Mining the Roof: An article on telecommunication rooftop installations and leases

02/02/2009

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Since the passage of the Telecommunications Act of 1996, many an owner of a building has discovered gold in a very unlikely location ? the roof of his building.  A number of companies have sought to install antennae and related equipment for service for cellular telephones, pagers, internet access and television, and the owner of a well-located, relatively tall building may find a nice little addition to his income at what appears to be no expense or risk.

Unfortunately, what appears to be does not always correspond to what is.  An owner who does not take proper care in setting up his rooftop gold mine may face costs and consequences he did not contemplate.  There are several questions that should be asked at the outset and answered satisfactorily by agreement or extrinsically before operations are allowed to commence.  These may be categorized as Who? What? Where? When? and How?
 

WHO?

Most rooftop arrangements (whether in form of a lease or a license agreement ) are made with one company providing a specified service, but a fortunate owner may have a roof that can accommodate facilities for and be attractive to more than one user.  An initial decision may be whether to enter into a master agreement covering the whole roof with a company which will then make arrangements with the user companies.  While it may prove worthwhile to obtain the expertise of such a tenant or manager at the cost of a portion of the profit, there is little motivation for such a tenant or manager to be concerned about matters affecting the physical structure or financial success of the remainder of the building, which is the owner's primary concern.  The owner will probably be required to deal with any operational problems by himself.

In some recent instances, owners have been persuaded to grant permanent recorded easements for rooftop facilities in return for a lump-sum payment.  Although the payment may be attractive, the permanent nature of such an arrangement raises serious problems.  Some lenders refuse to give mortgage financing for a building subject to such an easement.  Financing difficulties, the risk of problems in the event of casualty or redevelopment, and the loss of a remedy of termination in the event of default would seem to outweigh the benefits the owner receives from the sales price of the easement.

Owners should always look into the identity and financial responsibility of the tenant.  Where the tenant is a lightly funded subsidiary or affiliate of a more substantial company, a guaranty should be sought.  The owner should have a right of approval, not unreasonably to be withheld, for any assignment or sublease.  The owner might also be able to obtain a portion of the profits of any assignment or sublet.  If possible, encumbering the leasehold should be prohibited.  If this issue becomes a deal-breaker, at the least the lender should agree to remove encumbered equipment promptly or to keep the rent current in the event of foreclosure.  The interests of tenant and the tenant's lender must be subordinate to any present or future mortgages the owner may place upon the building and the tenant must agree to provide estoppel letters on request.  In return, the tenant will ask for non-disturbance from such mortgagees; the owner should only agree to use reasonable efforts to obtain it.

The tenant will probably ask that the lease or a memorandum of lease be recorded.  In such case, the owner should insist that the lease imposes a charge against the tenant for failure to deliver a recordable discharge of the lease upon its termination.
 

WHAT?

Prior to commencement of negotiations for a rooftop installation, the owner must determine whether the proposed installation will be permitted under applicable zoning laws and under the provisions of any existing or contemplated agreements for the sale of development rights for the building.  See Sections 22-21 and 73-30 of the Zoning Resolutions of December 15, 1961 of the City of New York, as Amended.

The lease should describe in detail the original equipment on the roof and the cabling for access to any internal equipment and for obtaining power to be installed, including relevant performance specifications, particularly those regarding emissions and the use of electricity.  The tenant should furnish a satisfactory RF Electromagnetic Fields Emissions Safety Report and any other report the owner's engineer deems advisable.  The tenant should represent that it has fully investigated all relevant building conditions and that the proposed installation will not cause damage to person or property or adversely affect existing telecommunications service at the building, including tenants' television reception, internet access and cellular telephone service.

The owner should have the right to approve the tenant's contractors and to inspect the completed installation.  The tenant must obtain all required licenses and permits before commencing installation or operation as applicable and must furnish proof of appropriate insurance coverage.  The work should not jeopardize the security of the roof membrane or nullify an existing warranty of recently installed roofing.

Equipment in a communications closet or other off-roof equipment should be specifically described as should any cabling.  The use of existing shaft ways, sleeves, conduit and other means of access for the tenant's wiring should be by non-exclusive easement.
Telecommunications are constantly changing, and it is impossible to determine what equipment may become obsolete or unsatisfactory.  The forms of leases promulgated by telecommunications companies give the tenant broad rights of revision and replacement.  The lease should clearly require that any revised or replaced equipment meet the same performance standards applicable to the original installation or provide a means of determining new standards such as referring to governmental or industry guidelines.  See Sprint Spectrum L.P. v. Mills, 283 F.3d 404 (2d Cir. 2002).
 

WHERE?

