By Robert Bergen, Frank K. Peterson and David A. O'Connor¹

Competition in the telecommunications marketplace is having a significant impact on the owners and managers of commercial properties, such as office buildings, malls, apartment buildings, industrial parks and condominiums. In the past, commercial property owners typically accommodated their tenants' need for telecommunications services simply by giving the incumbent monopoly service provider access to their tenants; the property owner was rarely, if ever, involved in the choice of a tenant's telecommunications provider.

Today, that is no longer true. Property owners and telecommunications service providers have been forced to re-evaluate their relationships and to recognize what each brings to the other. The service providers obviously must have access to the tenants of commercial properties, and that access is controlled by the property owner. On the other hand, property owners must be mindful of competition, since more and more tenants must have access to state-of-the-art, reliable and affordable telecommunications services.

Resolution of the access issue has taken two tracks. The first is contractual. Many property owners and telecommunications service providers are making deals to create what they hope will be win-win situations. Over the past few years, telecommunications companies and commercial property owners have executed agreements allowing access to tenants in commercial buildings across the country. For instance, one New York-based company, Winstar Communications, Inc., recently announced that by the end of 1999 it had negotiated access rights to more than 8,000 commercial office buildings. Other companies have announced similar arrangements. However, such access arrangements may not go far enough to satisfy some government regulators, thus leading to the second, or regulatory, track.

Current Regulations

The Federal Communications Commission (the "FCC" or "Commission") has established the overall regulatory framework for dealing with the issue of access to commercial property tenants. The Commission long ago recognized the need to remove the competitive advantage enjoyed by incumbent telephone companies due to their ownership of premises wiring. To break the bottleneck, the Commission in 1983 began a series of rulemaking proceedings which ultimately led to the detariffing and deregulation of telephone company-installed wiring on customer premises and gave control of the wiring to the property owner.

The FCC summarized and clarified its rules regarding telephone wiring in multiunit installations (office buildings, shopping centers, etc.) in its June 1997 Common Carrier Wiring Reconsideration Order (the "Reconsideration Order").² The Reconsideration Order clarified the "demarcation point" in multitenant properties, i.e., the point at which ownership and maintenance responsibilities for telecommunications transmission facilities (including the wiring) passes from the service provider to the building owner. For instance, the demarcation point in a building may be a switch room in the basement, or a wire closet located on each floor of the building, or even at the individual customers' premises.

In multiunit properties wired before August 13, 1990, the Commission permitted the incumbent telecommunications carrier to choose the demarcation point, provided the decision was based on the carrier's reasonable and non-discriminatory standard operating practices. In new properties and in buildings which have undergone major additions, modifications or rearrangements of wiring after August 13, 1990, the Reconsideration Order provided that the carrier could establish a reasonable and non-discriminatory practice of placing the demarcation point at the "minimum point of entry" into the installation (i.e., where the wiring crosses a property line or enters a multiunit building). If the carrier had not established such a practice, the building owner could determine where the demarcation point or points will be.

The Commission recognized that it had not addressed the important issue of access by telecommunications providers to tenants, but left the issue for a future proceeding. In the absence of federal guidance, a few states, such as Texas and Connecticut, have implemented statutes giving telecommunications service providers some form of mandatory access to tenants in multitenant buildings, coupled with just compensation for the property owners. A number of other states, including New York,³ have legislated mandatory access to tenants for the installation of cable television facilities. With the convergence of telecommunications and cable services, this type of mandatory access soon may give cable service providers an advantage in reaching potential customers. However, if regulations recently proposed by the FCC are implemented, the rules of the game could change drastically.

Proposed Regulations

A major goal of the Telecommunications Act of 1996 was to foster competition in the telecommunications industry. In July 1999, the FCC, concerned that the desired level of competition has not been reached, proposed rules that would encourage competition among local telecommunications service providers by, among other things, giving them mandatory access to privately owned multi-tenant properties. The Commission's Competitive Networks Notice⁴ proposed certain actions to facilitate the further deployment of competition in the local telecommunications market. Under the proposed new rules, utilities (including local exchange carriers, as well as electric, gas and other public utilities) will be required to permit access to "rooftops and similar rights-of-way, and riser conduit that they 'own or control' in multiple tenant environments."⁵

The Commission tentatively concluded that cable television system and telecommunications service providers should have nondiscriminatory access to all rights-of-way that a utility owns or controls and uses for wire communications, whether publicly or privately granted, under just and reasonable rates, terms, and conditions. The term "right-of-way" is given a broad definition to include not only conduit in a building, but also rooftop space to place a transmit or receive antenna.

The FCC asked for comments on whether such a rule would impose unreasonable burdens on building owners or compromise their ability to ensure the safe use of rights-of-way or engender other practical difficulties. The Commission also asked for comments on whether its proposed regulations would effectively limit the ability of property owners to enter into exclusive service contracts with telecommunications service providers or multichannel video programming distributors.

