Long-term data center leases must be carefully structured to ensure that data center developers can develop, operate, and maintain their projects without undue interference or legal uncertainty. Data center leases will undergo intense scrutiny from financing parties, technology companies, and their teams of attorneys.
This article – the first in a two-part series – highlights several key provisions that developers, operators, and counsel should consider when negotiating long-term leases for data center sites.
- Waiver of Landowner Rights to Improvements
The landowner should expressly waive any statutory or common law rights it may have to improvements installed on the land, such as fixtures or buildings. This ensures that the tenant (and its lenders) retain full ownership and control of these critical assets. Any lender loaning funds for the development and construction of a data center will require first lien rights as to the data center and all associated improvements.
- Exclusive Use Rights Post-Construction Commencement
The Tenant must be granted exclusive rights to the leased premises once construction begins and continuing throughout the operating term. This protects the site from competing uses or encroachments that could jeopardize development or operational integrity.
- Tenant Assignment and Sublease Rights
Given the capital-intensive nature of data center development, a tenant often will partner with investors or sublease portions of the facility. The lease should expressly permit the tenant to assign its rights in whole or in part, or enter into subleases, without needing landowner consent. It also is critical that the lease grants the tenant the right to encumber, hypothecate, mortgage or pledge (including by mortgage, deed of trust or personal property security instrument) all or any portion of the tenant’s right, title or interest under the lease as security for the repayment of any loan.
- Notice and Cure Periods for Tenant Defaults
To ensure that the entire project is not placed at risk, the lease should require that the landowner provide formal written notice of any alleged tenant default to both the tenant and to its lenders. Both the tenant and its lenders should have a reasonable period to cure any default before the landowner may pursue remedies.
- No Termination for Non-Monetary Defaults
Data center developments involve substantial upfront investment. As such, the lease should include a waiver of the landowner’s right to terminate the lease for non-monetary defaults (e.g., failure to maintain landscaping), ensuring continuity of operations and protecting lender interests.
- Lender Protections
Leases should include provisions commonly found in “financeable” ground leases, including recognition and non-disturbance agreements, cure rights for lenders, and a prohibition on terminating the lease without prior notice to the lender. These provisions are essential for securing project financing.
Conclusion
Long-term data center leases are far more complicated and significant than typical commercial real estate leases. For most data centers, hundreds of millions of dollars, or even billions of dollars are invested, and those investments are dependent on the lease structure. The data center lease is a foundational document that impacts project viability, financing, and operational continuity. Developers should ensure that data center leases include the protective provisions outlined above to avoid legal, financing, and practical pitfalls.
Stay tuned for Part II, where we will explore additional lease provisions critical to the success of data center projects.
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Alan M. Cohen is partner in the Austin, Texas, law firm of Stahl, Sewell, Chavarria, Friend & Cohen LLP, where his practice focuses on energy, real estate and construction. Mr. Cohen can be contacted at acohen@sbaustinlaw.com or (512) 652-2943.