Towercos’ perspectives on best practices when drafting MLAs

One of the roundtables at the TowerXchange Meetup Americas 2016 focused on Master Lease Agreements (MLAs) best practices and was run by Josh Koenig, VP and Associate General Counsel at SBA Communications. The MLA is the critical document defining the relationship between towerco and tenant - a good MLA can make a towerco more investible, a bad MLA can destroy value. TowerXchange reports on key findings from the session.

The threat of RANsharing was one of the first issues the group discussed, especially since the entire CALA region is witnessing a growing number of negotiations among carriers and requests to local regulators to approve sharing agreements.

While the decision on whether to allow or not a RANsharing agreement is up to the regulator, it is important to capture certain provisions at a contractual level in order to protect the towerco from the consequences of RANsharing. Contractualising RANsharing is a complicated operation which in certain instances could even get overruled by the regulator.

Some regulators such as Bolivian SITTEL forbid RANsharing since the license to operate is assigned to a given carrier on the basis of the expected performance of its own network. So in the case of RANsharing, it would be harder to actually point fingers against one carrier or the other in the event of bad connectivity, dropped calls et cetera.

The current law on roaming in Chile allows carriers to “get the best of each network” and pick up the signal from another network if necessary. This rule is particularly important in places like Chile where the high incidence of natural calamities requires strong networks and more cooperative actions. In reality, this provision has barely been used by operators but is referenced in most MLAs.

One of the issues faced by towercos is the fact that operators are innovating technologies and business models and while this becomes more sophisticated, towercos need to try and forecast the future which - as such - remains unknown. While there is a degree of effectiveness in simply forbidding sharing agreements in the terms of the tenancy, it’s critical that RANsharing (which comes in many forms and is constantly evolving) is clearly defined, especially since tracking new equipment on towers is often very complicated. While towercos struggle to monitor RANsharing, certain countries, such as Brazil, require the registration of sharing agreements which, if completed, will facilitate the task of finding out who is sharing what and who is adding equipment on a given tower.

The roundtable agreed that MLAs should define what is RANsharing and what types of other sharing agreements - such as sub-leasing - are permitted. In the event of sub-leasing agreements, it’s important to agree on payment terms so that if the first tenant stops paying, the towerco can enforce an eviction against the secondary tenant with whom it doesn’t have a formal contract. At the end of the day, tenants on towers are similar to those renting a house - proof of credit worthiness is required!

In light of the requests often brought forward by operators for RANsharing and sub-leases, it’s key that the industry comes together in order to determine what is and what isn’t acceptable.

The potential upside of RANsharing is that if and when a towerco decides to charge extra to operators who are sharing, this represents a financial gain without the actual extra load on the structure. So while still allowing to add new equipment from additional tenants, it’s a way to increase revenue with minimal effort.

What can towercos do in the event of the regulator revoking an operator’s license or, perhaps more pertinently in Brazil now, if an operator goes bankrupt and ceases trading? Towercos may find themselves forced to cancel the contract, which should therefore include protection clauses in each MLA to determine termination fees.

The group stressed that an operator ceasing all activities in a market should not be confused with the inclusion in the MLA of termination rights for specific sites. Operators should have the rights to terminate their contracts on specific sites under set conditions which should be incorporated in the Site Lease Agreement, a standalone agreement setting rules for each given tower. By exercising their rights via a Site Lease Agreement, the operator doesn’t affect the other leases it might have in place with the towerco. However, while the group recognised the validity of leases for individual sites, it also acknowledged that these often can create conflicts with the actual MLA.

While MLA provisions are often incorporated into SLAs, in case of discrepancies, the MLA should prevail. But then again, in the event of specific provisions to that SLA, that would possibly take precedence over the MLA… The law is often about interpretation. So while towercos and operators can set clear rules from day zero, the actual implementation of those rules can create conflicts and still generate confusion.

In the case of termination without a cause or another event that leads to a default, is either party entitled to seek consequential damages?

According to MLAs, damages are often limited to direct damages but in the CALA region, there’s also a differentiation between foreseen and unforeseen damages. In reality, it’s common practice to limit this to foreseen direct damages, especially since the definition and quantification of unforeseen and indirect damages could require years of judiciary battles! However, in certain countries there have been cases of requests for consequential (loss of profit) or moral damages.

