CommLawBlog : Broadcast & Communications Lawyers & Attorneys : Fletcher Heald & Hildreth Law Firm : Telecommunications, FCC Regulation, Communications Act

The Expiration Date. If you’ve got an existing lease, do you know when it expires? If not, that’s a big mistake. Knowing that important date should help you both to protect your valuable license and to obtain a new lease on terms favorable to your organization. Figuring out exactly what your expiration date is may not be as easy as it sounds. Before the FCC imposed the secondary market rules on EBS spectrum in 2005, standard operating procedure was to set a lease’s expiration for a date a specific number of years from the date of commercial launch of the system or the construction of your station (a single station? Yes, those were the days, if you can remember back that far). It may not be as easy now, several years down the line, to calculate exactly when the triggering event happened. If your lease has such a provision, it would be a good idea to tie down the relevant date NOW, to help you avoid any unnecessary time-crunch as the expiration nears. Remember – the expiration of a lease can provide you with important opportunities, but you may need time, possibly a significant chunk of time, to assess those opportunities and take maximum advantage. If you don’t know when your lease expires, you could be putting yourself at a considerable disadvantage when Expiration Time rolls around.

And if you’re a public institution, don’t forget that you may be required by law or internal policy to seek lessees through a formal RFP process. That means that, before you would be able to enter into a replacement lease, you would have to jump through the RFP hoops, which can be a lengthy process. If you wait too long (because, for example, you don’t know when your current lease expires), you could find yourself with no lease at all for a period of time between (a) expiration of your current lease and (b) successful conclusion of the RFP process. Oh, and don’t forget that, during that interim period, you would be receiving no lease revenue at all.

The Right-of-First Refusal. And what about that right of first refusal (ROFR) provision? Does your lease have one? (I’m guessing that as many as 80% of the leases that will expire in the next, say, five years contain ROFRs.) An ROFR generally gives the guy who’s leasing your capacity the ability to sit back and, if you decide you want to try to find a new lessee, to match whatever deal you might make with a new lessee. An ROFR is within the class of what we lawyers call “preemptive rights.” In other words, you do all the work and the existing lessee takes advantage of it. (By the way, put yourself in the position of a possible replacement lessee – how excited would you be knowing that whatever deal you try to cut would have to be made available for the existing lessee to pick up on? The term “fool’s errand” springs to mind.) Obviously, it is important to review the lease to see if it contains an ROFR and, if it does, it is equally important to know exactly what your particular ROFR requires. ROFR provisions vary considerably, so it’s not useful here to try to address any specific ROFR terms.

Battle of the Forms. If you do end up with a new lessee, an important question that you will face is “who is going to take the first crack at drafting the lease agreement?” Usually, but not invariably, the practice is to start the negotiations with the proposed lessee’s form. Note that, if you use an RFP process, you (as the prospective lessor) could prepare your own initial draft lease and include it in the RFP with instructions for the bidder to review it and change it as the bidder desires. Anyone NOT using a RFP process should consider starting the negotiation process by agreeing on a term sheet before reviewing a draft of a proposed agreement. Negotiating by draft is time-consuming, inefficient and provides the party whose contract is used with a significant negotiating advantage.

De facto Transfer Lease v. Spectrum Manager Lease. In the past, EBS leasing was relatively unfettered by FCC requirements: the Commission focused mainly on (a) the duration of the lease, (b) whether the lessor was given the right to buy or lease the transmission equipment at the end of the lease, and (c) making sure that the lessor reserved spectrum for its own educational use. Those concerns persist in today’s regulatory environment (although no one has ever been able to explain how the equipment purchase or lease right is anything but a detriment to both parties).

But since 2005, a host of new requirements have been added as a result of the FCC’s “Secondary Markets” rulemakings. Now what is a “Secondary Market?” It’s no more than garden variety spectrum leasing dressed up in sophisticated-sounding FCC-speak. The FCC’s “Secondary Market” rules provide for two types of spectrum leases. One type is a lease in which the licensee remains in actual control of the deployment of the leased spectrum. This type of lease is called a “spectrum manager” lease. Don’t worry about this type of lease, because the chances that your lease might fit within this category are slim and none, and slim just left town. The second type of lease is referred to by the FCC in even fancier FCC lingo: the “De facto Transfer” lease. This type of lease involves the transfer of actual day-to-day control of the leased spectrum to the lessee. The lessee is free to seek certain modifications of the license and is held responsible for any violations of FCC regulations which the lessee commits.

