How to structure MLAs and SLAs to effectively avoid future disputes

Vinson & Elkins are one of the most experienced law firms in the tower industry, having advised clients on some of the most complex cases in more than twelve African countries and a number of jurisdictions in the Middle East and Southeast Asia.  TowerXchange speak to Vinson & Elkins team to obtain their expert advice on structuring transactions and designing MLAs and SLAs that avoid the creation of frictions and disputes over the course of the long-term agreement.

TowerXchange: Please can you introduce Vinson & Elkins’ expertise in the tower industry.  What have you advised on and with what types of clients have you worked with?  

Vinson & Elkins has extensive experience in the tower sector, advising clients across the globe on both transactional and dispute work.

Our clients include public and private companies (from startups to well-established), mobile network operators, tower companies and investors.  We help them with tower acquisitions, co-location, master lease, build-to-suit, management services and marketing arrangements and all aspects of their businesses all over the world.

The matters we advise on include acquisitions and disposals of tower portfolios (often by way of sale and leaseback transaction), equity investments into tower businesses, debt financings, set up and day-to-day running of commercial and operational contracts and the resolution of disputes.  We have advised on some of the most complex and high value tower-related transactions and cases in high growth markets to date – including in more than twelve African countries and a number of jurisdictions in the Middle East and Southeast Asia.

We understand the regulatory, political and commercial issues that arise and the legal issues facing our international clients doing business in this sector and in these regions.

TowerXchange: We’ve have seen examples of tower transactions where an operator has been unhappy with the long term contract that has been put in place following a deal. When designing a Master Lease Agreement (MLA), what terms do both parties need to be particularly careful of that can have a negative impact on the attractiveness of a contract in the long run?

The lengthy duration of the MLA makes it particularly important for the parties to resolve any natural tensions between them at the outset to everybody’s satisfaction.

For perhaps 10-20 years or more, the MLA will define the operator’s rights and the towerco’s obligations in terms of space and capacity on the towers. The operator will look to ensure sufficient flexibility to deploy and maintain its equipment and provide the best possible service to its customers. The towerco will be focussed on maintaining sufficient control to maximise co-location opportunities and sufficient independence to attract other tenants.  If these needs are not suitably balanced in the MLA, both parties could encounter difficulties and seek to renegotiate the terms of the MLA.

One good example is renewal of ground leases.  Even a tower with perfect uptime is of limited value to an operator if the ground lease for the land or rooftop on which the tower sits is easily terminated.  The operator will therefore want to ensure at the outset that the towerco commits to full compliance with ground leases, prompt rectification of any breaches and timely renewals of expiring ground lease agreements.  If it is too easy for a towerco to terminate a ground lease and substitute the tower for another location, the operator will not have adequately protected its most valuable asset. Conversely, towercos will want to be mindful that they have autonomy on the management of their ground lease portfolios, are not subject to undue interference from their anchor tenants (which could undermine their independence) and maintain the ability to move tenants from troublesome sites in exceptional circumstances. Balancing these rights and obligations from day one is important for the MLA to remain attractive to both parties throughout its long lifetime.

TowerXchange: RAN sharing is becoming an increasingly hot topic globally but can have a significant impact on towerco revenues. How should potential RAN sharing agreements that could arise be treated in designing MLAs?

The days when a towerco would seek to prohibit RAN sharing in an MLA are numbered (if not over).  The status of the law and regulation around RAN sharing does vary tremendously by geography;  to take the extremes, in some markets it is mandated and in others it is not yet legally permitted.  There is, however, a likelihood that RAN sharing will be implemented more extensively in a significant number of markets in the short to medium term and it is therefore important to provide as much certainty as possible as to how these arrangements will work at the outset of the MLA (which should help to mitigate uncertainty and disagreement down the line).

While there are no hard and fast rules on how to treat RAN sharing in the MLA and establishing how to compensate the towerco for loss of revenue or opportunity is complex and deal specific, emerging trends include use of a fee-based model (perhaps with fees agreed at the outset or alternatively linked to the market at the time of the sharing).  Parties can consider increasing the fees beyond predetermined limits, e.g. if instances of RAN sharing or quantity of equipment shared are exceeded.  Distinctions can be made between sharers which are already tenants on the tower and other third parties.

The parties should also consider whether and how the requirements should change if RAN sharing becomes mandated by law or by the regulator.

TowerXchange: There is an appetite amongst tier 2 operators in sub-Saharan Africa to divest assets but their lower credit rating and thus suitability as an anchor tenant have made the deals less attractive to towercos. How can towercos best protect themselves against future financial challenges in both tower transactions and co-location agreements with such parties?

Towercos in a tower transaction might consider staging payment of the purchase price for such towers over time, perhaps allowing for set off of outstanding consideration against liabilities of the tenant which may arise, e.g. unpaid rent.  In sale and leaseback transactions, the consideration paid for the towers normally correlates with the lease rate agreed between the parties (i.e. the higher the consideration, the higher the lease rate).  So a deal could be negotiated where there is a low purchase price but also a low lease rate.  The operator would still free itself of liabilities associated with the day-to-day running of the sites and would benefit from a low lease rate.  The towerco would acquire the towers cheaply and would have a more manageable credit risk from the anchor tenant.

Another possibility, which could also apply to co-location agreements as well as tower transactions, would be to have the operator’s parent company provide a guarantee of the lease payments.  This would of course depend on whether the parent company had a higher credit rating. The towerco might also look to ask for payment of rent in advance rather than in arrears and/or a regular payment period and prompt settlement of invoices.

TowerXchange: In speaking to operators and towercos we see a move towards creating service level agreements that not only compensate failures but also reward good performance. What are key things contractually that both parties need to be aware of in creating service level agreements and how have you seen things change?

Operators will often want different service levels to apply to different towers.  For example, particularly critical towers or hub sites might require faster response and repair times or higher uptime commitments.  We therefore typically see different classes of sites provided for in the SLA with some flexibility for the operator to reclassify between classes (allowing for developments in their business over the term of the MLA).  Towercos will want reclassification to be limited or, for example, for overall percentages of site classes remain constant.  Otherwise they could find themselves having to provide “critical site” service levels to all or almost all towers.

One consideration that parties need to keep in mind is that performance of the SLA will often be contingent on the state of the towers upon transfer.  A towerco might not be expected to radically improve performance on the sites on day one if, for example, the towers and related equipment are not up to industry standard at the time of transfer.  In these instances, the parties should consider whether a transition period might apply.

We have seen a move toward additionally rewarding the towerco if service levels are consistently exceeded although SLA trends, like most contractual provisions in these transactions, will vary significantly from jurisdiction to jurisdiction.  Another noticeable recent change to SLAs in certain jurisdictions has been an increasing focus on the measurement of power usage and improving energy efficiency.  If, for example, not all sites have smart meters, we commonly see the parties commit to a glide path of smart meter installation.  Parties will often also consider how to share in any gain where sites become more energy efficient or less reliant on fossil fuels – this requires a certain amount of future proofing and is perhaps a subject for another day!

Vinson & Elkins will be exhibiting at the 5th Annual TowerXchange Meetup Africa & Middle East, being held on 3-4 October at the Sandton Convention Centre, Johannesburg. Visit the website for more information