Legal Briefs

Word Default Terms Precisely in Rooftop Rental Agreements

Renting rooftop space to telecommunications companies for cellular antennas and equipment can be an easy way for commercial property owners to increase revenue. Yet many owners are wary of such arrangements, concerned about a rooftop antenna's effect on a property's future marketability, possible legal complications, or expenses if the telecom company encounters financial difficulty or goes out of business.

To maintain flexibility and control of their properties, many building owners license rather than lease space to telecom companies. A license grants a licensee non-exclusive rights to enter and perform specified acts and is revocable or terminable at the licensor's discretion. On the other hand, a lease provides an interest in real property, grants the tenant exclusive use and possession of the identified premises, and is terminable only upon expiration of the stated term or upon other provisions.

A telecom company's installation of an antenna site is a significant investment and affects its network's design and available coverage. Thus, while willing to enter into license agreements, telecom companies typically require licenses that closely resemble leases. They rarely agree to licenses that are truly revocable or terminable at the licensor's discretion. Instead, telecom companies prefer to fashion agreements that run for a stated term and only terminate upon the occurrence of certain specified circumstances.

However, such licenses may be interpreted as leases, which limits building owners' options if they want to terminate the agreement. As the following case illustrates, property owners should write license agreements carefully and include specific termination provisions instead of taking for granted their ability to cancel such agreements.

License or Lease? The Court Decides

Nextel of New York, Inc. v. Time Management Corp., decided last August by the state of New York Supreme Court Appellate Division, highlights the significance of the lease versus license agreement characterization in deciding the rights and remedies available to both parties.

In June 2000, Nextel leased rooftop space and an equipment room at a property in Garden City, N.Y., from Time Management for the purpose of constructing a telecommunications site. The five-year agreement provided for the lease of “200 square feet of interior space in the building and space either adjacent to or on the roof of the building and all access and utility easements.” It also authorized Nextel to “erect, maintain, and operate on the premises radio communications facilities, including, without limitation, an air-conditioned equipment room in the building, utility lines, transmission lines, electronic equipment, radio transmitting and receiving antennas and supporting equipment and structures thereto.”

The agreement contained detailed drawings of the roof and equipment room plans. According to Time Management, Nextel assured the landlord that its equipment would not at all interfere with existing roof structures.

Yet after reviewing Nextel's construction plans, Time Management issued a default notice because the plans detailed “a virtual monopolization of the rooftop space with the installation of a massive array of cabling and antennas.” The notice gave Nextel 60 days to present alternate construction plans or Time Management would terminate the agreement.

Willing to correct the default, Nextel moved for a Yellowstone injunction, which, under New York law, allows commercial tenants allegedly in default to stop expiration of a contractual cure period. To obtain such an injunction, a tenant must show that it holds a commercial lease, has received notice of default or threat of termination, has requested injunctive relief prior to the termination date, and is ready and able to correct the alleged default.

In the lower court, to obtain the Yellowstone injunction, Nextel argued that it “is the tenant pursuant to a written agreement plan (‘lease').” Nextel also argued that after Time Management issued the default notice, it agreed to cure any default within the stated cure period, thus satisfying the requirements for the injunction. Time Management argued that Nextel could not request a Yellowstone injunction because the agreement was a license, not a lease. The property owner claimed that it “never surrendered, nor agreed to surrender, absolute possession and control of any portion of the premises” to Nextel. Time Management also argued that Nextel committed fraud by intentionally misrepresenting the proposed scope of the installation.

However, the court granted Nextel the injunction, finding that the agreement was in part a commercial lease because the detailed plans gave Nextel “absolute possession and control of a specific portion of the building.” In a separate decision, the court found that “the relevant provisions of the agreement — executed by sophisticated parties in an arm's-length transaction — undermine Time Management Corp.'s claim that it reasonably relied on Nextel's alleged representations,” and dismissed the fraud claim.

On appeal, Time Management contended that the injunction was granted in error because the agreement “merely granted Nextel a non-exclusive license to utilize a portion of the premises for its cellular telephone antennae and equipment.”

The appeals court reviewed the agreement's terms and concluded “the parties' agreement contained many provisions typical of a lease and conferring rights well beyond those of a licensee or holder of a mere temporary privilege.”

Although the case does not expressly state such, it seems logical to assume the agreement was styled or titled a license, and the operative language granted a license to Nextel rather than a transfer of a leasehold interest in the premises. However, as the court observed, the key terms and provisions were typical of those found in a lease, and it was not difficult for the court to recharacterize the agreement as such. As a result, Time Management was limited to landlord/tenant remedies, which prevented it from summarily evicting Nextel.

Make Termination Terms Specific

While this case will not be binding precedent in other jurisdictions, other courts may conclude that if an agreement looks and behaves like a lease, it should be treated as such, regardless of its name.

Rather than relying on the common concept of a license being revocable in situations in which the license is granted for a stated term and has other provisions typical of a lease, building owners should spell out with particularity any situations that may require early termination or trigger a default. Detailed contractual provisions between carriers and property owners, whether in agreements styled as licenses or leases, are more likely to be upheld when subject to judicial scrutiny than an owner's reliance on the ability to revoke or terminate a license.

Carol C. Honigberg, JD

Carol C. Honigberg, JD, is a partner in the real estate group at Reed, Smith, Hazel, & Thomas LLP in Falls Church, Va. Contact her at (703) 641-4220 or chonigberg@rssm.com. The discussion of legal issues in this column is for informational purposes only. Results may vary depending on state laws and individual circumstances.

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