Milestone 08


The Wyre Catchment Natural Flood Management Project


Establish Legal Contracts and Closing


 Project Summary

The Wyre Catchment Natural Flood Management Project is the first example in the UK of the use of repayable private investment enabling the delivery of natural flood management. The project will deliver more than 1,000 targeted measures to store, slow and intercept flood water and prevent peak flow in a catchment in England, with the interventions hosted by local farmers. Beneficiaries of the reduced flood risk are paying for the interventions through an extendable nine-year contract, and the Project’s Community Interest Company has successfully raised a nine-year £850k private loan facility to help fund the up-front capital cost of the interventions.

 

Milestone 1: Initial Project Scoping

Often the initial task is to understand the site(s) you want to use and the land use change needed for nature restoration or creation. This includes considering the goals of the land managers involved, the vision within the wider catchment or neighbouring area, and whether there are permits or planning consent needed for any proposed changes.

At this stage, you can also conduct a high-level assessment to determine which revenue streams can be generated from ecosystem services , e.g. carbon credits, flood reduction cost savings, or biodiversity units, which will be crucial for identifying buyer interest.

Finally, it is useful to have an idea of the costs of the project and potential grant funding that may be available to support initial development.

Milestone 2: Identify and Work with Sellers

Initial ownership of the ecosystem services will belong to the landowners or, in some cases, the tenants of the sites that the project is using. However, these can be passed onto others, such as third-party project developers, with appropriate legal arrangements and compensation. In some cases, there may be a sole seller of the ecosystem services, where the site or landholding is large enough that it delivers the volume of ecosystem services needed to cover the costs of the project and attract buyers.

However, in order to achieve scale and impact, a project will likely involve multiple sellers, such as neighbouring farmers and estate managers. Scale of land is often needed to deliver significant environmental outcomes, and also to attract private finance. Project developers must plan how they initially contact and engage with these sellers going forward, building their wants and needs into the project.

Milestone 3: Baseline and Estimate Ecosystem Services

At this point, you will have understood the vision for the project and identified a particular ecosystem service or set of services to be sold. The next step will be to carry out detailed analysis – baselining each ecosystem service and quantifying what will be able to be delivered from the interventions, as well as planning how to monitor and maintain these interventions. You will need to rely heavily on ecological expertise for this more scientific Milestone.

At this step, standards, verification and accreditation methods will be considered in more depth.

Milestone 4: Identify and Work with Buyers

Based on your earlier market analysis in initial project scoping, you will have identified one or more groups of beneficiaries who may be willing to ‘buy’ or pay for the ecosystem service(s) to be created, restored or maintained. Buyers vary – as do their requirements – but at this step, greater buyer engagement is now needed to develop a deal that channels money towards the nature-positive outcomes that your project wants to deliver.

 

 

Milestone 5: Develop Business Case and Financial Model

You’ll have started building your business case and financial model in earlier steps – laying out your vision, the market proposition and estimating costs and income. This step offers a review, in addition to providing details on information needed to build out the financial model and business case more fully. Both of these key documents will be iterated throughout project development, and may be altered during project delivery as new information emerges. These documents are interlinked and, if developed correctly, will ensure your project’s viability and also help you with discussions with stakeholders including sellers, buyers and future investors.

The financial model will also enable you to better understand the type of structure your project may take to attract investment (i.e., an environmental bond, a loan, an equity investment) and what sort of returns you can afford to pay/offer.

Milestone 6: Develop a Governance Structure

A governance structure will inform the way in which the project is run when fully operational and for what purpose. It identifies appropriate decision making processes, who is responsible for what actions, and what controls are in place to make sure that the project is meeting its stated goals, all while abiding by the risk appetite of its engaged stakeholders. The legal entity to host the project will be a key driver in this, and the appropriate choice of entity will be dependent on several factors that are outlined below.

Your governance structure should align with and underpin your business case, as a necessary component of how the project will deliver its environmental outcomes and other strategic targets.

Milestone 7: Identify and Work with Investors

It is important to note that not all projects will need up-front investment, but for those that do, this section provides a framework for thinking around the development of the investment model. This does not constitute financial advice – as the GFI is not licensed to do so. However these considerations are based on the insight offered by project developers and other market stakeholders.

An investor will be a new core stakeholder in your project, and it’s just as important to think of what you require from investors, as much as what they require from you – so that you can build a positive and collaborative relationship with them.

This entails defining the investment ask (in line with the financial model), the strategy for approaching the right investors, and the negotiation of terms that can then be formalised in contract development (Milestone 8).

 

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.

Community Engagement

Community engagement is highly advisable for any project that aims to sell ecosystem services, to ensure fair outcomes for local communities and the long-term success of the project. Project developers can build connections with local stakeholder groups early on to spot both risks and opportunities.

