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“The Devil Is In The Data Center Occupancy Agreement”

Law360 By Michael D. Rechtin

Computer data storage needs can be dealt with in many, many ways, ranging from a company that builds its own data center on real estate that it owns to outsourcing the data storage needs to the "cloud." This article will not deal with "cloud" or "hosting" offerings but instead those situations where a company places its servers and equipment in a data center facility operated by a third party.

Real estate and data centers have been strange bedfellows since day one. It is a relatively new category of real estate and, as such, the providers of space for companies wanting to locate their computer servers and data storage equipment in a noncompany-owned location were borne out of different fields of business — thus the contracts dealing with these arrangements are quite different. In general, the legal documentation of a data center transactions has many unique issues and concerns and this uniqueness is further compounded by the form in which the transactions are documented.

On one side, we have data center landlords who came from other types of real estate products where the preferred form of contract is a lease to document the contractual relationship between the company (the "tenant") and the owner of the property where the data center is located (the "landlord"). Real estate leases are universally used for what are called "wholesale" data center transactions, which are the larger variety (where the tenant will be using roughly 300kW of power or more and will have its own demised space).

On the other side, we have data center owners who evolved from computer data "hosting" companies where data storage was provided to clients on servers owned by the hosting company. Over time, these hosting companies began to offer their clients the ability to locate the client-owned servers and equipment in the data center operated by the hosting company. These data center operators grant licenses, rather than leases, under master services agreement with related service orders.

Notwithstanding the differences between the data center operators who provide leases and those who provide master services agreements/licenses, they each tend to operate their respective data centers in a consistent way that is tied to the data center industry as a whole so one type of documentation over another does not necessarily yield a "better" data center experience for the customer.

Within the leasing model, some landlords have opted for leases that look and feel like a traditional office or industrial warehouse lease whereas some landlords have architected completely different looking and sounding lease forms that are very, very defined-term driven. I would not say that there is any benefit to either one of these approaches, but the heavily defined term approach often makes for a more complicated document.

If a data center customer has the ability to influence the type of document that will be used, in most circumstances the customer should push for a lease, rather than a license. There are many reasons why a lease is preferable over a license and here are a few:

  • First and foremost, a lease is a real property interest whereas a license is just a contractual right. Tenants have more heightened rights than licensees so usually a statutory process will need to be satisfied by the landlord in order to have a tenant removed from possession or its lease terminated, whereas a licensee will have much fewer protections and is not considered a holder of a real property interest. Tenant defenses will include the right to be heard in court in an action to evict and to raise defenses challenging the eviction, including attacking the landlord's conduct and raising affirmative defenses. A licensee will not have the same defenses nor have the right to be heard in an eviction proceeding. As to a lease, it will take anywhere from two to six months for a tenant to be evicted, depending on the jurisdiction. Depending on the language of the license, it may be able to be terminated immediately upon a default.
  • If a tenant holds over after the expiration of the term, that tenant is still considered a tenant and the landlord will need to adhere to the eviction process to rid the property of the tenant. If the licensee holds over after expiration of the license, the licensor (absent language to the contrary in the license), can immediately remove the licensee and its property and deem the license terminated.
  • In the case of a lease that is either prior in time to a mortgage or where the lease has been made subordinate to a mortgage but the tenant has received a non-disturbance and attornment agreement from the landlord's lender, the lease will remain in effect in the event of a foreclosure. A license will not benefit from being prior in time to a mortgage as it is not a real property interest and a lender will not grant a licensee a non-disturbance and attornment agreement.


The other major form of contractual document used to describe the relationship between the data center operator and the company is the master services agreement/license and service order. The master services agreement originates from the IT/software fields where one master services agreement is signed between the parties to describe the overarching relationship between the parties and then separate service orders are signed as to each requirement, which in this case would be a separate service order for each individual data center. The theory is that the parties agree as to all the macro issues in the master services agreement and then document the specific business terms for each of the data center deployments.

Data center operators who insist on this documentation are considered colocation or "retail" operators where the servers and equipment within the data center are often separated and secured from other users by cages. If the data center customer's needs are small enough and do not warrant a cage, the data center customer will have allocated to it a server rack or portion of a server rack. These colocation/retail providers often offer more managed services to their customers than the wholesale landlords.

Master services agreements and service orders are often presented as documents that are not negotiable because they have a "printed form"-type look to them but my experience is that they are negotiable, just not as much as a lease.

Regardless of the form of document that will govern a data center customer's use of space within a data center, whether a lease or license, it is vitally important to prevent the arrangement from being terminated without sufficient notice and opportunity to cure while ensuring that the data center operator will operate the data center to the specifications required by the customer as the financial loss to a company of not being able to operate its data center to its desired level can be catastrophic.

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