While data center leases need to include most of the standard provisions of typical warehouse or manufacturing facilities’ leases, special attention should be given to their unique operational needs and special investments for the site. When leasing a data center building it is essential, among other things, to ensure the lease will address a high level of security, protect the privacy of both the tenant and the premises, and provide for continuity of operations throughout the lease term.
Below we highlight several key considerations for negotiating a lease for a data center:
Security and Privacy
Data centers house sensitive information, necessitating heightened security measures to protect data and restrict unauthorized access, including from landlords and their agents. These concerns flow throughout the lease, including in maintenance, work letters, signage, postsigning publications, landlord access, and confidentiality provisions of the lease. Further, the tenants themselves often do not want their identity disclosed to the public and will sometimes have very specific requirements as to allowing any third parties to know their identity.
Tenants may also seek to restrict the landlord’s ability to transfer the property to competitors, ensuring that their data remains secure. These can be points of contention given that the restrictions are not common in other lease types or where tenants do not have leverage. Careful consideration should be given to including these provisions and confirming they meet internal requirements for the tenant as well.
Maintenance
Due to the critical nature and security and privacy concerns of data center operations, tenants often assume more maintenance responsibilities than in traditional leases. This approach allows tenants to maintain control over their space and limit landlord access, thereby enhancing security and operational reliability.
Due to the tenant typically handling these costs, the overall rent for the site is often adjusted accordingly and special consideration given to credits/reimbursements (if applicable depending on the length of the term) for capital expenditures.
Utilities
The same concerns that can arise when assessing the purchase of land for data center development are also present in leasing data centers, including notably availability of utilities, particularly water, electricity, and fiber (as we have previously discussed on Data Center Bytes).
Depending on the stage of development, the lease may need to address whether landlord or tenant will be taking responsibility for negotiating with utility providers for bringing the utilities to the site or for rates on the utilities to be consumed at the premises. This ensures that the necessary infrastructure is in place to support data center operations.
Interruption of Services
Because data centers cannot afford interruptions in utility services lease agreements should include detailed provisions regarding service interruptions and force majeure events. Tenants typically seek options such as self-help, compensation, and termination rights for service disruptions, while landlords aim to define their liability clearly. Given that landlords tend to have less responsibility for maintenance and utilities in data center leases, the gap between the two parties can be bridged, and is easier to bridge, when the lease is considered in its entirety. Incorporating redundancies into the building and site design for interruptions can also mitigate risks.
Casualty
While all real estate is deemed unique, developed data centers are usually specifically zoned, permitted, and with special additional utilities brought to the site, making them difficult to replace. As such, a tenant may be more concerned than is typical about the casualty provision.
For instance, a tenant may want to negotiate the right to reconstruct after a casualty at any point in the lease even where the landlord notifies the tenant that the landlord does not intend to reconstruct the data center and even where the tenant has to pay out of pocket for some of the costs for the reconstruction. This differs from typical office leases where business interruption insurance helps address the costs of a casualty and alternative office space is generally more plentiful.
Environmental Concerns
Similar to concerns an owner might have, as with any real estate project, securing the necessary environmental permits and conducting Phase I and Phase II Environmental Studies are crucial steps during the lease negotiation and diligence period.
Careful consideration should be given to the existing conditions of the property and whether remediation is necessary prior to commencing construction and negotiating a clear allocation of responsibility for preexisting and future contamination.
Work Letters and Special Equipment
For data centers in development, work letter negotiations can be extensive. Tenants may prefer limited landlord involvement in planning improvements due to security concerns if the tenant is managing the construction, while some others are looking for turnkey data centers where landlords take on the majority of the work or require the landlord to deliver the building shell for the tenant to fit out the space.
Further, another consideration when addressing construction provisions is special improvements or equipment. Lease negotiations should address the installation and maintenance of special equipment, such as chillers or generators, to meet operational needs.
Defaults
Given the significant investments in data center infrastructure, tenants may request extended cure periods for defaults and additional notices before being placed in default. Termination rights for landlords under data center leases, even for defaults, are a major negotiation point to be addressed. In the event of a landlord default, tenants will want very clear self-help rights in order to quickly address any issues that might impact continuity of operations.
Memorandum of Lease and Subordination and Non-Disturbance Agreements
As with non–data center leases for either long terms or with significant tenant investments, a tenant will desire to have the right to record a memorandum of lease and have protective non-disturbance protections related, and data center leases are no exception. These documents notify lenders and other parties of the lease’s existence and protect tenants in foreclosure scenarios. While landlords and lenders typically agree on the general concept of these protections, the specific terms require negotiation.
By addressing the key considerations set forth above, both landlords and tenants can establish a lease agreement that supports the unique needs of data center operations. We invite you to subscribe to receive updates on our Data Center Bytes and join us during our Data Center Bytes webinar series.