‘The Evolution of Telecom Lease Agreements’

23 June 2015

Eddie Joyce

Advances in the telecommunications industry have seen significant changes over the past twenty years. It has become the norm to carry out day- to- day functions while on the move, such as shopping, banking and communicating by email and social media. The use of mobile technology in this way was unheard of twenty years ago.

In some respects the manner in which telecommunication services are provided has not changed all that much over this time. Mobile technology still relies on a network of telecommunication base station sites to provide service. However, what has changed significantly is the technology used to provide service.

As a property owner with a telecommunication base station site located on your property, has your lease evolved over the past twenty years to reflect changes in the market? In order to answer this question weI will analyse a number of terms found in a standard telecommunications lease:

Lease Term

Twenty years ago a five- year term was pretty standard for a telecoms lease. At the end of an initial five- year term the mobile operator usually had the right to extend the lease for a further period of five years. Each extension is known as a lease renewal. Recently, longer- term leases have become more prevalent with many operators seeking an initial ten- year term and rights to renew the lease for one or two further periods of ten years each. So why is this a significant change?

Under the original lease, in order for the mobile operator to renew the contract a rent review would be carried out as part of the renewal. Throughout the early to mid-2000s’ each rent review typically resulted in increases of 20% to 30% in the annual rent. In many cases, the lease provided for an automatic increase without any negotiation even being required by the property owner.

With ten year contracts becoming more common, it removes a property owner’s ability to renegotiate rents every five years. For a property owner who is locked into a longer- term lease of ten or twenty years without the ability to review the rent, this in itself results in a devaluation of the rental income over time, as it fails to track inflation. For a property owner this is not a desirable position. Further, and as discussed in greater detail below, the property owner does not get any added security with regards to receiving more rental payments with a ten- year term versus the older five- year terms as the mobile operator typically retains termination rights throughout the ten- year term that can be exercised with relatively short notice period to the property owner.

Payment Terms

Under telecom leases, rent has generally been paid annually in advance by the mobile operators. Over the past number of years most leases have switched to quarterly payments in advance and in the past six months or so, to quarterly in arrears.

By switching from annual payments in advance to quarterly payments in arrears, a property owner has to wait up to 15 months longer to receive their rent. In times of high inflation and when considering the time value of money, this amendment of the payment term is in itself a devaluation of the lease. That said, there are not many commercial leases in any area of business which provide for annual payments in advance, so this could be considered a correction of a payment system that was off sync with commercial norms, but is it an over correction? Further, payment in arrears places the onus on the property owner to chase the tenant for payment after the tenant has already received the use of the land instead of giving the property owner the leverage to remove tenant’s use if payment is not timely received in advance.

Rent Review Provisions

A rent review clause sets out the basis on which the rent is to be reviewed periodically. Historically there were three main types of review. The most common was based on rent tracking inflation through the Consumer Price Index. The second form of review was based on an automatic set percentage increase, often 15% to 25%. The third type of review was based on Open Market Value, which required negotiation between the landowner and mobile operator to determine a fair rent at each review.

With each of the three review clauses as outlined above, a property owner was mostly guaranteed a minimum increase of 15% every five years and in some cases up to 30%. More recently, in part due to lower market inflation or even deflation, the basis for carrying out reviews has changed significantly.

In many leases nowadays, the mobile operator will have the right to renew the lease ‘on the same terms and conditions’. This effectively permits the mobile operator to renew the lease without making any upward adjustment to the rent. The other form of review clause used nowadays is where the rent is ‘subject to agreement between the parties acting reasonably’. Quite often this clause has resulted in the rent being reviewed downwards, so the mobile operator actually pays less rent for the renewal term than would have been paid prior to the rent review.

In essence, property owners have effectively gone from a situation where increases of between 15% and 30% every 5 years was the norm, to a position where their rents are remaining static or in some cases decreasing at review. This is one of the most significant changes to telecom leases in the past five years as it gives a mobile operator greater certainty in terms of operating costs.

Co-location / Sharing Rights

Traditionally telecom leases have always allowed the mobile operators to share their infrastructure with other mobile operators. A standard clause allowed the mobile operator to effectively sublet space on a telecoms tower to any other mobile operator. Where subletting happened, a property owner would normally have received through the lease terms a rental increase of about 30% to 50% for each additional operator.

