Wiring Commercial Properties
 
March 1, 1999
 

Recently, there has been an interesting shift in emphasis with regard to the provisioning of telecommunications services to tenants of commercial properties, such as office buildings, shopping centers, apartment buildings, industrial parks, and condominiums. Telecommunications service providers and commercial property owners no longer seek by legislative fiat to obtain or deny access to the tenants of commercial properties. Instead, many of those same players now engage in deal-making to create what they hope will be win-win situations for tenants, service providers, and property owners.

In the past, commercial property owners and managers typically accommodated their tenants' need for telecommunications services by giving the incumbent monopoly service provider access to the tenants; the property owner was rarely if ever involved in the choice of a tenant's telecommunications provider. Today, property owners and telecommunications service providers are forced to reevaluate their relationships and to recognize what each group brings to the other. Telecommunications service providers obviously must have access to the tenants of commercial properties, and this access is controlled by the property owners. On the other hand, property owners must be mindful of competition, because in order for their properties to remain competitive in the commercial real estate market, property owners must ensure their tenants have access to state-of-the-art, reliable, and affordable telecommunications services.

In recent months, telecommunications companies and commercial property owners and managers have announced agreements allowing access to tenants in commercial buildings across the nation. One company, WinStar Communications, has even implemented a program to offer free local phone service until the year 2000 to business customers in more than 1000 buildings nationwide if they agree to sign three-year contracts for comprehensive telecommunications service. Obviously, this offer could be made only after WinStar sought and obtained long-term access arrangements with each building owner. Whether an agreement contemplates providing telecommunications services to 1000 commercial properties or merely to a single building, both the service provider and the commercial property owner must know their legal rights and obligations, as well as their business needs, in order to negotiate agreements to protect potentially divergent interests.

Federal Regulation

The Federal Communications Commission (FCC or Commission) has established the overall regulatory framework for dealing with the issue of access to telecommunications services in commercial properties. The Commission long ago recognized the need to remove the competitive advantage enjoyed by incumbent telephone companies due to their ownership of premises wiring in buildings. To break the bottleneck, the Commission in 1983 began a series of rulemaking proceedings which ultimately detariffed the wiring installed by telephone companies on customer premises. As a result, the wiring was made available for use by the property owner. The FCC summarized and clarified its rules regarding telephone wiring in multiunit installations (office buildings, shopping centers, campuses, military installations, etc.) in its June 1997 Common Carrier Wiring Reconsideration Order (Reconsideration Order).

The Reconsideration Order clarifies the "demarcation points" in commercial properties for determining the respective rights and obligations of the telecommunications provider and the property owner. The demarcation point in any given building is the point at which ownership and maintenance responsibilities for telecommunications transmission facilities (including the wiring) passes from the service provider to the building owner. For instance, the demarcation point in a building may be a switch room in the basement, or a wire closet located on each floor of the building, or even at the individual customers' premises.

The Reconsideration Order distinguishes broadly between multiunit properties that were wired prior to August 13, 1990, and those wired after that date. In multiunit properties wired before August 13, 1990, the Commission permits a telecommunications carrier freely to choose a demarcation point, provided the decision is based on the carrier's reasonable and nondiscriminatory standard operating practices.

In multiunit properties wired after August 13, 1990, for both new properties and those buildings which undergo major additions, modifications or rearrangements of wiring, the carrier may establish a reasonable and nondiscriminatory practice of placing the demarcation point at the "minimum point of entry" into the installation (i.e., where the wiring crosses a property line or enters a multiunit building). If the carrier has not established such a practice, the building owner may determine where the demarcation point or points will be.

The property owner controls the wiring on its side of the demarcation point and may deny other parties, including tenants, access to the wiring except on their own premises. Carriers may not change the demarcation point in an existing building to the minimum point of entry without the owner's permission. If a demarcation point is relocated, carriers may not charge the building owner or the customer for their use of carrier-installed wiring that is transferred to the customer's side of the demarcation point due to the relocation. The carrier also may not remove such wiring.

The FCC has declined to go further by granting telecommunications service providers mandatory access to buildings. The Commission is understandably reluctant to raise the specter of federal interference with property rights. Instead, the FCC has decided to wait and see if market forces will provide property owners with the incentive to deal with competitive service providers. There is no indication that this approach will change.

State Regulation

With federal regulators waiting on the sidelines, some states, such as Texas and Connecticut, have implemented statutes giving telecommunications service providers some form of mandatory access to tenants in multitenant buildings or projects, coupled with just compensation for the property owners. In other states, commercial real estate interests have succeeded in defeating proposed mandatory access legislation. Still other jurisdictions, such as the District of Columbia, have taken steps toward investigating the need for mandatory access, but have made no final determinations.

Contractual Checklist

Contracts between telecommunications service providers and commercial property owners are based on an interesting amalgamation of real estate, telecommunications, and contract law. Of course, the contract must be tailored to the type of arrangement agreed to by the parties. There are, however, certain issues that should be included on any checklist for telecommunications contracts. Among these are:

• compensation
• compliance with laws and regulations
• conditions for access
• duration of the agreement
• exclusivity or non-exclusivity
• indemnification
• insurance
• interference
• ownership of wiring and telecommunications equipment
• performance guarantees
• physical security
• service interruptions
• third-party rights
• type of access rights (e.g., license or lease)

For instance, the duration of the agreement is especially important to telecommunications service providers. After incurring the time and expense of installing telecommunications facilities in and on a building, a service provider will want some assurance that it will be able to recoup its investment over time. In order to protect its interest in the building, a telecommunications service provider will almost always request a nondisturbance agreement in some form or another, and may want to record a memorandum of lease. On the other hand, a property owner will be reluctant to grant any kind of property interest, such as an easement, to the service provider. Obviously, the owner also will want to be able to terminate the agreement if the telecommunications company is not performing its obligations under the agreement.

While any contractual issue might be the subject of litigation, it is not surprising that bottom line revenue or monetary damage issues are generally the ones that make it to court. In a Pennsylvania case, a service provider successfully sued a property owner for violating an exclusivity provision in their agreement by contracting with a competing telecommunications provider. In another case, a property owner took legal action to remove a service provider that failed to provide contractually required service. Importantly, cases such as these are decided based not only on the contract and real estate laws of a particular jurisdiction, but also on applicable federal and state telecommunications laws and regulations.

The interaction of telecommunications regulations and property law will continue to shape the relationship between and among telecommunications service providers, their customers, and the commercial landlords of those customers. Each of these groups must be able to address both telecommunications and real estate issues in order to realize the benefits arising from the changing telecommunications marketplace.

Frank Peterson is Senior Counsel and David O'Connor is an Associate in the Washington, D.C. office of Holland & Knight LLP, representing both telecommunications service providers and commercial property owners and managers. They can be reached at 202-955-3000, or by e-mail at fpeterso@hklaw.com and doconnor@hklaw.com.