Back in the day (i.e., before broadband), the FCC required its licensees to retain control over the use of their licensed spectrum. If a licensee abdicated control (explicitly or otherwise) to a third party without FCC consent, that was viewed by the FCC as a mortal sin. Despite this FCC policy, the FCC turned a blind eye to EBS (then called ITFS) leasing, as well as the leasing of the commercial counterpart channels (i.e., the BRS – then called MDS or MMDS – channels). EBS/BRS leases tended, in practical effect, to amount to the total surrender of control to the lessee, even though the leases usually contained provisions ostensibly reserving control to the licensee. The post-2005 “De facto Transfer” lease regulations impliedly acknowledge this practice and require the parties to go to the FCC to get consent to their proposed leasing relationship, thus avoiding an unauthorized transfer of control.

What about any old leases that are still in existence? Any of these types of leases executed before the new leasing rules went into effect are now acceptable. But any new leases or lease renewals will have to follow the “De facto Transfer” lease format and rules.

The Dangers of the De facto Transfer Lease. While “De facto Transfer” leases can satisfy the FCC’s control requirements, that does not necessarily guarantee that the EBS licensee can sleep comfortably thinking that it has no regulatory risk. The licensee is still expected to make sure that: (a) EBS channels meet the “substantial service” requirement by May 1, 2011 (the Doomsday scenario, under which you can expect to lose the license if none of the licensed channels is being used to offer a real service); (b) applications for license renewal are filed on time; (c) the licensee retains its eligibility to be an EBS licensee; and (d) the licensee doesn’t lose the license or have to pay fines due to the rule violations of the lessee. Risks (a) and (d) are big issues and need to be addressed effectively in the lease. Risks (a) and (d) often involve tricky questions of contract enforceability and questions of truly effective remedies (Sample situation: your lessee goes into bankruptcy and is not required to build the system required to meet the “substantial service” requirement – what would you do?).

Lease Term and ROFRs. You can sign an EBS lease having a 30-year duration. Is that really what you want? The lessee may very well ask for an ROFR. Have you considered whether you (or, more likely, your successor) are prepared to suffer the pain of an ROFR?

The Educational Use Requirement. Often overlooked in the EBS leasing process is the fact that the FCC still requires that the EBS licensee itself use each channel at least 20 hours a week for its original purposes (i.e., educational and/or related purposes). Along the same lines, the Commission also still requires that the EBS licensee retain the right to recapture an additional 20 hours per week per channel, and requires the EBS licensee to reserve no less than 5% of the capacity to itself. There are, of course, conventional ways of dealing with these requirements (e.g., through channel loading), and the lessee can also help the EBS licensee with compliance. Still, these requirements are anything but straight forward and need to be carefully considered in the lease, from the standpoints of both regulatory compliance and determining how you can best use your reserved capacity to meet real needs of your institution in a flexible and cost-effective manner. Once again, serious planning is in order.

Lease Fees. How much is EBS capacity worth? You could guess, but that’s not really a prudent business approach. The better way is to let an expert help negotiate the lease fees. Experts know the market rates (which are not easily determined in this environment) and how to translate those rates into lease fees (which is a highly nuanced exercise). And be careful about getting too fancy in calculating lease fees. Lessees like predictable lease fees. For example, do not expect a tentative lessee to take kindly to a variable lease fee based upon the lessee’s revenue (e.g., a percentage of gross revenue) or other performance measure (e.g., a per-subscriber fee). These types of fees can be hard to measure and hard to price in a start-up industry. Many leases go beyond the payment of periodic lease fees and require compensation to the licensee in the form of goods and services. But extravagant alternative compensation arrangements can have unfortunate consequences: for example, lessees cannot afford to have personnel tied up in administering various contract details. The universe of possible compensation arrangements is a broad one, probably deserving of its own separate blog.

