Right move

Lenka Glynn and Kelly Tymburski offer a practical guide to legal and drafting considerations of sale and leaseback agreements in the telecoms sector

Tags: Pinsent Masons
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Right move Lenka Glynn: Many issues affect the value of an asset portfolio.
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By  Lenka Glynn , Kelly Tymburski Published  September 15, 2010

In our last article, we examined some of the more common commercial considerations relevant to sale and leaseback transactions in the telecommunications sector. In this article, we put the spotlight on some of the relevant legal and drafting considerations the parties should take into account in relation to the suite of documents that will affect their sale and leaseback transaction.

The type, structure and scope of transactional documents will need to complement the way in which the transaction is to be structured and sequenced. Therefore, establishment of an optimal sale and leaseback transaction structure is the first step the parties will need to take on the way to preparing the relevant transactional documentation.

In a classic sale and leaseback, chronologically the first step is the sale of the asset portfolio from the seller / lessee (“Seller”) to the purchaser / lessor (“Purchaser”) in exchange for a purchase price.  This would then be followed by the leaseback from the Purchaser to the Seller of some or all of the assets, in exchange for lease payments. However, many variables may impact on the transaction structuring, including:

  • • the relationship between the Seller and Purchaser on the corporate level;

• financing of the purchase price;
• scope of the parties’ rights and responsibilities in respect of the transferred assets following the conclusion of the transaction; and
• regulatory and tax implications

The transactional documents should effectively facilitate the implementation and completion of the sale and leaseback, bearing in mind that the parties will rely on the transactional documents as a guide to following their respective agreed steps and obligations relevant to the transaction.

As such, the sale and leaseback transaction may require a number of stand-alone documents (e.g. corporate documentation, a purchase / sale agreement, a lease agreement, finance-related documents, a managed services agreement and/or a build-to-suit agreement), a single master agreement linking all parts of the transaction or a combination of these approaches. The optimal choice of such a structure is very much a question of the facts surrounding the proposed transaction and the relationship of the parties.

Defining the assets

Just as identifying the sale and leaseback asset portfolio is imperative from an operational standpoint, ensuring it is also adequately defined in the transactional documents is equally important.  Perhaps the most detailed and accurate way to do this is by reference to a property schedule, where all of the relevant assets are listed and identified in as much detail as possible.

The information required for the schedule noted above may be very extensive.  For example, a large telecoms transaction involving multiple leasehold tower sites should identify these sites with reference to the relevant leases which govern them – many of which may have lease registration numbers that should be listed, for certainty, in the schedule.

Conditions precedent: Because of the frequent interdependencies inherent to sale and leaseback transactions, parties commonly find themselves in situations where they do not wish to take certain actions prior to agreeing terms and conditions that will govern the transaction, but at the same time they do not want such terms and conditions to become effective until the action in question has been taken.

For example, where the Purchaser is required to obtain a telecommunications licence in order to own telecommunications infrastructure, the Purchaser is unlikely to apply for and obtain such a licence until the terms of the transaction are agreed between the parties. However, the parties can agree that the terms will only become effective upon the successful securing of such a licence. Therefore, obtaining such a licence would become a “condition precedent”.

Price and payment terms: It is essential that all relevant payment terms are adequately addressed in the transactional documents.  For example, the parties should consider whether the purchase price will be paid in full upfront or over time in instalments, and should also implement a sensible formula for adjusting the purchase price to accommodate potential changes in the transaction. The parties should also decide whether lease payments will be made at regular intervals throughout the year or as an annual lump sum, and if such amounts will be payable in advance or arrears.

Additionally, where the site or sites at issue are being shared (or will be subject to future sharing arrangements), the parties should also agree a formula for lease adjustments reflecting the fact that certain portions of the lease payments, such as the cost of maintenance and utilities, are likely to be shared amongst tenants proportionately.

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