How to perfect imperfections in leases to maximise the value of tower assets

Experienced tower transaction advisors Norton Rose Fulbright review the key issues affecting the transferability of leases from MNOs to towercos, and explain how to overcome common challenges, such as proving title, protecting against ground lease aggregation, and overcoming any restrictions on foreign companies owning land.

TowerXchange: Please introduce Norton Rose Fulbright and your experience in advising on emerging market tower transactions.

Norton Rose Fulbright is one of the first legal practices to observe the trend for the transfer of tower assets from MNOs to towercos in emerging markets, leveraging excellent relationships with the operators and bank contacts to secure many of the early mandates in African towers. More often (although not exclusively) found advising operators selling towers and lenders to towercos, members of the Norton Rose Fulbright team have advised on tower transactions  involving Eaton, Helios Towers Africa, Helios Towers Nigeria and IHS across Africa and advised Tower Bersama on a transaction in Indonesia. They have also advised ABSA on the financing of Cell C for their landmark acquisition deal with American Tower, advised Vodacom Tanzania on their deal with Helios Towers Africa, and advised Etisalat on their recent deal with IHS in Nigeria.

Having recently gained offices in Colombia and Venezuela, as well as opening in Rio, the firm stands ready to advise on tower transactions in South America. Key contacts for towers include Oliver Stacey and Andrew Savage for acquisitions and disposals and Daniel Metcalfe for finance.

TowerXchange: What do MNOs need from leases, how does that differ from what towercos need, and how much should MNOs do to get leases ready to be transferred to a towerco, thus maximising the value of those assets?

As long as an MNO is operating effectively from a site and it has unfettered access for maintenance of its active and passive infrastructure then it generally has few reasons (at least on a day to day basis) to consider the efficacy of its leases. For instance, if a ground lease restricts co-locations then this is often not a cause of particular concern for an MNO because any co-locations are generally non-core to its operations and, in practice, some co-locators may well have been on a  tower for a number of years without  the ground lessor having raised any complaint.

This contrasts with the requirements of a towerco where the leases are a central component of their business, albeit again if the towerco can operate the tower effectively and have unfettered access to do so then on a day to day basis the lease terms will be of little concern so in this sense the needs are to a large degree aligned.  Both an MNO and a towerco will be concerned to ensure they do in fact have a valid lease (so as to ensure ability to operate and access) and with a continuing term, and will seek to renew as expiry of the term approaches. A towerco will in particular require that a ground lease has a certain term or require that the lease is renewed prior to a site being transferred from the MNO to the towerco. If a ground lease contains a restriction on the ability to co-locate then this will obviously be a fundamental issue for the towerco and in these circumstances the lease would ordinarily be amended to remove this restriction before the site can be transferred. If the parties need to obtain the ground lessor’s consent to transfer a site then they may also take this opportunity to include an express right to co-locate in the revised ground lease if this is restricted. A towerco will also want to ensure that there is no restriction on granting security over its rights in relation to the leases so as to pre-empt any lending requirements; this will be of less concern to an MNO whose lenders are unlikely to require this level of real property security.

Ideally, the portfolio of sites which an MNO is seeking to dispose of would have long leases which did not require the landlord’s consent for a transfer of (or security in relation to) the ground lease and which do not restrict co-locations. As such, if an MNO is considering a tower sale and leaseback in the coming years then it should consider ensuring that when leases are renewed they are renewed on terms that would be acceptable to towercos such that as many sites as possible can be transferred over to the towercos at the first closing of the transaction.  One practical step that an MNO can take prior to commencing a sale and leaseback transaction is to have a full site list which shows, amongst other things, the number of years left on a ground lease, whether the landlord’s consent to transfer or encumber is required and whether it restricts co-locations.

TowerXchange: Tell us about the nature of the leaseholds – how are cell site landlords typically paid and what consents might be required of them?

The leases are often long leasehold interests (for instance fifteen years) with the MNOs often having paid five years rent in advance with the remaining rent being payable at years five and ten of the lease. As such, any advance rental payments need to be taken into account in the sale and purchase agreement. The ground lessor’s consent is often required for the transfer of the lease from the MNO to the towerco and, as stated above, there may also need to be amendments to the lease to deal with any restrictions on co-locations.  It may be that the interests in land are not always leasehold – they may be a simple licence arrangement (or other equivalent interests by reference to the nature of the legal system involved).

