Robbins, Salomon & Patt, Ltd.
Increasingly, owners of retail real estate are taking advantage of nontraditional sources of income generated by their properties. One of these alternative sources commonly originates from the license of space on the roof of a property. Although rooftop licensing is by no means new, the population of rooftop users has grown and diversified. Historically, rooftop use was limited to operators of radio and television transmission antennae; however, newer technologies such as solar and cellular have given rise to a variety of additional users of rooftop space. While these new users constitute an exciting opportunity for owners, the legal aspects of that use can be complex. This article highlights some of the critical legal considerations associated with rooftop licenses.
Rooftop licensing may provide a variety of benefits to a real estate owner. The most immediate example of this is the income from a monthly license fee that may be largely passive and free from costs and offsets. An added benefit is the potential increase in the values of an asset bearing that income, together with the capital improvements and infrastructure associated with technological uses, such as solar and cellular, that is likely to be attractive to buyers. Finally, the owner may enjoy benefits and concessions directly from its licensee, and that could be useful in attracting tenants and improving operational efficiencies within the property itself.
From an owner’s perspective, the legal agreement governing the user’s occupancy of rooftop space is best embodied as a license rather than a lease. Two components accentuate the legal advantage of a license over a lease. First, a license allows more efficient remedies for an owner in the event of default. Most retail real estate landlords are keen to avoid the time and expense involved in an eviction. A license allows the owner to exercise self-help to terminate the license and remove the licensee, sometimes in connection with an at-will occupancy. Second, a license does not convey a real estate interest to the licensee and thereby enables the owner to retain complete control over its property and all critical services rendered to the user.
In many respects, a license will appear very similar to a lease; however, these critical distinctions demonstrate the advantages of a license to a property owner. Additionally, some licensees (for example, cellular users) may attempt to negotiate easement rights to accompany their license, but owners should resist granting any interest in real estate for the sake of preserving the aforesaid default remedies.
Diligence and feasibility
Prior to entering into any rooftop license, a property owner should complete a comprehensive audit to determine whether they are authorized to grant the rights requested by the licensee. In the first instance, the owner should possess a comfortable understanding of the laws and regulations applicable to the proposed use in general, including environmental statutes effective in the jurisdiction. While the license will provide that the licensee is responsible for all matters of ongoing legal compliance relative to its particular use, the owner will not be pleased to discover a local legal prohibition to rooftop use a year or more into the license term. If other users and/or tenants are occupying space at the building, an owner will also want to determine whether any of the documents governing those occupancies prohibit the granting of the new license in the space and manner contemplated.
In addition to ensuring legal compliance, owners should confirm that the property in question is structurally fit and equipped to allow for a rooftop user. This diligence can be shifted to the licensee at the licensee’s cost, but the owner would be wise to also engage its own structural engineer to determine the soundness and load-bearing capabilities of the roof, particularly if multiple users are contemplated.
Owners should also review all existing roof warranties and insurance policies to confirm that the granting of the license will not invalidate or devalue any applicable coverage. This physical diligence should include comprehensive data on the size and functionality of all facilities and infrastructure necessary for the licensee’s intended use. This should also include all equipment ancillary to the contemplated use, such as cabling and risers.
Facilities and equipment
The initial provisions of any rooftop license document should include a comprehensive and precise description of the licensed premises as well as any space that is subject of an expansion option. This description, usually best expressed in the form of a drawing attached as an exhibit, should state both the boundaries of the premises and the location of the premises on the rooftop. In addition, particularly in the context of technological uses that require ancillary facilities, the exhibit should describe areas for ancillary presence by the licensee, such as transmission lines and other equipment that connect to building infrastructure. As discussed in greater detail below, in multiuser rooftop environments, owners are well served to define premises in detail in order to aid in enforcement of cooperation and noninterference covenants and resolving disputes between licensees.
The license should next include a detailed description of the permitted use of the premises by the licensee. While the basic notion of use may be quite simple (e.g. sun deck, event space, cell tower, bee farm), additional contour and detail is welcome. For example, a simple but ambiguous statement of “telecommunications use” is subject to manipulation by the licensee. The licensor will prefer a more robust statement such as “[the] installation, operation and maintenance of telecommunications equipment, including but not limited to microwave dishes, related ancillary equipment and cabling for the transmission of radio communications signals as licensed by the Federal Communications Commission.” Specificity and color will limit the conduct of the licensee on the rooftop and thereby allay risk to the licensor.
