Lease Requirements for Tenants with Data Centers
Standard form leases for commercial office space are likely to contain provisions that may not be compatible with the requirements of tenants who plan to install and operate data centers. What’s more, some real estate professionals may not fully appreciate the special needs of data centers that need to be addressed in a lease.
Electrical Supply Lease Provisions
The following types of electrical supply provisions (abbreviated for the purposes of this column) require close attention since the supply and cost of electric power are major considerations for a data center tenant negotiating a lease.
Utilities Included in Rent
Some office leases apportion the cost of utilities among tenants based upon the space each occupies. In these cases, the landlord is typically the utility customer and receives a single bill from the utility. The landlord will soon recognize that a data center consumes much more electricity proportionally than a typical office space tenant and its demand for electricity may exceed the building’s wiring capacity. Following is an example of a “rent-included” provision addressing possible “excess usage”:
“All electricity used by Tenant in the Premises shall be paid for by Tenant through inclusion in Base Rent (except as provided below with respect to excess usage).”
The “excess usage” provision should be negotiated with knowledge of the terms under which the landlord purchases electricity, and a tenant should model the cost of anticipated excess use for the purposes of lease negotiations.
In other large city office buildings, tenants are submetered and receive a monthly electric bill from the landlord. Submetering can cause issues for data centers when the landlord adds a proportional “administrative fee” (rather than a fixed administrative fee) or percentage “adder” to each bill. The demand for electricity by data centers may result in unreasonably high bills when such fees or adders are added to the base cost of electricity. Following is an example of such a provision:
“Landlord…during the Lease Term, [has] the right to separately meter electrical usage for the Premises or to measure electrical usage by survey or any other method that Landlord, in its reasonable judgment, deems appropriate and invoice Tenant for its usage adding an administrative fee for Landlord’s services.”
For a data center tenant, the method of metering or measuring and the administrative fee should not be left for determination by the landlord (reasonably or otherwise), since the landlord’s concept of an “appropriate” determination may well be at odds with the tenant’s. To protect the tenant, the issue of submetering should be addressed by a provision describing the calculation of the monthly electric bill and the adders or fees included in this calculation.
Landlord Operates Electrical System in the Building
In the above situations, the landlord owns and operates the building electric system “behind the utility meter.” As part of its responsibilities, the landlord is responsible for delivery of electricity from the utility master meter (generally in the basement) to the data center. Older buildings may have faulty wiring that might reduce the quality of power provided to the data center, creating a “dirty” power situation. Tenants should negotiate a provision in the lease requiring that power delivered to the data center be the same quality as power provided by the local utility.
An office lease may permit a tenant to install supplemental HVAC to meet the cooling load required for a data center. Following is an example of such a provision:
[if] supplemental HVAC is installed to serve the Premises, Tenant shall, at Tenant’s sole cost…, have a separate electric [sub]meter installed . . . and Tenant shall pay Landlord for electricity used by… supplemental HVAC…Tenant’s use of electrical services furnished by Landlord shall not exceed voltage, rated capacity, or overall load… standard for the Building. [If] Tenant requests…electrical services in excess of [the]Building standard, Landlord may refuse to consent to such usage or may consent upon such conditions as Landlord, in its sole discretion, elects…all usage shall be paid by Tenant as Additional Rent.
This, too, is a clause that could cause major difficulties for a data center tenant since the landlord may refuse to consent or may set terms for its consent in its sole discretion. The specific terms of the provision of supplemental HVAC should be determined in advance and provided for in the lease.
Landlord as the Utility Customer
When electricity is included in rent or submetered, since the landlord is the utility customer, the tenant must rely upon the landlord to handle all matters with the local utility, and, in a deregulated state, to potentially contract with electric commodity providers such as non-utility energy services companies (ESCOs) and other suppliers. Following is an example of such a provision:
Landlord shall have the right at any time and from time-to-time during the Lease Term to contract for electricity service from such providers of such services as Landlord shall elect.
Since few leases require landlords to bargain for the best electric power prices or to hedge against potential price rises, if a landlord fails to take a data center’s needs into account, a data center tenant may be stuck with higher bills than it might otherwise have had to pay. It might also find itself on an inappropriate tariff (such as a time-differentiated tariff which is premised upon a customer’s ability to shift loads to off-peak times). This potential harm to the data center tenant should be considered and, in the event protective language can be negotiated, it should be included in the lease.
Since we expect that it would be difficult for a tenant to negotiate a lease (for electricity costs passed to the tenant) requiring a landlord to bargain for the best electric power rate on behalf of the tenants, it is important for a data center tenant to secure the right to use existing building risers or run new risers to its leased premises and become a direct customer of the local utility or contract to purchase power from an electric commodity provider. Also, the landlord should warrant and represent in the lease that the building has adequate riser capacity to accommodate the data center’s electric load and that the tenant is permitted to use such risers.
Limitations on Landlord Liability
Office leases may exempt landlords from virtually all liability relating to a lack of sufficient energy supply. Following is an example of such a provision.
…Landlord shall not be liable to tenant for any… damage sustained by tenant resulting from any failure to supply electric current to the Tenant from any accident or occurrence…in the Building as a result of any repair or…defect in or failure of equipment, pipes, or wiring, or by gas, water, steam, electricity …(except where due to Landlord’s gross negligence or willful failure to make repairs required to be made…after…written notice to Landlord), nor shall Landlord be liable to Tenant for any loss or damage occasioned by the acts or omissions of other tenants.
Since data center tenants operate second to second, the “written notice” is a snail-like process alien to their interests. So, in addition to notifying a landlord in writing, a data center tenant needs specific rights to perform its certain types of repairs or to otherwise respond to such an emergency.
Rights Reserved to Landlord
The lease may reserve broad rights for the landlord to take action without notice or liability to a tenant such as the following:
…to temporarily close the Building (for a period not to exceed _____ days) to perform repairs, alterations or additions in the Building.
Except in an emergency, a building shutdown should only occur on sufficient notice to tenants and in a manner that permits a data center tenant to continue to operate by bringing in temporary power and should also provide a data center tenant with a right to install its own generator.
As these examples suggest, time spent in carefully reviewing a proposed lease and negotiating these types of provisions is not wasted.