Policy and Regulation

Project developers and enterprises will need to keep a continuous check on how current and future policy may affect the project, and also opportunities for the project to inform policy. The role of private finance for nature across the UK is being encouraged by the UK government and its devolved administrations, and new rules, standards and markets are being developed.

 
Acknowledgements 

 

With many thanks for their time and insight on this case study:

Dan Turner, Technical Lead, Land Management and Market Creation, The Rivers Trust

Dan Hird, Principle and Founder, Nature Finance

 

Date published: 08/12/2022

Next Milestone

Importance of using Memorandums of Understanding

Before starting formal contract development, the project team signed several Memorandums of Understanding (MoUs) with the relevant stakeholders of the project.

The project team signed MoUs with the two key sets of stakeholders (i.e., buyers and landowners) within the first 12 months of the start of the project. This followed detailed discussions with these parties and became an important way of documenting what had been agreed to date, such as what each party would be responsible for, payment terms and the proposed lifespan of the project – including the initial nine years and the willingness to renew terms thereafter.

Alongside MoU development, the project team had developed a business plan and financial model and were in the process of establishing the financial investment requirements of the project. Early discussions with potential investors were being held around this time to gauge interest. Once enough buyers and landowners were in agreement with the MoUs, the project team decided to form the legal entity which would deliver the project. In the case of the Wyre, this is a Community Interest Company or CIC (See Milestone 6 for legal entity formation). The initial directors of the CIC were then able to formally sign non-binding MoUs on its behalf.

Dan Hird, Principal of Nature Finance and a member of the project team, comments that this is important because a signed (albeit non-binding) MoU is more of a commitment than an unsigned MoU. This holds particular weight when you are dealing with larger organizations, such as the Environment Agency, a local authority or a water company. The MoUs were also essential in the due diligence process with investors (See Milestone 7).The project team anticipated that it would need separate contracts with each buyer and seller, and therefore decided to standardize the MoUs and future contracts by having only the payment terms and interventions vary, the latter detailed within seller contracts only. This way, the project team could use standardized templates on the buyer and seller contracts, saving time and resources. The C.I.C. did not seek MoUs with its investors, as these were the last parties to be engaged with before contract development began.

Overall, Hird stresses the importance of the signed MoUs in engaging legal advisers and contract development, saying these allowed for a much smoother delivery and minimizing disagreements in contract negotiation.

 

Securing Legal Services

The project required external legal services to develop many of the contracts.

As one of the four pilot projects funded by the Esmée Fairbairn Foundation, the project team engaged Hogan Lovells, which had an agreement with Esmée Fairbairn to provide pro bono legal advice for these pilot projects. The Wyre project team was therefore able to take advantage of their contract development services when required and did not approach any other legal firms.

Hogan Lovells has a defined pro bono strategy with strategic themes that includes ‘supporting innovation in environmental protection’. Hogan Lovells was already known to the project, having provided advice on tax implications and appropriate legal agreements to use, and so agreed to provide further pro-bono services as this project aligned well with its pro bono strategy.

Ultimately, Hogan Lovells needed to formally confirm their role with a ‘client’ as this is a regulatory requirement of all law firms, regardless of whether they are charging for their services or delivering advice on a pro bono basis. The project team therefore prepared a legal specification that explained the ask of Hogan Lovells and arranged a first virtual meeting with its pro bono team, headed up by Fenella Chambers.

The project team also had a draft business plan available at this time. During the first meeting, it introduced the project and answered any questions they had on the specification and draft business plan. The Hogan Lovells pro bono team then agreed that it would:

  1. Put in place a formal engagement letter with the Rivers Trust as principal project developer
  2. Engage the various teams within Hogan Lovells that would provide the legal services required

This engagement involved at least two or three separate teams, because the project required help in setting up the CIC, drafting investment loan agreements and commercial contracts with buyers, landowners and suppliers. This required input from different lawyers in different teams within Hogan Lovells, which the pro bono team agreed to co-ordinate. Hird comments that having a single point of contact at Hogan Lovells to co-ordinate engagement was important and prevented a lack of co-ordination at this stage.

The project team followed up this initial meeting with further meetings with partners in the Financial Services and Commercial teams at Hogan Lovells. Hird comments that the pro bono team itself were able to help with setting up the CIC, as this is a more straightforward and less specialist area of expertise.