As in any retail lease, this provision also offers the owner the right to carve out any prohibited uses and to express that the use by the licensee is subject to any exclusive uses reserved to other users at the property. In addition, the agreement should provide that the licensee is prohibited from all uses that conflict with applicable law and from uses that vitiate or increase the insurance coverage maintained on the property. Finally, the owner may incorporate rules and regulations governing the day-to-day operations by the licensee on the premises, as well as limitations on timing and means of access to the roof.
Matters of timing are as important to a rooftop license as they are to any commercial lease. Owners should be vigilant in defining license commencement and expiration dates, as well as other critical dates, such as commencement of monthly license fees and completion of work. In contrast to most commercial leases, some rooftop licenses will provide an at-will occupancy, while others will demand a longer initial term (sometimes up to 20 years), which term may renew automatically if it is not terminated sooner. An owner desiring lockstep, long-term income from its rooftop may be open to the longer term, particularly in multi-license environments where turnover may be disruptive to the owner and problematic under applicable law. A licensee facing a longer term and significant capital investment may also require a contingency to allow for a feasibility study and other diligence prior to the commencement of license fees.
A long-term license often raises a variety of questions of early termination:
Both parties will seek the right of early termination in the event of default, or if the other party fails to fulfill its obligations under the document. For instance, common grounds for termination is when a licensee allows an operational license to lapse, resulting in a fine and/or lien on the property. As with a lease, this right may be accompanied by a notice and cure period. In addition, many licensors maintain a right of early termination in the event that the building is sold, demolished or renovated in such a way that the rooftop is no longer available for use. Conversely, a licensee will seek to include a right of termination in the event that the rooftop is no longer technically feasible for operations (e.g. for signal interference).
In most commercial leases, the rent payable by the tenant is based upon the amount of space leased, the quality of the building and other real estate market conditions. In a license, the proxy for rent is customarily a license fee, which is derived less from the licensed space itself and more from the needs of the licensee and the location of the property.
For cellular providers, common metrics for lease valuation are substituted with an analysis of customer value generated from the licensed use. For example, a provider with limited opportunities for coverage in a rural market will likely pay a higher licensee fee for a rooftop in an optimal location than it would pay in a dense urban market, which is likely to garner more opportunity and competition among owners.
Rooftop licenses, particularly for technology providers such as cellular and solar companies, should include detailed provisions governing the installation of facilities and equipment. Most licensees will require that the title to all equipment remains with the licensee, free and clear of any liens in favor of the licensor.
If any plans are agreed upon in advance, the license should incorporate those plans together with the site plan and the technical specifications of all facilities contemplated by the licensee. Future improvements should be subject in all respects to the approval of the licensor and compliance with applicable laws. And, in each instance, such improvements should be completed with diligence at the licensee’s sole cost, with minimal disruption to other users of the property.
Cooperation and noninterference
In contrast to leases of demised and enclosed multi-tenant spaces, licenses of rooftop space require more substantive language governing relationships between licensees. If an owner wishes to accommodate multiple licensees on its rooftop, then each license should include an acknowledgement by the licensee of this possibility, as well as covenants of cooperation and noninterference.
The licensor should be expressly permitted to enter into rooftop licenses with third parties, and the licensee should agree to configure and operate its facilities in a manner that allows for maximum flexibility for the owner. This agreement by the licensee may also serve as an acknowledgement by the licensee that the licensor may add facilities and infrastructure for other authorized rooftop users or to support rooftop HVAC, mechanical or other facilities for the benefit of other users of the building.
Another critical provision for an owner is the right to relocate the licensee. Like a commercial tenant, a licensee will likely resist this concept during negotiation of the license, based upon the inconvenience and the residual cost of an interruption to its use. However, those grounds are less convincing for the licensee in light of the relative low cost of the relocation and the ease of finding comparable space on the rooftop.
If the licensee agrees to allow a relocation, then the typical restrictions are commonly negotiated: comparable nature of the substitute space; ample notice prior to relocation; limitation of relocations within the term; and the obligation of the licensor to cover all relocation costs. The parties may also agree that if the relocated facilities do not perform to the standard initially bargained for by the licensee, then the licensee may terminate the license following a notice and cure period.
The increasing prevalence of rooftop uses in commercial property is exciting for owners and users alike. A licensor’s ability to monetize previously stagnant portions of its building complements a growing population of licensees seeking opportunities to better serve their customers. Though rooftop transactions may be modest in relation to indoor leases, the attorneys representing these parties should be mindful of the unique and evolving issues raised in these relationships.
David Resnick is a shareholder at the firm of Robbins, Salomon & Patt, Ltd., in Chicago, Ill. He maintains a varied business practice, concentrated principally in commercial real estate development, leasing and finance. Mr. Resnick represents all types of business enterprises, from individuals and closely held concerns to public companies. He can be reached at email@example.com.