WANTED: A Good Telecom Access Agreement (Now More Than Ever)
 
October 30, 2003
 
James M. "Jim" Norman- Ft Lauderdale

The emergence of robust competition for telecommunications and Internet services has presented exciting new opportunities for owners and managers of commercial office buildings, apartments, hotels and other real estate assets. To deploy their technologies, and to tap the burgeoning demand for fiber, cable and wireless services, telecom providers must gain access to high-density buildings and to the tenants of such buildings.

Telecom providers normally require entry to or use of space on the roof, in the basement or through the risers to install equipment and cable, and concerns about access and security have never been higher.  Many building owners and managers learned some very hard and expensive lessons when the broadband and fixed-wireless industries went into a tailspin. Issues related to insurance, ownership of equipment in the event of bankruptcy, and liability for mechanics’ liens took time, energy and money to resolve. Consequently, not only is it crucial for a building owner to have a written telecommunications agreement in place prior to granting a telecom provider access to its building, it is more important than ever to have legal counsel review and participate in the development of such telecommunications-related documents. 

In the past, building owners used leases to formalize the contractual relationships with telecom providers, if they documented such relationships at all.  There is considerable discussion occurring within the commercial real estate community regarding the subject of telecommunications leases vs. telecommunications licenses.  With the exception of large antenna tower leases, landlords typically prefer to call the agreement that permits installation of a rooftop antenna or communications closet, or the wiring of a smart building, a license agreement rather than a lease.

Generally, a license agreement vests fewer rights in the licensee than a lease vests in the tenant. It is faster and easier for the building owner to terminate a license agreement, and remove the occupant from the property. Although general legal differences do exist, if ever litigated, telecommunications license agreements may be found to fail many, if not all, of the tests that typically differentiate a true license agreement from a lease.  Consequently, notwithstanding the psychological comfort building owners may receive from designating the document a license agreement, a telecommunications license may nevertheless be construed as a lease for real estate purposes.

On the other hand, a court might just as likely find that the parties knowingly entered into a license rather than a lease.  As courts are generally not in the business of remaking contractual obligations that parties entered into freely and in good faith, a telecommunications agreement may be construed as a license because that is what the parties had originally intended. 

This issue is one that deserves much consideration since conclusions will likely be guided by the particular facts of each case.

Another current issue relates to the abandonment of infrastructure equipment, which is quickly becoming a common occurrence due to the realignment of the telecommunications industry.   Before entering into a telecommunications agreement with a telecom provider, business owners should consider who has rights to the telecom provider’s equipment in the event the telecom provider abandons its equipment in the building.

In the wake of recent telecommunication provider bankruptcies, building owners have found themselves in two noteworthy situations. The first occurred where the building owner entered into a telecom agreement with a telecom provider who had since filed for bankruptcy and/or abandoned its equipment in the building; and the second occurred where the building owner entered into a telecommunications agreement with a telecom provider who, in turn, entered into a sublicensing agreement with other telecom providers – and either the primary telecom provider, or the sublicensee, or both filed for bankruptcy and/or abandoned equipment in the building. 

In the event a telecom provider files bankruptcy, the first thing a building owner must do is determine whether the equipment has indeed been abandoned.   The legal authority that permits a debtor to abandon property is contained in Section 554 of the Bankruptcy Code. This section permits a debtor to abandon property that is burdensome or of inconsequential value to the bankrupt estate. The basis for such an assertion might be that the cost of removing each piece of equipment outweighs the salvage value the company could obtain from selling the equipment in the open market, i.e., the equipment has a negative salvage value.

However, abandoned property is not free for the taking. While abandoned equipment is no longer considered part of a bankrupt estate, legal title normally reverts to the debtor as if no bankruptcy case had ever arisen. In addition, even a bankruptcy court’s order that approves the abandonment of property does not legally transfer the property to a third party. In such case, title to the property is determined as though the bankruptcy petition had never been filed. The building owner may need to take specific steps under state law to take possession of and title to the abandoned property.  Furthermore, some building owners have attempted to improve their situation by using a license agreement that provides for the transfer of title to the property.  The license agreement can provide that the license agreement operates as a bill of sale. 

In the event a telecom provider abandons its property under circumstances unrelated to bankruptcy, a variety of issues can arise.  When evaluating who has rights to the property, the first question to consider is whether the property is classified as a fixture or personal property.  The terms “real property,” “real estate” and “fixtures” refer to things that are permanent, fixed and immovable; such as land, whatever is erected or affixed to the land, and the rights arising out of or annexed to, or exercisable within or about, the land.   Generally, these terms have been characterized as referring to property that is local or immovable.   The terms “personal property,” “personal estate” and “chattel” have a distinct technical meaning relating to the nature of the property itself.   Included are things that are subject to ownership and which have an exchangeable value, but do not come under the category of real estate.  These terms have been characterized as referring to property that is personal or movable.

 Determining whether property is classified as a fixture or personal property can vary greatly between jurisdictions.  Some courts, for example those located in the Commonwealth of Virginia, use the following criteria:

• The degree of permanency with which the chattels are annexed to the realty
• The adaptation of the chattels to the use and purpose to which the realty is devoted
• The intention of the owner of the chattels of make them a permanent accession to real property 

Courts in certain jurisdictions have held that even property which traditionally is categorized as “real property” may be deemed “personal property” if there is an understanding between the parties that the property is to be removed, or that the property is intended to be considered personal property.  Legal counsel can help navigate this complicated area of the law and ensure that the building owner’s rights are thoroughly protected. 

New issues continue to arise in the wake of the recent problems facing the telecom industry.  The lack of venture capital funding, and the need for building owners to interact with the telecom providers’ lenders and other financing parties has created a new set of factors for building owners to consider. Because telecom providers typically do not own their property outright, competing claims may arise in connection with the rights to the telecom provider’s equipment. 

Recently, lenders have requested that building owners enter into a separate document with them called a “comfort letter.”  This comfort letter requires the building owner to provide the lender with notice in the event that the telecom provider defaults under its telecommunications agreement – to the extent such agreement or the telecom provider’s equipment secures the telecom provider’s debt to the lender.  Separately, a default under a telecom provider’s loan with its lender can thrust a building owner into a debate with the lender over continuity of service.  Further, in certain cases, the telecom provider’s loan may grant the lender the right to enter the building owner’s property to remove the telecom provider’s equipment.  Wise building owners will refuse to execute both the telecom agreement and the comfort letter without first obtaining an indemnity, which includes insurance, from the lender in the event that the lender causes damage to the building in the process of removing the telecom provider’s equipment. 

Besides lender-related concerns, recent amendments to the National Electrical Code requiring the removal of abandoned cables will add yet another issue to be addressed in a well crafted telecommunications access agreement.

For more information, e-mail Jim Norman at jim.norman@hklaw.com or call toll free, 1-888-688-8500.