TowerXchange: What’s the difference between a lease and a license? Why is consent important?

In broad terms, a lease is the grant of a right to exclusive possession of land (i.e. it can exercise the rights of the landowner and exclude both the landlord and third parties from the land) for a determinable period of time. It is also both a contractual relationship and an estate in land and therefore capable of existing independently of contract.

A licence is simply permission for a licensee to do something on a licensor’s property – in the case of a towerco to access, build, operate and maintain the tower and ancillary assets such as generators. The permission given to the licensee prevents the permitted act from being a trespass but does not grant them a right of exclusive possession.

In some African jurisdictions lease agreements are termed licence agreements in order to comply with local law requirements (or if this would avoid the need for timely and expensive registration procedures) although these should include the main characteristics of a lease (despite being termed a licence). Similarly, certain jurisdictions will not have the concept of a lease (or licence) as such but the law prescribes an equivalent interest.

Often the lease itself will expressly state that the ground lessor’s consent is required to transfer the lease from the MNO to the towerco (or for the towerco to grant security over its rights in the lease) or the consent will be required as a matter of law. As such, in these circumstances, a tower cannot be transferred or encumbered without the ground lessor providing its consent and as such it is essential (at least in relation to transfers, but preferable also for encumbrances in order to pre-empt any lender requirements) that this is obtained for each tower that forms part of the portfolio to be sold.

TowerXchange: How does one prove title in emerging market contexts?

This is often a jurisdiction specific question and something that towercos will be focused on in their due diligence exercises of the relevant tower portfolio. Although in some jurisdictions there may be a Land Registry this does not necessarily mean that all titles (or even any significant number of titles) are registered (and if they are then the Registry is not necessarily determinative of registration due to delays in updating for example) and there are further complications if certain local consents need to be obtained (such as governor’s consent) or other requirements satisfied (such as stamping requirements) before title can be registered.

Proving title is therefore often interpretative and a purchaser will need to try and deduce title (including the ground lessor’s title) by reviewing disclosed documentation including any applicable freehold documentation, leases and any assignments of the leases. In certain circumstances affidavits from the freeholders and leaseholders may also be used if other forms of suitable title documentation are not available. We would note that across Africa freehold land is typically now the preserve of the State/government (certain historical interests may exist) and as such leasehold (or equivalent) is the most senior category of interest in real property that can be obtained.

TowerXchange: Is a leasehold enough to protect against the threat of ground lease aggregators, or should freeholds be secured under high value sites?

Professional aggregators are a growing problem for towercos. If ground leases are acquired by professional ground lease aggregators then negotiations over any ground lessor consents and/or ground lease amendments that are required as part of the transaction may become more protracted and difficult (and more expensive) to obtain.  Although these problems do not exist when the MNO owns the freehold title to the sites that it wishes to transfer and an MNO may consider attempting to secure the freehold interest for certain critical sites (if this is possible, and it may not due to state control over freehold titles) it is unlikely to wish to do these on any great scale because of the significant capital investment that this would entail and as such it will consider the value and importance of any particular site (and the availability of any alternative land) as part of this analysis.

TowerXchange: What can be done if foreign companies are not permitted to own land in a given tower market?

It is sometimes the case that the relevant local law prohibits freehold interests being owned by owned by foreign individuals or companies but the prohibition may not extend to leasehold interests which can be helpful in the context of the number of leasehold interests in a typical tower portfolio.

In some jurisdictions (and typically this is the case across Africa) there are more extensive prohibitions on foreign ownership, extending to leasehold and other interests, and if this is the case then the parties can take appropriate local law advice in an attempt to structure around the prohibition, although often there is no restriction on indirect foreign ownership so a local company can be established (as it would ordinarily in any event for licensing and operational purposes) with foreign ownership above. However, this depends on the relevant restriction as the applicable law may be deliberately broadly drafted to prevent any interest in land being directly or indirectly owned by foreign companies.