides “social, economic or environmental benefit”, the “land is appropriate for the intended uses” or the grant will provide “social and economic opportunities to Aboriginal peoples/ communities”.  The WA land allocation and other outcomes that these policy positions are directed towards are fairly obvious and well-known already, including that land in WA with the best wind and solar resources is used under (or in association with) a diversification lease for green energy generation.

The requirement for the proponent to have the “capability, capacity and experience to deliver the intended outcome” will drive natural selection in a customary and a likely uncontroversial (albeit, broad) way. 

In addition, an overarching discretion is expressly preserved by the statement that diversification lease applications will be considered by the Minister on “a case-by-case basis”.

These policy positions require careful consideration when determining the role and use (or uses) of a diversification lease in a particular project.

These minimum considerations will also have material legal structuring implications for diversification lease projects, particularly where there will be multiple:

• uses/ activities, such as wind and solar developments to be conducted in conjunction with less-intensive uses such as carbon farming;
• stakeholders, such as existing landholders (such as pastoralists), native title holders and developers; and/or
• subleases to different sub-lessees for different purposes, as expressly contemplated in the draft Policy Framework.

The draft Policy Framework also incorporates potentially important “competing application” protections – with the Minister being entitled to take into account “benefits to the State, the relevant region or locality” and “any other considerations the Minister may deem relevant” - and also contemplates competitive tendering for highly sought-after land.  Whilst not expressly stated in the draft Policy Framework, these policy positions go to “land-banking” issues and would likely enable the Minister to determine applications in a manner which best serves the increasingly urgent and onerous requirements of the clean energy and decarbonisation transition.

The draft Policy Framework is also quite explicit that diversification leases will not be granted “to improve a party’s negotiating position in relation to third party proposals”, recognising the current competition for Crown land (to say the least) in WA.

It should be noted that securing the consent/ agreement of any existing interest holders, such as pastoralists (who must surrender their pastoral lease to enable the grant of a diversification lease) and native title holders, may go a long way to addressing risks associated with competing applications and/or competitive tendering requirements.

“Financial and management capacity” and “public interest” tests

There will be no minimum or maximum allowable area for a diversification lease, however the factors that the Minister may take into account in granting a diversification lease are expressed to include:

• the proponent’s “financial and management capacity to commence the intended use in a timely manner”; and
• whether the grant is likely to “result in a concentration of control over Crown land such as to be against the public interest”.

The “concentration of control/ public interest” criteria is a pre-existing concept found in the LAA in relation to pastoral lease holdings and concepts of “financial and management capacity” are customary to energy and resources legislation in various jurisdictions. 

Even so, these criteria will necessitate input from various legal and non-legal advisers in preparing diversification lease applications as the Policy Framework has noted the need for rigour behind an applicant’s submission.  In the absence of more detailed policy guidance, there is also a risk of “teething issues”, such as risk of delays in approvals processes, arising from the need for the Government to assess “financial and management capacity” to conduct projects which are at the cutting edge of industry and technical innovation (such as green hydrogen and ammonia projects).

One glaringly obvious omission in the Policy Framework is the lack of any statement on how foreign ownership will be considered.  Given these leases will be a direct grant by the State, in most cases they will not be assessed under Australia’s foreign investment laws.  The State has a published policy relating to foreign ownership of pastoral leases but it appears it does not intend to make a similar statement in relation to these new diversification leases, presumably leaving that to the Minister’s discretion and the “capability, capacity and experience” test.

The draft Policy Framework also flags potential lease termination consequences if the lessee does not commence use of the diversification lease within a reasonable period of time and in accordance with the lease. We can expect the lease terms will impose specific commencement timeframes that are negotiated in the context of the specific use or project involved. The Policy Framework has also flagged the potential for options to lease being used where project details and/or the affected land areas are yet to be confirmed. 

In addition, the lease terms should set out greater granularity regarding the concept of “commence using” to ensure “commencement” does not occur in such a way that allows large areas to remain under-exploited during the diversification lease term.

