When Telecommunications Access Becomes Too Much -
Suggestions for Real Estate Counsel and Their Clients
By Gerard Lavery Lederer
Gerard Lavery Lederer practices with Miller & Van Eaton P.L.L.C. in Washington, D.C.
Commercial property professionals today are faced with the challenge of meeting tenants' demands for access to redundant and competitive broadband services in an era when bankruptcies have drastically reduced the supply of such providers. Integrated telecommunications service providers (TSPs)—voice, video, and data providers—are offering residential property professionals and developers great prices but are demanding exclusive deals in exchange. These issues are arriving in your office with your clients. You need to know what the legal and practical implications of such issues are and what role you as counsel for these folks have to protect them both legally and from a business perspective.
The following checklist is neither a cure-all nor legal advice. It is offered to counsel, property owners, management professionals, and interested telecommunications providers to help them address the challenges emerging in 2003.
1. Have Clients Conduct a 2003 Tenant Needs Survey
Suggesting that a client conduct a tenant needs survey may not seem like a message normally delivered by counsel, but it may be the best protective advice you offer this year. Your clients can never inquire too often about their tenants' needs, especially technology needs. The only way to avoid being surprised about tenants' needs is to ask about them.
For instance, in this era of risk and homeland security, many office tenants now want access to redundant and complementary pathways—wired and wireless connections to phone companies and the Internet. Waiting until such a requirement is presented to you in a lease extension counteroffer may be too late. Learn about these needs now so that your client is capable of offering its tenants multiple vendors that provide access to both wireless and wired connections.
Increasingly in the residential setting, tenants want access to broadband or high-speed Internet in addition to traditional phone and cable services. Developers and providers alike understand such needs and are negotiating exclusive deals to offer such services. (The FCC has not banned exclusive deals for residential properties, but it has banned common carriers from entering into exclusive agreements with office building owners.)
Before your client negotiates such a deal, make sure you consult the state's right-of-way and utility easement rules, which may allow access to the carrier of last resort and therefore jeopardize your client's ability to offer an exclusive deal. Alternatively you might investigate whether state law permits you to limit the local telephone company to offering only regulated tariff services. In this way, you have preserved your client's ability to pursue partnering arrangements with the incumbent or a competitor for additional services.
2. Conduct a Physical and Legal Audit of Clients'Telecom Space
Counsel should conduct an audit of all existing leases, licenses, and other access agreements to see who has a preexisting right to the telecommunications spaces in your clients' buildings and to make sure that the clients are aware that such priority rights exist. Such an exercise has become especially important if clients have equipment from bankrupt providers in their buildings. Also suggest that the client's engineering staff determine what space is available to accommodate the wires and equipment of a TSP that might wish to serve the building.
3. Make Sure Client's Building Is a "Hot Spot" and Amend Leases to Address RF Interference
A central issue in 2003 is wireless access to the Internet by means of "Wi-Fi" or "Hot Spot" technology. If clients want their residential properties, and especially their office properties, to stay hot, then they had better be a "Hot Spot" (a location that provides access to the Internet using Wi-Fi technology).
According to industry research, sales of Wi-Fi networking products grew from $76 million in 2001 to $280 million in 2002, and the average price for an access point fell from $136 to $87. By 2006, the research firm Gartner, Inc., expects 99 million Wi-Fi users and 89,000 public WiFi access points around the world. Jeordan Legan, Get Ready to Tune in to Wireless Net, Cable News Network, available at www.cnn.com/2003/TECH/ptech/03/12/wifi.growth (Mar. 13, 2003).
The technology is simple. A high-speed (DSL or cable modem) line is attached to an antenna that can send and receive data over a short distance. With a wireless card in their computers tuned to the antenna, everyone within a certain range can have a high-speed wireless connection to the Internet. These devices can be purchased at any local electronics store.
In 2003 providers will make a big push to show tenants/users just how easy it is to connect computing devices to an organization's local area computer network or to set up temporary wireless networks so long as users stay within about 2,000 feet. Because industry research reveals that tenants have up to 40% annual churn of space within the rented suite, use of wireless devices will create significant cost savings for tenants and provide additional flexibility. The result could be an explosion of wireless office applications. That is the good news.
The bad news is that these devices use what is known as "unlicensed" spectrum. The public is free to use instruments that operate within the unlicensed frequency range, but they have no recourse against another user of the spectrum for interference. Thus the term "unlicensed." Common devices used in this Wild West of spectrum are wireless remote controls, walkie-talkies, garage door openers, cordless phones, and baby monitors.
Before you or a client is forced to referee a battle between the tenants on the seventh and eighth floors or the Starbucks and McDonald's on the ground floor, all of whom have shifted to a "wireless" office or "Hot Spot," simple language should be inserted in the lease to address the issue of interference. And before a client loses a tenant to another hot property, it ought to examine its ability to tune its property to Wi-Fi. You can help with the right documents.