One example is represented by Bolivia where the regulator (SITTEL) has a very strict approach when it comes to penalising operators for any kind of downtime or outages. Operators are requested to warn in advance in the event of a scheduled maintenance or report any kind of outage or downtime as soon as possible to avoid being fined by SITTEL.

Operators and towercos would need to work on their MLAs and ensure they negotiate clear terms to offset the financial consequences of technical issues on a tower. The damage in this case is consequential but is also identifiable and parties should define responsibilities at a contractual level. While the group agreed that MLAs should include a limit to the damages, caps shouldn’t apply in the case of gross negligence or misconduct by any of the two parties.

The assignment of towers is a crucial component of the towerco business model. And while towercos should notify and sometimes even get the consent of carriers to transfer a given site, obtaining their consent isn’t always easy and depends heavily on the individual relationship with each tenant. As a result we have seen instances where this results in towercos notifying tenants after the fact.

The group touched upon the issue of “locking period clauses” which would tie an operator to the towerco for a set period of time. But while towercos should always be chosen on the basis on their capabilities, the quality of their sites and overall track record, the reality of things - especially during tough times - is that operators would hardly feel comfortable being locked into contracts without exit clauses. This is particularly true in countries like Brazil where consolidation among towercos is likely to happen in the future and operators will often find their leases being transferred from one entity to the other and may wish to safeguard the right, under certain terms, to stay or leave.

Speaking about consolidation, the other side of the coin refers to when two operators merge and become one entity (or get acquired by a third one like in the case of Iusacell and Nextel in Mexico). At the end of the day, the towerco will end up losing a tenant and tutelary provisions such as minimum guaranteed terms should be incorporated in MLAs to mitigate this risk.

A relatively new trend towercos are dealing with relates to requests from hi-tech companies to put small antennae or fibre on towers for technologies such as the Internet of Things (IoT). These companies hardly occupy any space on the ground (typically zero to less than 1sq. mt.) and often cannot afford to pay the same rent as mobile network operators.

So how can towercos open up to this new revenue stream while redefining their lease rates (and not upsetting their existing tenants)?

Whereas typically an additional MNO tenancy on a tower results in a split of pass through ground rental costs, these IoT tenants are often too small to afford an equal share of the rent. This may consequently require the renegotiation of the MLA with the anchor tenant, seeking to allow the IoT to pay a percentage of ground rent proportionate to the amount of space used. These pro rata agreements can be complicated by the fact that the IoT tenant may use a fraction of the space of a full MNO tenant, they nonetheless represent a similar burden of access cost, security risk et cetera. Such negotiations can be further complicated if the MNO tenant has their own ambition to provide IoT services.

Participants concluded that ideally an MLA should define ground rent as to be shared only among MNOs, or should specify that a share of ground rent should apply only to tenants occupying in excess of one square meter on the ground.

The group touched upon a crucial issues related to the responsibility for theft or vandalism on sites. While this often results in tough negotiations among stakeholders, MLAs should incorporate a responsibility matrix setting clear rules applicable in the case of theft and other illicit acts.

The owner of the infrastructure - the towerco - has a duty to protect the site with fences, locks, lights et cetera, and to mitigate risk through insurance. However in the case of equipment, the risk should be shared between the carrier and the towerco. In fact, while in countries like Peru carriers have gone as far as terminating their contracts after a number of thefts, towercos and operators should negotiate in good faith, share the security costs, appreciating that this problem affects both of them.

While the roundtable discussion did cover key issues to be taken into consideration at a legal level, one “soft” aspect has barely been raised and should deserve more attention… No matter how refined and sophisticated an MLA can be, the relationship between a towerco and an operator needs to be built on the premises of a solid cooperation and partnership with the common goal of succeeding in each individual business objective.

Whether the issue at stake relates to theft or to the terms for the addition of a new tenant on the tower, towercos and MNOs should keep in mind that both the telecom and tower industries are constantly reshaping themselves and require quite a degree of fluidity to function.