Collocation is the latest trend to sweep the industry for the acquisition of wireless communications sites. There are several incentives for carriers to enter into collocation agreements.
The ability to collocate allows the sublessee to avoid a large expenditure of capital if it can locate on an existing tower. There also is a savings of time in developing a new network if a carrier can attach to an existing tower and avoid an otherwise lengthy site location and permitting process. Local planning and zoning boards also are promoting collocation in an effort to minimize the construction of new towers.
Even with these incentives for collocation, it is important to consider the legal issues and risks associated with these transactions. There are real estate issues that can have an impact on the continued ability to use a particular site. The bankruptcy of the tower owner also can discontinue the use of a particular site. In addition, the manner in which interference issues among the occupants of a tower will be resolved is critical. Another concern is the assessment of risks and liabilities for the use and operation of the particular site among the various occupants.
This article discusses each of these issues and other practical guides to mitigate these risks.
Practical considerations
The sublessor must evaluate its plans for tower facilities so that any proposed use made by a sublessee will not prohibit the sublessor’s full use of its own tower. If future uses of the tower facilities are difficult to anticipate for the sublessor, it is prudent to include in the sublease a clause which allows the sublessor to terminate for any reason or no reason at all upon notice to the sublessee.
A collocation relationship can be nullified if the sublessor’s ground lease requires that the ground lessor consent to any proposed sublease. In representing the lessee of the ground, it is wise to include in the lease a provision which allows the ground lessee to sublease the property at its sole and absolute discretion.
Real estate issues
Most tower owners have leased the land upon which their towers have been constructed. A lease grants the tenant or lessee a property interest in the real property being leased. In the context of a sublease, the sublessee has a property interest in the underlying lease and the improvements which are constructed upon the underlying ground lease. In the situation of a collocation agreement, this means that the sublease depends upon the continued existence of the underlying lease.
A license does not grant any property interest in the underlying leasehold or the improvements. A license also is by definition revocable. In some states, the license continues to be revocable even if there is language in the license itself which states that it is irrevocable. In representing a carrier which is allowing other companies to occupy space on its tower, I structure that agreement as a license. In those instances in which my client is leasing space on someone else’s tower I prefer to structure that agreement as a sublease or a lease. For the sake of simplicity in this article I will refer to the proposed collocation agreement as the “sublease” and the parties as the “sublessor” and “sublessee.”
The terms of the underlying ground lease must be reviewed in each instance to make sure that the sublessor has the ability to enter into a lease for the full term of our proposed sublease agreement. If the underlying lease is divided into an initial term and several renewal terms, the failure of the sublessor to renew the lease will also preclude the ability of the sublessee to renew or extend the sublease agreement.
The text of ground lease agreements typically allows the lessee to renew the lease for several multi-year terms. If the underlying lease does not grant the lessee the absolute right to renew its lease, the lease should only be viewed to be valid for the balance of the then existing term. In representing a sublessee it is preferable to have the ability to compel the sublessor to exercise options to renew its lease so that the sublessee may rely upon its ability to exercise an option to renew the sublease or license for multiple terms.
Effects of liens and mortgages
There also is the possibility that other entities besides the sublessor or licensor will cause a loss of the sublessor’s or licensor’s interest in the property and, in turn, cause an eviction of the sublessee from the tower. The fee simple owner of the real estate may have granted a mortgage on the property. If the ground lease was filed after the mortgage, the mortgagee could choose to extinguish the lease and require the sublessor to remove the tower facilities from the property. Likewise, the sublessor may have granted a security interest in the tower and other improvements. If the sublessor defaults in payments to its secured creditor, the secured creditor may choose to evict the occupants on the tower so that is may sell the tower and mitigate its loss. In either of these circumstances the mortgagee or secured creditor could choose not to foreclose even though it has the right to do so. The greatest incentive for the mortgagee to avoid foreclosure of an inferior interest in the property would be to receive the income stream provided by the subleases.
The only way to effectively preclude a foreclosure of an interest which is subject to a mortgage or lien is to enter into non-disturbance and attornment agreements with the lienholders. The non-disturbance and attornment agreement provides that the creditor will not disturb the sublessee’s interest in the property if after the decree of foreclosure is entered, the sublessee or licensee agrees to continue to make payments to the lienholder and recognize the lienholder as its lessor.
Effect of default
It is also prudent to have a non-disturbance and attornment agreement between the sublessee and the owner of the fee simple interest in the property. Such an agreement provides that in the event of a default under the underlying ground lease, the lessor will not terminate the ground lease provided that the sublessor makes the payments owed the ground lessor under the ground lease. In the event of a default under the underlying lease by the sublessor, this could place the sublessee in the position of making a rental payment to both the owner of the tower and to the ground lessor until such time as an agreement can be reached between the sublessee and the owner of the tower for a sale of the tower to the sublessee. If non-disturbance and attornment agreements cannot be entered into, a proposed eviction after an event of a default will place the sublessee in the position of either looking for a new site or renegotiating a lease agreement. The sublessee should also seek a covenant in the sublease from the sublessor that the sublessor will notify the sublessee of a default on the ground lease, any mortgages or security agreements. This will provide the sublessee an adequate opportunity to either look for another site or negotiate with the lienholder.
Bankruptcy effect
It is important to have an understanding of the implications of bankruptcy law upon collocation agreements. In bankruptcy, the entity which has filed the petition seeking protection from creditors is granted a period of time in which it may decide to either reject or affirm executory contracts. A lease is an executory contract. The effect of this principle is to allow a lessee to choose to reject an existing lease agreement. For example, ABC Corp. chooses to locate on a tower constructed by XYZ Corp. and XYZ has constructed its tower upon a ground lease. XYZ subsequently files a petition for relief from creditors under the bankruptcy code. If the site upon which ABC has located its equipment is not valuable to XYZ or XYZ otherwise does not wish to continue to make renal payments, XYZ may reject that lease and have no further obligation to perform under the lease. This means that ABC’s sublease also is terminated by the r
ejection of the ground lease.