 

Contracts Required

The contracts and other work that the project team asked Hogan Lovells to undertake, as well as the information first provided, was as follows:

  • Buyer contract (called an Ecosystem Services Contract) – the project team gave the detailed template MoU between the CIC and each Buyer.
  • Landowner/Land Manager contract (called a Hosting and Maintenance Contract) – again, the detailed template MoU between the CIC and each Land Manager/Landowner was given.
  • Asset Management contract (called a Hosting and Maintenance Contract) – the detailed and fully signed MoU between the CIC and the Rivers Trust was given, which sets out its provision of finance, administration and company secretarial services to the CIC.
  • A Contract Delivery and Management Contract – giving the detailed and signed MoU between the CIC and Wyre River Solutions Limited (the commercial arm of the Wyre Rivers Trust), for delivering the interventions over 3 years and then managing and maintaining them and Land Manager relationships.
  • An Institutional Loan Agreement (called the same) – giving the detailed term sheet agreed between the CIC and the five impact investment funds that were investing £650k.
  • A SITR Loan Note Instrument (called the same) – giving the detailed term sheet agreed between the CIC and the four individual HNW investors who were investing £200k in the SITR Loan Notes.
  • CIC and company set up – the project team gave Hogan Lovells the details of what sort of company wanted (limited by guarantee), objects, directors, the Registered Office and other such details, as well as information for the CIC36 application form, which registers the company as a Community Interest Company with the CIC regulator.

 

There was also a separate contract between the Wyre Rivers Trust and the Woodland Trust for the woodland and hedgerow planting grants of the project. Because the C.I.C did not have enough trading history, the Woodland Trust could not form a contract directly with them, as this was in breach of their risk and procurement policies. The contracts with the Rivers Trust and Wyre River Solutions Ltd were developed separately with legal counsel of these respective organisations. However, to maintain oversight and alignment, the project team had also developed the MoU that was then used in contract development between these separate entities.

Though the services were free of charge, it was estimated that, if these services were charged on a discounted basis (given to impact organisations) it would have cost the project £10,000 for each of the buyer and land manager templates plus around £20,000 for the two loan facilities developments, plus a fixed fee for management of the contract management and DocuSign completion process.

 

Negotiations and Amendments

In total, it took approximately twelve months to reach the point of having signed MoUs between buyers and some land managers. From this point it took a further two months from formally beginning contract development to signing all contracts between the parties, with weekly meetings and regular email and telephone correspondence. Dan Turner, Technical Lead of the Rivers Trust and member of the project team, says that contract negotiations would have taken much longer without the relationships built to date, the signed MoUs and Hogan Lovells’ prior knowledge of the project.

However, negotiating and agreeing these contracts simultaneously required considerable chasing, negotiating and project management. There were also one or two other factors which impacted the start date of the contract development phase – the principal one being the length of time it took to secure advance assurance for Social Investment Tax Relief from HMRC, which was a condition of the High-Net-Worth investors coming into the transaction (See Milestone 7).

Hogan Lovells used its own contract development templates, as with any law firm, and an email and DocuSign process to secure and evidence signatures at legal completion. Once the agreements between parties had moved from MoU to legal contract, the project team agreed that Hogan Lovells would retain version control, although the project team continued to be responsible for negotiating and collecting contract changes.

 

  • Contract negotiations – land managers

Turner comments that contract development with the land managers was relatively straightforward, as most areas of debate and concern were resolved in previous discussions and through the provision of a non-binding MoU.

The farmers did not have any formal legal representation in their contract development, but the land agent for one of the large estates volunteered to discuss, negotiate and review the landowner MoUs and final contract. Hird comments that this was very useful, as the agent was experienced commercially, and the project team were able to tell all the other smaller landowners that they would be getting a template contract that the estate was negotiating on. In other words, anything the estate agreed with the project team would benefit all landowners because of the near identical contracts.

One requirement that arose later on was the need for a ‘clawback clause’ that addresses the potential case of land manager default and exit of the project.

After signing the contracts (completion – see below), the project team realized that the land manager contracts did not have a clawback clause in the event that the contract is extended by the CIC for a further 41 years – which is entirely at the discretion of the buyers and the CIC. In this case, the land managers continue to receive their annual inflation linked fees on the proviso that they continue hosting their interventions.

Considering the possibility that the farmer defaults on this obligation and removes the interventions, the project team had to agree an additional clawback clause that would cover the return of a proportion of the fees paid to the land manager.

This additional clause was mainly negotiated with the land agent of the large estate. Hird comments that the clawback clause is not overly penal but is similar to the clawback clauses in Countryside Stewardship and Higher-Level Stewardship agreements. This principle was accepted by the land managers but some negotiation on the proportion of repayments was needed. This additional clause is now included in all landowner contracts and the discovery required an amendment to those land manager contracts already signed. Hogan Lovells likewise developed the amendment.

Where the project team were negotiating with individuals with differences in land tenure, there were two slightly separate contract versions – one for owner-occupiers and one for tenanted land managers. The latter contract required 3 signatures between the CIC, the land manager and the landowner. This meant that the terms, conditions and obligations of the contract were being agreed with the landowner and the land manager, albeit the commercial beneficiary of the contract and the party that the CIC would engage going forward was the land manager.