Owners should put serious thought into the location of rooftop equipment.  In the absence of an express right of the owner to relocate, the tenant of a rooftop area has the right to the space demised throughout the term of its lease.  New York SMSA Limited Partnership v. 225 5th LLC, 8/2/2005 NYLJ 18 (col. 1).  Even if a right of relocation exists, it may be expensive for the owner to exercise it.  Such possibilities as a lease to other users, future need for HVAC equipment or even construction of a penthouse can be foreclosed by the owner's lack of care in determining the site.

Where the arrangement is a true license rather than a lease, the licensee is given a right to use a portion of a roof which may be determined by mutual consent or other means at or later than the signing of the license agreement.  Such an arrangement may be more liberal in allowing one or both parties rights of relocation.  An easement for cabling should be licensed and not leased since relocation should not be burdensome on either party.
 

WHEN?

In most instances, the tenant will require several months for testing, obtaining permits and installation, all before starting to receive any economic benefit and the tenant may decide to terminate if permits are denied.  The owner should try to obtain a modest interim rent during this period as compensation for not dealing with a competitor during that time.

The telecommunication companies usually insist on a long-term lease to amortize their original costs but with rights to terminate for a number of reasons or for no reason whatsoever.  Five year terms and renewals over 20-25 years are fairly typical along with a right to cancel upon withdrawal of legal authority or other causes preventing the tenant from operating its systems.

In some instances it may be important for the owner to have a right of termination during or at least at the end of one of the five-year terms.  Demolition and redevelopment or additional construction are cases where the owner needs to be able to cancel, perhaps upon payment of reasonable compensation for the tenant's unamortized costs.  The rights of the parties upon casualty or condemnation also require consideration.  Furthermore, the owner should have rights, comparable to those contained in space leases, for suspension of service for any necessary repairs.
 

HOW?

In all respects, the tenant must comply with the requirements of any governmental bodies having jurisdiction and of the insurance industry, as the same may be revised from time to time.  Should requirements change significantly, the tenant may chose to discontinue operation; the lease should be clear whether such an event gives the tenant the right to terminate.

The tenant must maintain its equipment without damage to the building with particular attention to the roof membrane.  The owner must avoid damage to the tenant's equipment.  The lease should describe the tenant's rights of access and the owner's rights to be present during such access.

Exclusivity is a significant issue in two respects:  competition and interference.  The former is self-evident; the later more complicated, as building occupants are currently utilizing telecommunications and will increasingly do so.  The modest rental from such a lease may not compensate for loss of desirability of apartments in a luxury building because television reception or cell phone or internet use is adversely affected.  In an extreme case, severe interference with such uses might be a breach of covenants of quiet enjoyment in building leases.  Standard telecommunication tenant clauses prohibiting owners from introducing services that might interfere with the tenant's service should exclude customary services obtained directly by occupants of comparable buildings.  

Interference of another kind should be considered.  Do building occupants have a right to use the roof in a manner that might interfere with the tenant's operations?  Many penthouse occupants have such rights.  Cooperative or condominium offering plans may afford such rights to others.  The tenant's installation should never impede a secondary egress route for occupants in case of fire.

Frequently the presence of telecommunications equipment, or the income stream derived from it, is considered by the taxing authority in assessing real estate taxes.  Any increase attributable to such equipment should be borne by the tenant.  If the amount of that increase is disputed, a simple resolution process should be followed as the amount in controversy should be minor.

Upon the termination of the lease for any reason, the tenant must promptly remove its equipment, including "abandoned" cabling as required under the 2002 National Electric Code, and restore any damage to the roof and other areas of the building.  If the tenant has encumbered its leasehold, the lienor must agree to remove equipment promptly or permit the owner to do so.

The danger in establishing a rooftop gold mine is that the modest return promised suggests to owners that little attention is required of them.  Accordingly, they accept the tenants' printed form leases and do not investigate the relevant circumstances.  To avoid the collapse of your rooftop mine, take the time to ask the five questions above and make sure they are satisfactorily answered before you start digging.

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* An abbreviated version of this article appeared in the January/February 2009 issue of Real Estate New York published by Incisive Media US Properties LLC.

(1) Owners prefer the operative agreement to be a license; their counterparties prefer a lease, since an owners' recovery of possession in the case of a default is more difficult.  Where the governing agreement gives the telecommunications company exclusive possession of a specified portion of the roof (or a communications closet), a court may find the agreement to be a lease even though the parties designate it a license.  Nextel of New York, Inc. v. Time Management Corporation, 297 A.D.2d 282, 746 N.Y.S.2d 169 (2002).  For simplicity, the term "lease" in this article includes licenses as well.