4. Ensure That Clients Understand Not to Grant an Easement to a TSP
Real estate counsel could best serve their clients in these days of integrated service providers seeking access to their buildings by ensuring that clients understand the differences among a lease, a license, and an easement. Although the author prefers to employ a license, others have made persuasive arguments for a lease.
TSPs, including cable multi-service operators, competitive local exchange carriers, and some Bell companies, are submitting easements rather than licenses for access to buildings. Easements are less desirable for owners than licenses forseveral reasons. Unlike an access license agreement, which conveys limited business rights to the telecommunications service provider, an easement confers a property right upon the carrier. Armed with such a property right, a TSP will be difficult, if not impossible, to control. Also, an easement granted in favor of the local Bell company may render space in the client's building subject to rules governing access to utility spaces. See Cable Holdings of Georgia, Inc. v. McNeil Real Estate Fund VI, Ltd., 953 F.2d 600, 608-09 (11th Cir.), cert. denied, 506 U.S. 862 (1992).
5. Understand That the Rules Governing Cable Wires and Telephone Wires Are Different: Be Aware of the Latest FCC Decision on Cable "Home Run" Wires
The Federal Communications Commission's rules governing telephone wires (47 C.F.R. § 68.105) and cable wires (47 C.F.R. § 76.804) and the right of building owners to take possession of either are very different. Suffice it to say that a cable operator retains greater autonomy over cable wires than a telecommunications provider retains over telephone wires. For instance, under the inside telephone wire rules cited above, a building owner has the right to move the demarcation point to the minimum point of entry and may rely upon state law to establish the price at which it may acquire inside telephone wires. Under the rules governing cable wires, a building owner may take steps regarding cable wires only if it has reserved the rights at the time it entered into the access agreement with the cable operator.
On January 29, 2003, the Federal Communications Commission (FCC) released its long-awaited cable inside wiring proceeding. First Order on Reconsideration and Second Report and Order in CS Docket No. 95-184 and MM Docket No. 92-260, FCC 03-9, 2003 FCC LEXIS 464 (In re Telecommunications Services Inside Wiring) (Jan. 21, 2003). In this proceeding, the FCC
o"decline[d] to restrict exclusive contracts for the provision of video services in [multiple dwelling units] MDUs," Order 4, and
o"decline[d] to ban perpetual contracts for the provision of video services in MDUs or subject such contracts to a fresh look window." Id.
In addition, the FCC modified its existing rules in two ways that may benefit property owners.
oIn the event of the sale of "home run wiring" in an MDU, the wiring must be made available to the MDU owner (or a new provider selected by the owner) during the 24-hour period before actual service termination by the incumbent. Id. 3. (Home run wiring is the wire that runs from an individual or subscriber in an MDU to the demarcation point in the building. 47 C.F.R. § 76.800(d)).
oHome run wiring located behind sheet rock is deemed physically inaccessible for purposes of determining the demarcation point between home wiring and home run wiring. Id. This last change makes it easier for competing providers to obtain access to wiring inside individual units without causing damage to a building.
6. Stay Current with the Courts' Interpretation of Inside Cable Wire Rules
In late 2002, two federal district courts issued opinions on when the "home-run" wires are available to a second provider or the building owner under the FCC's Home Run Wiring Regulations. 47 C.F.R.§§ 76.804(a) and (b).
In CSC Holdings, Inc. v. Westchester Terrace at Crisfield Condominium, 235 F. Supp. 2d 243 (S.D.N.Y. 2002), the Southern District of New York ruled that the FCC rules apply only when an incumbent provider is about to be ejected from a building. Thus, the rules do not apply as long as the cable operator had a right to serve even one tenant in the building in question. A month later, in Time Warner Entertainment Co., L.P. v. Atriums Partners, L.P., 232 F. Supp. 2d 1257(D. Kan. 2002), the court disagreed with the CSC Holdings court's conclusion. The Atriums Partners court found that the CSC Holdings court had failed to recognize the distinction between 47 C.F.R. § 76.804(a), building-by-building disposition of inside wiring, and 47 C.F.R. § 76.804(b), unit-by-unit disposition of inside wiring. It held that Section 76.804(b) presumes that the incumbent cable provider may continue to provide service on a unit-by-unit basis while competitive providers serve other units. Thus, when a subscriber terminates service, the cable operator can be required to abandon, remove, or sell the home run wiring that serves that particular unit at the request of a homeowners' association (or presumably the building owner) even though the cable operator may have legal authority to continue to serve other units. Furthermore, the Atriums Partners court held that the Kansas mandatory access statute did not provide a basis for Time Warner to refuse to abandon, remove, or sell the requested home run wiring.