Bankruptcy can have an even more detrimental effect upon a carrier which has agreed to share costs in the construction of a tower facility or has constructed the tower facility with the intent of receiving a credit against future rentals in return for its share of the construction costs. As an example, XYZ has acquired a number of sites by options to lease and has permitted those sites but lacks the capital necessary to construct new towers. It is very tempting for ABC to offer to construct the towers on these sites. The mere fact that XYZ lacks enough capital to construct these sites raises a concern as to its continued financial solvency. Assume that XYZ proposes that ABC construct the tower and other improvements and give XYZ a bill of sale for the improvements in return for XYZ’s promise to allow ABC to be on the tower for a period of years without having an obligation to pay any rent. XYZ then files bankruptcy. XYZ may choose to reject the lease in bankruptcy and subsequently remove and sell the tower to satisfy the claims of creditors. ABC has no ability to object to this proposal since the improvements belong to XYZ. The net effect is that ABC not only loses its lease but also loses the improvements that it has paid to construct.
It is extremely risky for a sublessee to consider constructing a tower facility at its expense with the expectation of being allowed to occupy that tower for no additional cost over a period of time. The preferable way to handle such a situation is for ABC to assume XYZ’s lease or option to acquire the site and for ABC to construct the facilities at its sole cost and expense. ABC will then be in control of the underlying lease as lessee and will have ownership of the improvements constructed on the leasehold. ABC could then offer XYZ an opportunity to occupy its tower for a definite term to allow them to recoup the expenses which it incurred in acquiring and permitting the site. If during the term of its occupancy of our tower, XYZ files bankruptcy, ABC will be allowed to file a claim against the estate of XYZ as an unsecured creditor and it would not risk losing its lease or the improvements.
Interference
Generally, a sublessee should grant a covenant that its use of the tower will not cause wireless communications interference with the use made of the tower facilities by the sublessor or other occupants of the tower which are present as of the commencement date of the sublease agreement. In the event that an occupant of the tower changes its frequency of operation after the commencement date of the sublease agreement, that entity should have the obligation to resolve any interference with the newcomer or another occupant of the tower. Likewise, if an entity proposes to attach to the tower after the installation of the sublessee’s equipment or the commencement date of the proposed sublease, that company should have the responsibility of resolving interference caused with an existing occupant of the tower. A more subtle issue which may arise is whether the sublessor will have the ability to change its use of the facilities in such a manner as to cause interference with either the space occupied or frequency of operation of another occupant of its tower. These issues should be addressed in the sublease.
Allocation of risk
and liability
As in any other transaction, the sublease or collocation agreement should seek to allocate risk and define liabilities between or among parties. Risk should be allocated or assessed through three principal mechanisms. A principal means to manage risks is through an obligation of the parties to procure and maintain insurance with specific coverage requirements. Second, the lease or sublease should also require that the parties obtain a waiver of subrogation clause from their respective insurors. Likewise, the parties should also include a mutual release agreement in their subleases. Finally, there should be reciprocal indemnities in the sublease. Both the sublessor and the sublessee should be required to procure and maintain policies of commercial general liability insurance. Both parties should also be required to maintain insurance covering fire and casualty losses to their respective improvements, equipment or other personal property.
The sublease should also require each party to name the other as an additional insured on its policy of commercial general liability insurance. In addition to providing a source of money for both parties to satisfy claims, the naming of the other party as an additional insured may also preclude a subrogation of the insured of claims held by the insured against the other party. It is prudent to also obtain a waiver of subrogation clause in the insurance policy to remove any doubt that the insured will have a claim against the additional insured. In other words, if XYZ and ABC are occupying one another’s towers and XYZ’s insured pays a claim to a third party which relates to a liability that is arguably attributable in whole or in part to the fault of ABC. In an ordinary transaction, the insured would be able to subrogate the claim of XYZ against ABC. Simply put, this means the insured could sue ABC for contribution of the sums that have been paid to the third party as a result of the loss. The waiver of subrogation precludes the subrogation of claims by the sublessor’s insurance company against the sublessee and vice versa. If a tower is to be occupied by multiple sublessees, it is preferable for the sublease agreement to contain releases among the sublessees and covenants that waivers of subrogation will be sought from each sublessee for the benefit of the sublessor and all sublessees.
The final method of minimizing risk in these transactions is to have reciprocal indemnities. In other words, the sublessee should indemnify the sublessor from any action brought against the sublessor for sublessee’s negligence or which action would not have been brought except for sublessee’s use, occupancy and presence on the property. Likewise, a covenant should be obtained from the sublessor that the sublessee will be indemnified from any claims, causes of action or damages brought by a third party against the sublessee for sublessor’s negligence or which action would not have been brought except for sublessor’s use, occupancy and presence on the property.
Waiver of damages
Another area of concern relates to losses that arise from damage that the sublessor or sublessee may cause to equipment owned by the other. In such a situation, the sublessee should be agreeable to reimbursing the sublessor for the actual cost of replacing or repairing equipment which has been damaged as a result of the negligence of the sublessee. However, the sublessee will be very reluctant to assume any responsibility for lost revenues or other incidental and consequential damages that may have arisen from its inability to use its equipment during the time that the equipment was inoperable. It is very easy to imagine that the losses attributable to lost revenues or customer dissatisfaction could astronomically exceed the cost of repairing or replacing damaged equipment.
Todd A. Lewellen is a registered professional engineer and attorney who practices law in Little Rock, Arkansas.
