Indefeasible Right to Use Agreements (IRU’s): Key Legal Considerations

Alex Preiser Associate Counsel UCAR

IRU Agreements

• IRU Defined • Key Terms • Considerations • Strategies • Summary • Questions

Definition

Indefeasible Right to Use Agreement (“IRU”): An agreement whereby one party (the “User”) obtains the right to use specified network facilities and/or fiber of another party (the “Grantor”). Essentially it is a lease. The User is granted rights to use the facilities and/or fiber of the Grantor for a specified period of time.

Key Terms

• Connection • Acceptance Testing • Maintenance • Construction • Fees • Performance • Property Rights • Term/Usage Rights • Payments/Taxes • Force Majeure

Connection

• What is agreement for?

– Fiber only vs. Fiber and Equipment • What are the responsibilities of each party?

– Ensure that all responsibilities are clearly outlined • Which party pays connection fees?

• Where is connection to occur?

– If at Grantor’s facility, what are Grantors rights at facility?

– User access – What if Grantor loses rights at that facility • Does Grantor own facility? If not, what is lease term?

Acceptance Testing

• Extensive Specificity of Tests – Make part of the contract – Grantor is only going to do that which is required • Ensure Tests Accurately Demonstrate Required Functionality • Require Specific Timeframes/Levels of Effort – Penalties and/or Credits – Termination

Maintenance

• Generally provided by Grantor • In most cases User will not be allowed to access fiber – Fines and/or criminal penalties • Costs are expensive – Understand what is being provided • Should cover scheduled and unscheduled maintenance • Penalties and/or Service Credits and the right to terminate should be included for User

Construction

• Costs – May be very expensive – Often borne by the User • Property Rights – Who owns the property ?

• Who owns Fiber?

– If Grantor is to retain ownership of fiber, what rights does Grantor have beyond the rights granted to User – If there is potential value to Grantor, costs of construction should be shared • Penalties – Time delays and cost over-runs are not uncommon and should be addressed in advance

Fees

• Fees can be significant percentage of overall costs and to the extent possible should be negotiated in advance: – Management Fee – May be as much as 50% of the costs incurred by Grantor.

– DP&E: Design, Planning, and Engineering • Fees should not be profit center for Grantor

Performance

• Maintenance/Outages – Understand Grantor Obligations – Penalties/Credits • Re-routing – Potential performance issue – Could effect Grantor’s property rights

Property Rights

• What are Grantor’s rights with regard to the “Associated Property”(Easements, Licenses, etc)?

– What if Grantor loses rights or has to pay unanticipated license fees?

• May be force majeure event (read carefully) • Fees may be passed on to User – Obtaining of Rights/Penalties • Negotiate terms that ensure you are covered

Term/Usage Rights

• Term – Based on User’s needs – Useful life/Type of fiber – Case-by-Case basis • Usage Rights – Does User have the right to lease to third parties?

• Strategies – Balance term with usage rights/potential to enter into agreements with third parties and act as grantor – Consider shorter terms with extension rights

Payments/Taxes

• Lump Sum Payments vs. Monthly – If making lump sum, should receive deep discount • Grantor should put Bond or LOC in place to protect in the event of termination, bankruptcy, etc… • Taxes – Almost all taxes will be borne by the User – Understand all taxes up front. Grantor may provide accounting for previous year(s) • Agree that User’s tax liability will not exceed certain amounts or increase by more than specific percentages

Force Majeure

• Understand all potential events covered – Is losing “Associated Property” rights a force majeure event? • In the case of force majeure events, what are User’s rights/Grantor’s responsibilities?

– If fiber is damaged, understand maintenance ramifications – is this carved-out?

Summary

Understand your goals and timeframes Do not try to cover every specific contingency, rather address the overall concerns Understand all your rights and obligations under the Agreement – Even if they do not appear applicable

Questions?