REVIEW OF KEY LEGAL ISSUES REGARDING DATA CENTERS AND THE EXECUTION OF A COLOCATION AGREEMENT
Data processing and the ensuing need for efficient and secure storage solutions are at the center of most organizations’ business and as a result, the presence of data centers is expected to increase considerably in the coming years.
Clients generally use data center services in any of the following manners: i) by concluding a turnkey agreement with an experienced data center provider who will manage all of the client’s operations, ii) by leasing an exclusive data center space or iii) by entering into a wholesale agreement with a data center provider.
These transactions involve many considerations from a commercial and real estate perspective. This article outlines our analysis of the following:
- Is the provider a tenant?
- What are the client’s rights in terms of use and modification of the co-located premises?
- Service outages and maintenance.
A — Is the provider a tenant?
A key preliminary question in the due diligence process is to confirm if the provider’s activities are operated within its own property or within leased premises.
If the provider leases its premises, several additional real estate considerations should be addressed, namely:
- Is the provider entitled to sublease or grant access to the leased premises under the terms of its lease?
- Is the term of the provider’s lease at least equal to or longer than the term of the client’s colocation agreement?
- Does the provider’s lease provide for access to and use of a dedicated back-up and generator system for its leased premises?
We strongly recommend that the client ensure that these elements are incorporated into the colocation agreement by way of representations and warranties from the provider.
In addition, the client should negotiate the inclusion in the colocation agreement of a right to terminate the agreement should the provider fail to renew its lease or be placed in default thereunder. Moreover, the client should require that the provider forward a copy of any default notice received from its lessor and/or a copy of the exercise by the provider of any lease renewal.
Finally, in this context, the client should consider registering its sublease at the Land Registry.
B — Client’s rights in terms of modifications to and use of the premises
Colocation agreements generally provide that the client is responsible for the maintenance and upgrade of its equipment located in the data center.
As such, it is essential that the client has all the necessary rights of access to and use of the co-located premises enabling it to carry out its maintenance and upgrade requirements without the restrictions usually found in commercial leases.
A standard commercial lease will usually provide that the tenant may not perform alterations or modifications without having first obtained the landlord’s consent and may also impose weight and storage restrictions. We, therefore, recommend making sure that the colocation agreement contains provisions that authorize the intended use of the co-located premises by the client. It should, however, be noted that this use by the client must, in no way and at no time, interfere with the operations of the data center’s other clients.
C — Service outages and maintenance
The uninterrupted use of the co-located premises is an essential consideration of the data center clientele. The power consumption of a data center is significant and must be supported by a back-up and generator system.
In this respect, the fee payable by the client often takes into account its power usage during the term of the agreement.
The usage requirements and warranties offered by the provider are detailed within a service level agreement (SLA) which is entered into concurrently with the colocation agreement. It is therefore essential that the client conduct an in-depth review of the terms and conditions of the SLA. The common practice is to cap the service credits available to the client in the event of an outage.
The client must, therefore, confirm that the offered capped service credit is adequate to cover the damages it may incur as a result of an outage. The client should also determine if the nature of its business requires the negotiation of an additional remedy, such as a termination right.
Finally, the SLA should detail the provider’s maintenance obligations in relation to the data center, the back-up system, the generators, the common areas, and the cooling systems. Accordingly, the client should make sure that the SLA contains all of these provisions as well as any additional condition required for the client’s business. For instance, in order to minimize its damages, does the client require a step-in right should the provider default in its maintenance obligations?
By Audrey Robitaille