 

  • Contract negotiation – buyers

Turner comments that the majority of contract negotiation time was spent on the buyer contracts. As some of the buyers were larger entities with their own legal counsel, some of the buyers had more stringent requirements on the contract features, which focused on mitigating their perceived risk and complying with their own regulatory requirements. As the largest commercial entity within the buyer group, United Utilities (UU) took the lead in most of these discussions. Similar to the land managers (above) the rest of the buyer group were comfortable with this approach because anything that UU negotiated in the template buyer contract would be to the benefit of all buyers.

For example, the buyers wanted to include a clause on Construction Design and Management (CDM), which relates to the installation of the interventions by the Wyre Rivers Trust and its implementation partners.

The buyer group wanted this clause to ensure that the regulatory risk from health and safety breaches were being minimized. They also did not want to be legally identified as the client, as they could appear to be liable for any defaults or non-compliance in this case. Turner comments that this took some time to set out in a way that all parties were comfortable with, and the clause made clear that the C.I.C was acting as the ‘client’ of this work and not the buyers.

The buyers also requested clauses on more ‘boilerplate’ or standard content, such as General Data Protection Regulation (GDPR), Anti-Money Laundering (AML), anti-slavery and human trafficking, anti-bribery and corruption, publicity clauses and tax compliance. Turner says these clauses were easy to agree, but it required some cross-referencing with the parallel policies of each party to ensure technical compliance.

An important output that arose from these discussions was the C.I.C.’s need for insurance. In discussions around liability and appropriate cover with the buyers, the team realized that the C.I.C. itself would need Professional Indemnity Cover and also Directors, Officers and Trustees Insurance. (See Milestone 6 for more detail).

 

Closing and Next Steps

The project team formally completed the deal on 31 March 2022, around two years from when the project first started its development in June 2020.

All of the key contracts were signed within the space of a couple of days, and legal completion couldn’t formally take place until all contracts were signed because many were conditional on each other. For example, the investment agreements were contingent on the buyer contracts being signed, but the CIC also wanted to minimise the window of time where it would be contractually obligated to buyers without the necessary up-front investment. Therefore, all the signed versions were collected and held by Hogan Lovells until an agreed “completion” had formally taken place.

To sign the contracts, a CIC Board meeting was held to approve the registered directors of the CIC to sign all of the contracts. At the time, there were only two registered directors – Mark Lloyd and Dan Hird of the CIC – as this provided more simplicity in forming the legal entity (see Milestone 6).

Immediately after this completion Board Meeting, the team had a second Board Meeting to appoint the five new directors of the CIC. The meeting also agreed a few practical actions, because at this point the CIC was effectively “trading”. These included the drawdown of money from the SITR investors, paying certain transaction costs, and agreeing dates for first couple of board meetings.

Hird says they were ably supported by Hogan Lovells in the completion phase, which was brought in to manage the contract signing process via DocuSign. Hogan Lovells have also retained all copies of the contracts signed in digital form and provided a completion ‘bible’ to the CIC of all signed contracts. All counter signatories also have a copy of their contracts.

 

Lessons Learned

Hird comments that there were many lessons learned from the contract phase, and has set out the below points for other project developers to note:

  • To manage costs and keep project management tight, don’t involve legal advisers too early in the project – it should be the responsibility of the project team to design the commercial structure, establish MoUs and then provide clear guidance to the legal advisors as to what needs to be followed. This is an effective way of managing down legal costs
  • A good way of doing this is to work towards negotiation of non-binding MoUs between all the parties that will ultimately require to contract with each other. Again, this should be done by the project team and not the legal advisors
  • When negotiating template MoUs and contracts with a group of stakeholders who are going to effectively sign a largely identical contract, you need to think how you will do this practically
  • One way is to create a Buyer Group and/or a Landowner Group and explain the intention is to develop a mutually acceptable MoU between your project SPV and the Groups. What you may find is that certain members of the Group want to step up and be involved and others don’t and are happy to rely on one or two of the Group to negotiate on their behalf on the grounds that they will benefit from any changes made. This can be an efficient way of doing things. With the Wyre project for example, United Utilities took a lead role in negotiating the Buyer contract and the large estate took a lead role in negotiating the Landowner contract
  • Negotiating investment finance agreements should be more straightforward for investment readiness advisers who have experience in capital raising. Typically, this process would involve creation of a digital data-room containing the project business plan, financial model and all other draft project documents for due diligence purposes (See Milestone 7). The actual investment agreement would usually follow the agreement of a term sheet and then investor due diligence.

 

Photo credit: The Wyre Rivers Trust