Developing and leasing a data center in France

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As technology changes, the demand for data center (DC) space is increasing with many companies needing somewhere to house large banks of data storage. DCs have not always been an attractive investment, in particular due to investors’ fear that the need for such storage space will eventually disappear. However, in recent years, the asset class has gained popularity in the private equity and real estate sector.

There are many factors to consider when developing DCs, both from an owner and user perspective, such as the need to consider specific customer specifications and lease agreements, and other legal requirements.

Given the often huge costs of building a DC, it is not surprising that both DC operators and service providers are choosing to lease rather that to build DC spaces. A lease on a DC requires a DC-specific focus, with many of the provisions of the lease agreement being tailor made to the use of the premises and to the tenant’s operations within them.

Technical aspects of DCs

The lease agreements on DCs in France are usually subject to in depth technical due diligence and to various condition precedents relating to the obtaining of specific permits in relation to power supply and to location-specific considerations such as proximity to power grids and networks.

Both the tenant and the landlord need to be advised by competent engineering specialists who can help them to evaluate their technical needs. Since the legal aspects of these lease agreements are driven by technical issues, lawyers usually also need the assistance of a project management team to ensure that the contract accurately reflects the agreement of both parties on technical issues and to review technical annexes to the lease which are often as important as the lease agreement itself.

Usually the owner of the DC is responsible only for the shell facilities, with the DC operator being responsible for the configuration of the space and deployment of infrastructure equipment, the cost of which can be higher than the cost of the building itself. In particular, the tenant needs to control the heating, ventilation and air-conditioning system, backup power supplies, and mechanical and electrical infrastructure to ensure a certain level of service to its customer. Because the information stored in the DC can be sensitive, DCs often house very specific security equipment.

DC operators enter into very detailed and specific turnkey contracts for the installation of the equipment which are the heart of their business. Under article 1792 of the French Civil Code, all building contractors are strictly liable to the owner or the purchaser of the building for a period of 10 years after completion for damage which compromises the structural integrity of the works and renders that building unfit for its intended use. However, the scope of the 10-year contractors’ liability excludes liability for equipment such as that installed in a DC. It is for this reason that turnkey contracts for the installation of DC equipment usually include specific contractual guarantees.

Given the high spec design requirements of a DC, the DC operator will be very involved in the technical definition of the property and in the definition of the landlord’s works. For leases of property still being constructed, the definition of completion is very complex and can give rise to heated and long discussions between the parties, since any deviation from the original plans can make the building unsuitable for DC use.

Having a new DC ready on time is crucial, in particular where the tenant is migrating a DC from elsewhere or where the tenant is already committed to a fixed date with the end users through services agreements already entered into. Both the lease agreement and the tenant’s turnkey contract for the installation of the equipment includes penalties to the benefit of the tenant should the target date not be met by the landlord or by the building contractor. However, any contract subject to French law must take into account the possibility that the amount of the indemnity will be reduced or increased by the court if it is considered to be excessive or ridiculous compared to the real damage suffered.

The tenant is often allowed earlier access to the DC to inspect equipment to be installed before the lease agreement comes into effect. However, it should be noted that this usually raises some issues in relation to the period of co-activity between the landlord and the tenant’s work and to the transfer of the legal risk on the premises between owner and tenant.

Longer duration of the lease agreement on DCs

Given the costs involved in developing a tailor made DC for an occupier, the lease agreements on such properties are usually long term. However, in France, the lease agreements are usually entered into for a maximum duration of 12 years, in light of the legal and tax constraints arising from the obligation under French law to publish any lease exceeding 12 years and to pay land registry fees at a rate of 0.715 per cent applied on all the rent and service charges due by the tenant throughout the duration of the lease. The lease agreement usually includes a waiver from the landlord of its right to refuse renewal of the lease, breach of which would give rise to payment of an eviction indemnity to the tenant. This allows the tenant to benefit from an automatic and certain right to renew the lease for at least nine additional years.

Specific provisions to be taken into consideration

The clause which deals with subletting the premises should be carefully negotiated and drafted, taking into account both the occupier’s main business to provide companies with DC storage through service agreements and the landlord’s concern to avoid any such disposal being legally classified as a sublease. Indeed, a DC operator will grant permits or services agreements, rather than leases, in the service agreements (which include related services orders) it concludes with its customers. According to French case law, where the principal obligation of such services agreements between DC operators and their customers is the obligation to provide services (and the obligations relating to the use of the premises are secondary by comparison) this may reduce the likelihood of such agreements being classified as subleases (thereby avoiding the specific legal consequences for both the tenant and the landlord which arise from a sublease arrangement). However, if servers and equipment within the DC are separated and secured from other users by cages which have private access, the legal classification of such services agreements could be called into question and may be more likely to be classified as a sublease arrangement.

The lease clearly deviates from general legal rules on accession provided by the French Civil Code and states that all equipment installed by the tenant are owned by the tenant until the tenant’s departure, thus avoiding any transfer of ownership at the end of the initial term of the lease agreement.

The standard provisions of a lease generally require that a tenant must restore the premises to the state they were in at the date they took possession. However, this may be extremely costly for a DC tenant. That is why the reinstatement of the premises upon the tenant’s departure is also a provision which is usually discussed at length, the tenant wishing to avoid huge reinstatement costs whereas the landlord is keen to benefit from premises that can be easily leased to a new tenant or with a configuration suitable for typical office or industrial use.

A tenant’s requirement to have continuous power, connectivity, access, appropriate security and controlled maintenance and in particular temperatures and humidity, can cause the landlord some concern about potential damages to be paid to the tenant should the latter be unable to operate the DC in some circumstances. A DC owner will therefore attempt to lessen its exposure to liability resulting from any interruption to the tenant’s DC operations, leading to detailed and complex indemnification provisions in French lease agreements.

Note: For those interested in DCs generally, the Real Estate Gazette (Issue 12, 2013) provided a special feature on DCs, with articles on this topic from Thailand, Belgium, Russia and the UK.