Current Issues in Negotiating and Updating Cell Site Lease Renewals
A combination of critical provisions, rights of refusal, expansion and termination rights, along with other helpful but optional provisions make up cell site leases often desired by wireless carriers.
by Lynn Whitcher
Associate General Counsel
You can’t build a cell site without leasing or owning property. When negotiating a lease agreement for a new site, a carrier generally takes the time to review each contract term. But when it comes times to renew that same agreement, too often busy project managers are juggling multiple and conflicting deadlines because of an expanding list of impending expirations. In order to cope, they triage their workload by focusing narrowly on rent and extension options. As a result, the actual terms and conditions of a renewal are often dictated by the landlord’s needs and desires. This mindset results in the loss of an important opportunity to reexamine the contract terms and update the agreements to bring them into compliance with the inevitable changes in network leasing guidelines implemented in the 20 to 30 years that have passed since the inception of the lease.
So, what should the carriers look for in an ideal lease renewal? (The following information addresses a range of potential business benefits and risks that may be present in a typical telecommunication lease. Carriers should consult with counsel to understand how state law or other considerations may factor in.)
As essentials of daily network operations, these provisions are characterized as “must haves” because they are critical to the day-to-day operations of the network. A carrier is likely to utilize these rights and protections on a frequent basis throughout the lease term.
Use: The permitted use should be broad enough not just to cover the current, actual use of the site, but also future advances in technology.
24/7 Access: The ability to readily access the site 24 hours per day, seven days a week, for inspection, repair and maintenance is critical. This is because technicians may want to service a site when customer usage is at its lowest from 2 a.m. to 5 a.m. When a landlord demands prior notice of access, try to establish mutually agreeable requirements. Even landlords that initially request advance notice of site access will generally agree to no notice during regular, defined business hours; after hours access pursuant to prior written notice for routine inspections, repair, maintenance and upgrades; and emergency access at any time, subject to reasonable notice, even if provided afterward. If telephone notice is permitted, it helps to have the landlord contact telephone number inserted into the lease for ease of reference.
Because the carrier will bear the burden of most administrative provisions in the lease, the practical aspects of administering a national real estate portfolio will affect provisions in the lease agreement.
Automatic renewals: Telecommunication leases have relatively short terms, often five years. Thus, automatic renewals help avoid the need to manually prepare and mail hundreds of renewal letters across the country each year.
Fixed rent escalators: Although Consumer Price Index-based rent escalators are common in many leases, the reality is that these provisions are extremely difficult to administer correctly. Moreover, many CPI provisions are poorly drafted, often failing to take into consideration that it can take anywhere from 30 to 60 days for a CPI figure to become published.
For illustration, let us examine a CPI escalator for a March 1, 2014, adjustment, for which the parties have agreed to use the most recent CPI published. At the time a carrier is calculating the rent increase, probably sometime in the middle of February, the March CPI has not been published, and neither has February’s. It is possibly that the January’s CPI might not be published yet. If, then, the December 2013 CPI is used, which CPI do you compare it with- March 2013 (one year before the anniversary date)? December 2012(twelve months prior to December 2013)? What happens when the January 2014 CPI is published after the carrier cuts the March 1, 2014, rent check but before March 1? Does the January 2014 CPI figure become the most recent? Does the carrier need to recut the rent check? Will the landlord even notice? Fixed escalators alleviate the administrative burdens presented by these often complex and convoluted lease provisions.
Updated notice addresses and provisions: Whenever a lease is amended or extended, the carriers will confirm the landlord and carrier notice addresses in the lease are current. This helps ensure the parties do not waste time with returned mail or rejected courier deliveries when sending a notice. Also, the methods for delivery of notice must make practical sense. Some lease administrators prefer the option to send notices by overnight courier as opposed to certified mail. Some refuse to accept notices by facsimile or email. Also, landlords must realize that it can take days for a notice to be routed from the main office to a local office. Therefore, very short notice provisions are not practical in the context of telecom.
Limited period for site plan review: Ideally, landlord approvals would not be required for routine equipment upgrades and additions within the premises. However, in the event that the landlord review and approval cannot be avoided, carriers will often impost protocols for landlord review so that project deadlines can remain on track. The lease may provide that landlord approval will be deemed to have been granted where the landlord fails to respond to a request for approval within a certain period of days after receipt of the request.
Documentation required by taxing authorities or auditors: The Internal Revenue Service has strict documentation requirements relating to the identification of third parties such as landlords who receive monetary payments such as rent. The carriers may also look at local tax requirements in addition to federal requirements. For example, in addition to requiring an IRS Form W-9 from a landlord, tenants leasing California properties may require local state forms to confirm whether withholdings on rent payments (applicable to payments to out-of-state landlords) may be required.
Auditors may also have strict documentation requirements. Therefore, the carrier may contractually require a landlord to provide such documentation as a precondition to receiving any monies under the lease. In other words, no documentation, no money. There is no greater motivator for compelling delivery.
Limited period for reimbursement requests: The lease may contractually prohibit landlords from submitting late demands for reimbursement so as to avoid the situation in which a carrier faces a demand for reimbursement going many years back.
Acceptable tenant insurance obligations: Both at lease inception and at renewal, the insurance provisions will be reviewed. It is not uncommon for a carrier’s ability to comply with insurance requirements to change over the long life of a telecom lease. For example, a lease may require that a tenant provides a certificate of insurance that provides that 30 days’ notice of termination or cancelation be given to the landlord. However, the insurance industry has changed the certificate of insurance forms to remove this language. Therefore, a modification to the certificate of insurance requirement may potentially be needed or new policy endorsements obtained.