The manner in which site sharing happens between mobile operators has changed significantly, especially since mid-2011. Instead of the incoming operator (the sharer) installing their own set of antennae they can now utilise the existing operators antennae, meaning little or no extra equipment is required to be installed on the site.

This ability to share equipment and not just a demised area, means site sharing amongst mobile operators is now also viable on rooftop sites. Leases have changed to reflect this new system of sharing, with mobile operators acquiring rights to allow additional operators share their demised area and equipment for no extra charge, or in some cases for nominal fees of €500 to €2,500 per additional operator.

For a property owner, it has become far less lucrative when additional telecom tenants locate on his/her property. Even more importantly for the property owner of a telecom mast site with multiple tenants, this change can have far reaching consequences. Take an example where a property owner has two mobile operators on their property, both of whom pay rent under their own individual lease. That property owner now runs the risk that one of the existing telecom tenants will terminate their lease and instead share the remaining operator’s equipment. As a consequence, the property owner will lose one of his/her rental income streams while both operators continue to maintain coverage from the site. It is important that property owners are conscious of these terms when agreeing to leases with mobile operators to best protect their interests or work with a third party who can better manage these contractual arrangements.

Lease Termination Rights

Telecom leases have always had a termination clause, which allowed either the mobile operator or the property owner (to a lesser extent) to terminate the lease. Usually a certain minimum period of written notice was required, with 12 months’ notice being common. If a lease was terminated for whatever reason, there was no requirement for a property owner to refund any of the rent which he/she may have received in advance.

Over the past 5 years the termination notice period has reduced considerably, with 30 or 90 days’ notice now being most common. More importantly, only the mobile operator is usually allowed to serve termination nowadays. Furthermore, where a lease is terminated the property owner is required to refund back to the mobile operator, any pro-rata rent which he/she may have received in advance but which relates to the period after the termination date.

The mobile operators’ now have far greater security as only they can issue termination. At the same time it also gives them greater flexibility to terminate their lease at short notice, without suffering any loss of rent which they may have paid in advance. As can be clearly seen, this expanded termination right ties in directly with the mobile operators’ desire for “longer term” leases discussed above with less frequent rent reviews as they essentially are able to delay the rent review for the property owner while maintaining the flexibility to still cancel their obligations with a short period notice to terminate the lease. At a time when mobile networks are constantly being reassessed and consolidated, this security and flexibility is of major benefit to mobile operators.

Additional Equipment Rights

Historically, telecom leases would allow a mobile operator to install a limited amount of equipment on any given site, be it a mast or a rooftop. If the need arose for additional equipment such as more antennae, the property owner would receive an increase in their annual rental payment, the amount to be negotiated at that time.

More recently, telecom leases allow mobile operators install additional equipment without incurring any additional fees. This applies to mast sites as well as rooftops and is not ideal for property owners.

Demised Area Definition

Virtually all telecom leases have a drawing appended which sets out the demised area being leased. In conjunction with recent changes regarding rights for installing extra equipment and sharing equipment (both of which are discussed above) the definition of demised area has also changed.

Many mobile operators now seek a demised area within which to install their equipment, but with the right to amend or extend that demise as necessary. The right to extending a demised area is generally reserved for the purpose of facilitating another mobile operator on site. Based on the new wording of the standard clause now commonly proposed by mobile operators, it is intended that an extension of the demised area will not require any additional payment of rent to the property owner and can be done unilaterally by the mobile operator when desired.
Having analysed the changing nature of modern telecom leases it is evident that developments in the market are reflected in telecom leases. Mobile operators appear to be looking for three things:

  1. The reduction and greater control of operating costs through minimising outgoings in rental payments, supported by infrastructure sharing and thus collectively reducing operational costs (OPEX) for all mobile operators.
  2. Greater security of tenure to ensure key telecom sites can be retained for the future and where necessary, to expand the use of any given site at no additional cost.
  3. Greater flexibility to allow telecom networks evolve and redevelop over time. This includes the ability to remove redundant sites from the network in a cost and time effective manner.

We I have no doubt the telecoms industry will continue to evolve and improve for many years to come, so what exactly the future holds for mobile operators, property owners and telecoms leases remains to be seen. The only things that appears to be certain, that changes are inevitable and if you are not staying abreast of such changes, you are likely to agree to new terms to your detriment.

‘The Evolution of Telecom Lease Agreements’ was last updated February 1st, 2016 by APWireless IE
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