Tenure toolbox

The diversification lease is a non-exclusive form of tenure that is intended to be used in conjunction with other forms of LAA tenure – such as (exclusive) section 79 leases and (non-exclusive) easements.  This is reflected in the policy statement that “[a] diversification lease may be granted to enable a range of activities that are associated with or ancillary to intensive activities on land outside the diversification lease area” (paragraph 7).

However, the draft Policy Framework provides important guidance by specifying that diversification leases are not suitable for certain type of uses – in particular:

• the primary land use must be able to “co-exist with other land uses” (paragraph 1);
• the appropriate form of tenure for activities which “can be carried out on a smaller land area” and/or which will be “predominantly intensive” is an (exclusive) section 79 lease (paragraph 4); and
• a diversification lease will not be granted solely for a “highly intensive land use”, grazing or mining (paragraph 20).

These references to “intensive” land uses should be read as references to the types of industrial activities that until now have been conducted on exclusive land tenure under the LAA such as a section 79 lease – say, the construction and operation of power stations and other similar industrial facilities.  This also means that, in the future, the construction and operation of hydrogen and ammonia production facilities will not occur on a diversification lease (but on land “outside” of the diversification lease area).  

Rather, diversification leases are intended to be most suitable for the construction and operation of wind turbines and associated cabling and related infrastructure (in addition to other less-intensive land uses).  Whether diversification leases or exclusive tenure will be the most suitable form of tenure for solar farms may be determined on a case-by-case basis, particularly having regard to an operational need to fence-off or exclude access to large land areas on which solar arrays will be constructed.

Minister for Mines and Petroleum approval

One of most challenging policy aspects of the new reforms relates to the approval of the location of wind and solar infrastructure for the purposes of the Mining Act 1978 (WA) (Mining Act).

The grant of a diversification lease requires the approval of the Minister for Mines and Petroleum under section 16(3) of the Mining Act (which applies an existing legislative requirement that no Crown land in a mineral field shall be leased, transferred in fee simple or otherwise disposed of without prior Ministerial consent).  This legislative requirement is the basis for the stated policy position that the Minister for Mines and Petroleum must first approve of:

• the “uses proposed under the diversification lease, including the locations of those uses within the lease area”; and
• the “locations of any substantial structures to be erected”,

with a new approval required to “vary the permitted the use” and/or “change the location of substantial structures or infrastructure” (paragraphs 11 and 12).

There will also be amendments to section 20 of the Mining Act that will have the effect of preventing mining from being conducted on the areas of the “substantial structures” unless written consent from a lease holder is otherwise obtained. 

For this reason, the approval of the areas of the “substantial structures” (being, approval of the location of wind and solar infrastructure where applicable) by the Minister for Mines and Petroleum is expected to be one of the most challenging policy aspects related to the grant of diversification leases as that Minister will take into account the various relevant customary factors - including if the land is prospective for mining (such as any known current or future resource or current or future potential development), amongst other factors.

For this reason, the draft Policy Framework suggests engagement with the Department of Mines, Industry Regulation and Safety as to the location of any substantial structures and/or cables at an early stage.

The status of the amendments to section 20 of the Mining Act, including the interaction with the regime under the Mining Act for the payment of compensation, are not addressed by the draft Policy Framework, which only sets out the policies from the perspective of DPLH and the Minister for Lands.

Rent and valuation considerations

As expected, the draft Policy Framework provides limited guidance regarding the calculation of the “market rent” that will apply to diversification leases, other than stating that it will be assessed by the Valuer-General and the valuation will consider the permitted uses set out in the lease.  Based on our experience in analogous circumstances, we expect that uses associated with energy generation and transmission will attract material rental valuations.  Given the need to reflect such material amounts in project financial models, relevant proponents should seek relevant legal and non-legal advice at an early stage.

Consultation on the draft Policy Framework

DPLH has invited comments on the draft Policy Framework, with consultation closing on 13 August 2022.

Gilbert + Tobin operates at the forefront of the energy and resources sector and interacts extensively with industry experts, Government, regulators and key industry stakeholders to provide a meaningful contribution to the clean energy and decarbonisation transition. 

We have extensive experience advising on land assembly for complex projects clean energy projects in WA.  For advice on the how the diversification lease reforms may affect your firm or existing or proposed projects, please contact one of our experts.