General housekeeping: A carrier will review the lease to determine whether there are any unusual administrative requirements that may be difficult to comply with. Some lease administration departments cannot realistically calculate fair market value adjustments, send rent payments outside the first of the month, or send the rent check together with the utility reimbursement or other documentation.
Rights of First Refusal
These days, landlords are being inundated with rent stream buyout offers. As part of the buyout transaction, landlords typically transfer certain interests in the lease or over the premises to a third party. Depending on the nature of the rights acquired, the third party may be in a position to charge above-market rents to the carrier. Or, a carrier may find itself faced with a Wall Street investor landlord who has no interest in responding to zoning signoffs or request for consent during the lease term. Right of first refusal provisions typically require a landlord to provide a carrier with notice of any seriously contemplated offer which allows the carrier an opportunity to meet the terms and conditions of the third party’s offer. Carriers that buy out the rental stream of their own sites ensure that the contractual line between the property owner and cell site tenant remain unbroken. Also, this may help avoid the situation in which a carrier leases the original premises footprint from the buyout company but also must enter into a second lease with the property owner for additional space for a generator, fiber-optic lines and other equipment. Why have two leases at one site?
Modification and Expansion Rights
It is almost certain that a carrier will contemplate expanding its equipment or antenna space, add utilities such as fiber or add equipment such as a generator during the lease term. In addressing equipment modification and site expansion rights, landlords may agree to lock in the rental rate for future expansion or agree that no rent increase will be due for site modifications needed to keep the technology at the site current or in compliance with the law.
Any restriction on the ability to freely assign the lease may cause legal issues or increase costs in the event of a merger and acquisition or sale of the asset. Where the landlord consent is required, a carrier may seek to carve out transfers to the top national carriers and tower companies, corporate affiliates and assignees of the applicable Federal Communications Commission license.
Landlord Termination Rights
To the extent possible, carriers will seek to limit or remove landlord termination rights so that the carrier can be assured of continued long-term operability at the site. At the very least, carriers will seek to extend the termination notice for period far enough in advance to allow the carrier sufficient time to get an alternate site on air. In jurisdictions where zoning is difficult, carriers may need 18 or 24 months.
Although the following provisions may not be essential, they could be helpful in that they could one day be put to use. They can be the subject of much negotiation between sophisticated landlords and carriers. However, when examining the totality of relevant considerations in deciding whether to accept or renew a lease, because these provisions may or may not be triggered, these provisions may be less essential than the must-have provisions previously mentioned.
Interference: Carriers often view lengthy interference protocols between the landlord or its tenants on the one hand, and the carrier on the other hand, as a strict necessity for wireless industry leases. However, in the event that the landlord will not agree to the standard interference language, the carriers may also consider whether the protections afforded under the interference resolution regulations and processes of the FCC provide additional protection.
Mutual and parallel indemnities: The ideal indemnity provides for mutual and parallel obligations between the parties. Where this ideal cannot be achieved, carriers will work with counsel to determine the best alternate course of action. If the landlord will not agree to a contractual indemnity obligation, perhaps the landlord will agree to remove the contractual indemnity altogether, which may leave the parties with indemnities provided as a matter of law. Or, the scope of a one-way tenant indemnity obligation may be sufficiently narrowed so that it only applies to the extent of the tenant’s negligence without risk of exposure to damages caused by the landlord or third parties At minimum, where a landlord fails to provide the tenant with a contractual indemnity, the carriers will seek to ensure that they do not waive any claims against the landlord.
Sublease rights: Sublease rights are an area where a “no” from the landlord does not always mean “no”- even when consent rights and sublease rent are issues. Many times, a landlord will agree to allow a carrier to sublease space contingent only upon the subtenant obtaining its ground space from the landlord directly. This structure allows the landlord to known which subtenants are on the property and allows the landlord an opportunity to negotiate rent from the subtenant. The original tenant does not have to worry about obtaining landlord consent or negotiating and administering sublease rent splits.
Carrier right to terminate for convenience: Termination for convenience provisions can provide the basis for a carrier to terminate a lease in instances not covered by enumerated termination rights. For example, a cell site may be technically compatible with the network but still on a carrier’s termination list if a carrier has to wait until the lease expires to terminate the lease, this may increase network operation costs.
Landlord insurance requirements: Landlord insurance requirements are helpful to manage risks and are likely to be zealously pursued. However, on certain rare occasions, sophisticated landlords (such as hotels) may hesitate to agree to a landlord requirement for insurance in a lease, especially a cell site lease that is considered incidental to the landlord’s general operations at the property. When faced with this reluctance, a carrier may look at other circumstances that might make the absence of this obligation acceptable. For example, a carrier may check mortgage of a deed of trust documents to see whether the lender has required the landlord to maintain insurance. This may provide some level of comfort because lender insurance requirements often exceed those found in cell site leases.
The decision whether to accept the terms of a particular lease amendment or renewal is, ultimately, a business decision. The agreement needs to make good business sense based on careful assessment of the totality of various factors that include actual costs (e.g. rent and other payments required under the lease), as well as the risks presented (both legal risks as well as risks such as loss of competitiveness and the cost of pursuing alternate solutions). The time spent in careful management of lease renewals will pay off for the carriers in the long run by keeping their operating expenses in check. The costs of outdated lease provisions, especially those stemming from an agreement inherited through the acquisition of another carrier with different leasing standards and protocols, could lead to rent claims, attorneys’ fees and litigation costs affecting the bottom line.
As a service provider to the wireless industry, we would like to share our insights, observations, and analysis about what is happening from time to time.