Planning. You may not need your EBS capacity now, but you may need at least a part of it in the future. It is important to consider this opportunity cost and provide for the retention of spectral capacity if you see a present or future need for it. But keep in mind that retention of spectrum means sacrificing lease fees.

The bottom line here is that EBS leasing is a complex undertaking best left to the experts. I and my colleagues at Fletcher Heald have considerable experience in this area, and may be able to assist.

Reconsideration petitions were duly filed and opposed, but eventually the commercial industry group (WCAI) and the educational industry group (NEBSA) jointly offered a compromise solution: the 15 years could run from the execution date if the lease had in fact commenced prior to March 20, 2008 (the date of the Order that caused all the hubbub) or if both parties to the lease agreed to its treatment as grandfathered.   The joint proposal also provided that leases entered into between January 24, 1999, and January 5, 2005, that provided for deferred start dates on the leases would be grandfathered for up to 15 years from the agreed start date (rather than from the execution date).

The FCC gladly accepted this compromise proposal (which to our mind leans heavily in favor of the commercial lessees) as meeting most of the interests of both parties. It also was able to avoid the deeper question of whether the FCC can abrogate contracts by administrative fiat.

Cleaning up another loose end, the FCC proposed to give auction winners in upcoming Auction 86 four years from the date of their new licenses to build out their systems rather than the 15 months or so that would be available without a rule change. This much needed revision – if ultimately adopted – would come too late, however, for prospective auction participants who were deterred by the short construction fuse from filing short form applications. Comment deadlines on this proposal have not yet been established, but the comment and reply comment periods will be short (15 and 25 days from Federal Register Publication for comments and reply comments, respectively).

Finally, the FCC clarified that licensees of old channels 1, 2 and 2A can simultaneously operate on both their old channels and their new channels pending migration of all of their subscribers to the new band plan.   So theoretically, if an AWS licensee does not evict the incumbent BRS licensee from the old band, it could continue to operate on those 6 - 10/12 MHz of spectrum indefinitely by keeping subscribers on the bands.   Not that anyone would ever do such a thing.

Over and above the justifiably confused folks, there were also quite a few applicants who had simply neglected to file their renewals on time due to carelessness, oversight, changes in personnel, or because their lessee had failed to take care of it.  The Division declared, in effect, that these educators were grown-ups, and excuses akin to “the dog ate my homework” were unacceptable. Nevertheless, since it was permitting mere permittees to file late-flied renewals, it decided it would be inequitable not to accord similar relief to licensees who had actually built their systems. The Division therefore magnanimously waived the filing deadline for everybody.  

A huge sigh of relief was audible over much of the country, particularly from the administrators who had failed to file the renewals on time. At the same time, the Division dismissed Sprint-Nextel's objections to this action on the grounds that Sprint would not be harmed by acceptance of the late filings and therefore had no legal standing to complain.

The dilatory filers did not get off unscathed, however.  The Division decided that late-filers would not be allowed to "split the football" with nearby incumbents who had timely filed their renewal applications. “Splitting the football” occurs when the protected service areas of two co-channel licensees overlap. The FCC ruled several years ago that in such overlapping situations, the licensees would divide equally the overlap area, which appears as a football-shaped figure in diagrams.   Under last week's ruling, the late-filers would not be entitled to their half of the football.    Half a football is normally better than none, but here none of a football is better than none, because at least the licensees get the service areas that do not overlap with anyone else.

The Division also permitted those applicants who had neither constructed their stations nor timely filed for extensions of time to file late-filed requests for extension time, which the Division agreed to grant when filed.  

Finally, the Division also tied up loose ends for a handful of BRS licensees whose late-filed renewals had been petitioned against by Sprint-Nextel. Here, too, the Division dismissed the Sprint petitions on procedural grounds, freeing the licensees to proceed with build-outs and transitions of their markets. The Division obviously decided that, legal niceties aside, it was better for the development of the BRS/EBS service to have these renewals established and a build-out accomplished by 2011 rather than putting the spectrum up for auction and waiting perhaps another ten years for service to be provided.