The Atriums Partners decision has been appealed to the Court of Appeals for the Tenth Circuit. Real estate forces and property custodial officers should unite to provide amicus support for what is a very pro-competition decision that is consistent with FCC rules.
7. Amend Leases to Address Residual Wires in the Tenant's Suite
Discussions with building engineers reveal that increasingly tenants are leaving behind network wiring within vacated premises. Building owners are then faced with the decision to either leave the wires in place or pay someone to have the wires removed. Such a predicament should not be acceptable to landlords. It is no different from a tenant's vacating the premises and leaving desks behind. This problem is exacerbated because most new tenants will not use a previous tenant's wires, preferring to have their IT professionals install their own, and there is little, if any, salvage value to old wiring.
Although security deposits have traditionally been used to address abandoned materials in a suite, some landlords have been reticent to employ the fund to pay for removal of wiring, because it was not addressed in the lease or the wiring was not discovered as an issue until too late. Practitioners should address wiring removal in leases and ensure that the clients' telecommunications audit of the building reveals where such excess wires exist.
8. Make Sure Clients Are Aware of the FCC's OTARD Rules and That Their Leases or HOA Rules Comply
In 1996, the FCC adopted its "Over-the-Air Reception Devices" (OTARD) Rules preempting governmental and homeowner association restrictions on installation of video antennas and satellite dishes that are less than one meter (39.37 inches) in diameter(or of any size in Alaska). 47 C.F.R.§ 1.4000. The rules prohibit restrictions that (1) unreasonably delay or prevent installation, maintenance, or use, (2) unreasonably increase the cost of installation, maintenance, or use, or (3) preclude reception of an acceptable quality signal. In 1999 the FCC extended the reach of its OTARD rules to rental property, and in 2000 it expanded the rules to apply to antennas that receive and transmit fixed wireless signals.
The FCC did provide two safe harbors for banning or limiting such devices: for safety or for historic preservation purposes. From the OTARD matters that have been litigated at the FCC, these safe harbors are ports not easily reached. See, e.g., In re Victor Frankfurt, 16 FCC Rcd. 2875 (2001).
9. Make Sure Clients Understand Bankruptcy Law and the Limitations on Self Help
TSPs once flooded with cash are now cash-poor or broke. The past two years have seen a large number of bankruptcy filings by TSPs. Real estate counsel must assist property professionals to protect three constituents in the event of a TSP business failure: the building owner, the tenants, and the property professionals themselves. The plan of attack must ensure that:
oThe building owner is protected from potential losses in revenue as well as from liens placed against the building by the subcontractors of the TSP;
oThe tenants are protected from the loss of telecommunications services; and
oThe property professionals are protected from themselves as they seek to engage in self-help.
Here are some suggestions on how such a plan may address these needs:
oDraft access agreements that require a letter of credit and also establish a priority position for abandoned property. Language might require that, in the event of the abandonment of telecommunications service facilities, the building owner may order the TSP to promptly remove the facilities from the building and restore the building to its prior condition or may declare the ownership of such facilities to have been abandoned and forfeited to the building.
oIn the event of a TSP bankruptcy filing, counsel the client to file a Notice of Appearance and Request for Special Notices to protect its rights and interests. A Proof of Claim should be filed by the date established by the bankruptcy court.
oPolice the title of the building to see if the TSP's subcontractors have registered mechanic's liens against the building.
oA TSP will likely continue to pay its rent. But if a TSP fails to make payment either before or after filing for bankruptcy, depending on the exact language used in the letter of credit, the building owner may be able to recover any unpaid license fees and other debts from the letter of credit.
oIf the building owner cannot collect from the letter of credit, it is not likely to recover any debts owed before the bankruptcy filing and may want to file an administrative claim for fees and debts incurred after the bankruptcy filing date. An administrative claim will be paid ahead of unsecured claims, but there is no guarantee that a TSP will emerge from bankruptcy.
Despite the bankruptcies of leading proponents of mandatory access, such as Teligent and Winstar, 2003 will see serious efforts at the federal and state levels to establish mandatory access. What makes 2003 scarier than other years is that the new mandatory access effort will be led by the regional Bell operating companies and the local phone service subsidiaries of cable and long distance companies. In recent filings with the federal government, telecommunications giants such as WorldCom, BellSouth, and RCN have advocated limiting the rights of building owners to manage their telecommunications space. In Utah, Qwest, backed by numerous cable and long-distance affiliates, is seeking a new definition of "essential facilities," including facilities within a building. Finally, it should not be forgotten that Time Warner is defending a case in Texas brought by the Texas Building Owners and Managers Association to challenge a 1997 law that allows competing TSPs access to buildings. Judge Upholds Building Access for Telecom Firms, AUSTIN BUS. J., June 3, 2002, available at http://austin.bizjournals.com/austin/stories/2002/06/03/daily41.html. Accordingly, it is crucial for real estate counsel and their clients to be proactive in this environment.