Increasing demand for fast and secure bandwidth has resulted in a surge in transactions for fiber optic networks. Everything from smart devices to cloud services has accelerated the demand for scalable, secure and reliable fiber optic networks. Meanwhile, public funding has poured into the space, including $65 billion from the Infrastructure Investment and Jobs Act earmarked for broadband access and myriad other state and federal broadband infrastructure programs. Substantial private investments, including from private equity firms, have followed suit. In this active market, savvy negotiation of fiber optic agreements is critical to meet short and long-term business goals and avoid undesired risk.
Traditionally, end users contract for “lit fiber” (i.e., live fiber strands with electronics attached) for bandwidth needs, including for internet, intranet and other network solutions. However, “dark fiber” (i.e., strands of fiber without electronics) can present a unique opportunity for organizations with excess fiber or that seek to better control scale, speed and capacity through use of dark fiber, as well as those seeking capacity to meet their business needs. Agreements can take the form of an asset purchase, indefeasible right to use (IRU), which entails a long-term contract with exclusive access rights and potential end of term ownership right, or a more standard license agreement.
There are several important considerations for parties entering into dark fiber agreements. Legal terms for any fiber agreement need to be carefully crafted to include provisions for ownership rights, maintenance and end-of-term rights among others. Beyond contractual and ownership considerations, fiber networks involve multiple stakeholders across federal, state and local governments, each with their own set of laws and compliance expectations.
Agreement structuring
Agreements can be structured in various forms based on your needs. Indefeasible right usage (IRU) is a popular arrangement structure for dark fiber. Some find IRUs beneficial for their potential tax benefits and network control. Under an IRU, payment is made up-front for a typical 10- or 20-year term, thus the greatest risk for an IRU is the potential bankruptcy of the network operator with an inability to recover your up-front payment. Alternative structures that may be utilized include licensing, leasing, or asset-based purchases. When considering which agreement structure is most conducive to your needs, you should consider if your agreement will be subjected to regulatory approval, among other considerations.
Regardless of the agreement’s structure, it may be beneficial to include a provision allowing for subsequent transactions under the operations of the agreement. A network order form can be included to future-proof network needs without having to create a net new agreement as they arise. Including this provision can save you valuable time and expense in the future should increased network needs develop that you are not currently aware of.
Ownership
It is imperative that a dark fiber agreement explicitly specifies ownership during the term and at termination. Typically, the grantor of an agreement will retain ownership of the dark fiber, fiber system, facilities and premises. However, there may be instances where ownership of those different components will be distributed among different parties. Detailed arrangements should be specified to account for grantor or grantee ownership. Additionally, it is critical that consideration is made to how ownership will or will not change among the various components at the end of the term.
Pricing
Pricing is traditionally set at a per strand per mile basis. Arrangements often calculate total cost of fiber by a set rate multiplied by the number of strands used multiplied by the number of miles. Ongoing operational and maintenance costs of the fiber network should also be accounted for and expectations of who is responsible for these costs should be included in the agreement. Finally, various fees and taxes may be implicated by the underlying fiber and should be accounted for, especially in cases where the network is yet to be constructed.
Acceptance testing and standards
Prior to taking control of the fiber, a grantee will often incorporate acceptance testing process into the agreement. Acceptance testing is a fundamental component because this ensures the network works before the grantee or purchaser enters into the arrangement. Such testing should be objective requiring the grantor to test segments under the contract against the loss budget and attest to the results.
Accompanying testing requirements, cure rights can be contracted for to hedge against potential excessive losses during testing. Cure rights can be included to maintain accountability for performance from the grantor without nullifying the agreement should acceptance testing fail. By preventing the termination of a contract due to a failed test, this will prevent costly re-contracting.
Access and maintenance
Maintenance of fiber network across the term and accessibility will be essential. The grantor will typically be responsible for maintenance of the fiber system. Step-in rights can be included in contracts to ensure that if the grantor does not meet agreed upon maintenance terms that the grantee or a third party is able to perform necessary maintenance at the expense of the grantor. Service level agreements for expected repair turnaround times should join maintenance expectations. Considerations of who is responsible for overall maintenance costs should be included as well. Access permissions may be included in the agreement outlining access rights to the physical facilities. Further, any restrictions a grantee may require from the grantor based on potential data sensitivity should be specified in access provisions.
Rights of termination
Provisions considering rights of termination and potential termination fees will be helpful to include in the agreement. Termination for convenience, termination due to casualty or condemnation, or termination for default can be included in the agreement. The inclusion of termination provisions will help clarify ownership of equipment, proper reimbursement as needed, and that facilities are reverted to the appropriate parties and avoid potential costly legal battles.
Underlying rights
Dark fiber is typically not regulated under traditional telecommunications regulations, but certain key legal frameworks may apply. Any fiber project will require a holistic review and detailed consideration of laws and compliance expectations across all levels of government. Additionally, fiber projects should be cognizant that local governments require permitting for each project. As a result, permitting fees to maintain compliance with local municipalities should be included in any project budget. State and federal infrastructure safety laws may further be implicated in a dark fiber agreement and should be considered a part of any plan.
Conclusion
Negotiating the right dark fiber agreement to meet your network needs while remaining in compliance with laws and regulations requires careful consideration. Experienced professionals from the legal and tax industry can help navigate this complex environment.
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