In addition, if a building owner permits access to the building by one telecommunications provider, under the proposed rules, the building owner may be required to allow comparable access to the premises by all telecommunications carriers, under nondiscriminatory rates, terms, and conditions. The Commission recognized, however, that there may be practical limitations to implementing a nondiscriminatory access policy. For instance, physical limitations on a building's size or space availability could, practically speaking, render impossible the installation of equipment from multiple vendors. Further, it may be economically infeasible for a provider to install facilities to service some locations without an exclusive service agreement to allow recovery of its investment. Moreover, such a mandatory access requirement may be considered a per se taking of private property by the government, in violation of the Fifth Amendment to the United States Constitution.

The Competitive Networks Notice also solicited comments on other matters related to the provision of telecommunications services to multiple tenant properties. Among other issues, the Commission asked whether it should adopt a uniform rate demarcation point (i.e., the point at which the telephone company's communications facilities terminate at a subscriber's premises). As discussed above, the demarcation point may be located at any number of locations (e.g., minimum point of entry into a building, wire closets on each floor, or individual customer premises) depending on various factors. If a uniform demarcation point were established, for instance at the minimum point of entry into a building, an incumbent local exchange carrier ("LEC") would not be able to claim exclusive ownership or control over any wire or cabling in a multi-tenant location. On the other hand, the incumbent LEC would not be responsible for maintaining those on-premises facilities and the responsibility would devolve to the property owner.

The FCC is now evaluating comments filed by telecommunications service providers, state and local governments, and multi-tenant property owners in response to the Competitive Networks Notice. Given the nature of the issues dealt with in that notice, it is unlikely that final regulatory action on the matters will be taken anytime soon. Moreover, court challenges are likely, if and when the Commission does attempt to implement many of the proposals. Nevertheless, both commercial property owners and telecommunications service providers will want to keep abreast of the progress of this proceeding.

Contractual Checklist

In the meantime, many service providers and property owners are negotiating their own telecommunications service and access agreements. These contracts are based on an interesting amalgamation of real estate, telecommunications, and contract law. Of course, the contract must be tailored to the type of arrangement agreed to by the parties. There are, however, certain issues that should be included on any checklist for telecommunications contracts. Among these are:

• Compensation
• Exclusivity or non-exclusivity
• Duration of the agreement
• Ownership of wiring and telecommunications equipment
• Type of access rights (e.g., license or lease)
• Conditions for access
• Physical security
• Performance guarantees
• Interference
• Indemnification
• Insurance
• Service interruptions
• Third party rights
• Compliance with laws and regulations

For instance, the duration of the agreement is especially important to telecommunications service providers. After incurring the time and expense of installing telecommunications facilities in and on a building, a service provider will want some assurance that it will be able to recoup its investment over time. In order to protect its interest in the building, a telecommunications service provider will almost always request a nondisturbance agreement in some form or another and may want to record a memorandum of lease. On the other hand, a property owner will be reluctant to grant any kind of property interest, such as an easement, to the service provider. Obviously, the owner also will want to be able to terminate the agreement if the telecommunications company is not performing its obligations under the agreement.

While any contractual issue might be the subject of litigation, not surprisingly bottom line revenue or monetary damage issues are generally the ones that make it to court. In a Pennsylvania case, a service provider successfully sued a property owner for violating an exclusivity provision in their agreement by contracting with a competing telecommunications provider.⁶ In another case, a property owner took legal action against a service provider that failed to provide contractually required service.⁷ Importantly, cases such as these are decided based not only on the contract and real estate laws of a particular jurisdiction, but also on applicable federal and state telecommunications laws and regulations.

The interaction of telecommunications regulations and property law will continue to shape the relationship between and among telecommunications service providers, their customers, and the commercial landlords of those customers. Each of these groups must be able to address both telecommunications and real estate issues in order to realize the benefits arising from the changing telecommunications marketplace.

Endnotes

¹Robert Bergen is a partner in the New York office of Holland & Knight LLP, Frank K. Peterson is a senior counsel in the Washington office of Holland & Knight LLP and David A. O'Connor is an associate in the Washington office of Holland & Knight LLP.

²Review of Sections 68.104 and 68.213 of the Commission's Rules Concerning Connection of Simple Inside Wiring to the Telephone Network, CC Docket No. 88-57, Order on Reconsideration, Second Report and Order and Second Further Notice of Proposed Rulemaking, 12 FCC Rcd 11,897 (1997).

³N.Y. Public Service Law § 228.1 (McKinney 1999).

⁴In re Competitive Networks in Local Telecommunications Markets, Notice of Proposed Rulemaking and Notice of Inquiry, FCC 99-141, 11 FCC Rcd 12,673 (rel. July 7, 1999) (the "Competitive Networks Notice").

⁵Id. para. 28.

⁶Shared Communications Svc. of 1800-80 JFK Blvd. v. Bell Atlantic Properties, Inc., 692 A.2d 570 (Pa. Super. Ct. 1997), petition for allowance of appeal denied (Pa. S. Ct. Mar. 8, 1998). The competing telecommunications provider was also successfully sued.

⁷Forward Industries, Inc. v. Rolm of New York Corporation, 123 A.D. 2d 374, 506 N.Y.S. 2d 453 (2d Dept. 1986).