Hogan Lovells is your first port of call and the leading legal provider in relation to successful realization and investments in data centres in Germany and Europe.
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This brochure summarizes key legal aspects to be considered when buying, selling, financing and/or constructing a data centre, including data protection, digitalization and cyber security.
In the last 3 years the datacentre workload has grown on average by more than 20% worldwide. This development will continue in the coming years until at least 2021. (Source: CISCO)
Lease or build a data centre?
When a company is growing and wants to out-source servers and IT equipment, it must decide on the best way to do this. Such a decision can be crucial if the business is expanding rapidly and therefore urgently requires additional space for servers and IT equipment. The choice it faces is whether to lease data centre space (by a colocation or warehouse solution, which we will refer to as "leasing" or a "leasing solution") or whether to build its own data centre.
The obvious advantages of building over leasing are that
- the company has maximum control over the IT equipment and anything related to it;
- there is no risk of "losing the lease", and
- any unused space can be leased out to other companies, thus reducing electricity, cooling and security infrastructure costs.
On the other hand, the main disadvantages of building are upfront costs which can add up quickly if not calculated thoroughly. The costs of building and maintaining a data centre should not be underestimated and may be a crucial factor in the decision making process. When evaluating the costs involved, the focus is mainly on power, staffing and IT infrastructure. However, real estate related costs are often not taken into account sufficiently or at all. These include architect, planning and design costs, building costs including costs for permits, such as building permits, costs for fire suppression and detection systems, notary costs, costs of registrations, etc. Nor should companies underestimate the various risks related to power and cooling infrastructure, hardware and software, technological development, uncertainty surrounding future business strategy and potential space problems, i.e. if the space later proves to be too small or too big. Moreover, companies should be aware of the large number of building regulations to be met, for example in the area of fire safety which may be very strict in some jurisdictions. On balance, leasing is likely to be a better solution for many companies because it allows risks to be confined and gives companies the flexibility to adapt their space needs to their business needs.
Data centre leasing strategies – the various types of contract structures
The most common types of leasing structures for data centres are:
- Wholesale data centre and colocation solutions
- Server hosting – managed hosting
Balancing the need for control with the desire to cut costs
Ultimately, the decision between a whole sale/colocation structure and a purely managed hosting structure is one of balancing the need to control the servers and IT equipment with the desire to achieve the best possible cost savings by entering into a data centre lease. Important topics which need to be addressed before taking such a decision include:
- how much control is necessary with respect to operation of IT equipment and the premises in which the IT equipment is stored;
- whether the tenant is prepared and willing to accept (high) capital expenditures for repairing and updating IT equipment; and
- whether the tenant is prepared to employ and pay for the necessary personnel to operate and maintain the IT equipment.
When taking this decision, the tenant should not only consider its present situation and its needs as a business, but also bear in mind its future strategies and plans in order to find the best solution. Overall, the wholesale/ colocation solution or a hybrid solution might be the right choice for many bigger companies, whereas the managed hosting solution could be the ideal solution for smaller firms.
What a data centre lease should cover
First and foremost, it is vital to clarify the legal relationship between the data centre provider/landlord and the occupier/ customer. Depending on the actual use and allocation of rights and obligations, a lease agreement (triple net or double net), a service agreement or an agreement with lease and service elements are possible options. In the majority of cases, the parties will sign a lease agreement which also includes elements of a service agreement.
As the lease agreement is the main legal document which governs the relationship between the parties, particular care should be taken when negotiating "Provider Must Haves" on the one hand, and "Customer Must Haves" on the other. Key topics to be considered in lease agreements include:
Lease term and renewals
Would the company prefer a long-term or short term lease taking into consideration that the initial term is often 15 to 20 years? In addition, the number of renewal periods and any pre emptive rights of the tenant should be taken into account.
Another important point is how the rent will be paid. The basic rent is usually based either on square meters or on power availability.
Space, permitted uses and equipment
The leased space might not be enough for all the equipment and infrastructure that the tenant requires. It is therefore advisable to stipulate in the lease agreement whether the tenant is allowed to use additional space, e.g. on the roof for antennas, shaft space within the building or special support areas for the placement of generators.
Set-up, alterations, maintenance, repair and replacement
Depending on who owns and who will be obliged to maintain the facility infrastructure, specific provisions must be incorporated into the lease agreement regarding alterations, maintenance, repair and replacement. The tenant and/or landlord might be required to comply with certain standards and/or maintenance schedules. Provisions on services relating to data centre equipment, heating, ventilation and infrastructure should also be included.
Power supply, cooling, humidity, connectivity and data capacity
Power supply, cooling, humidity, connectivity and data capacity are the core topics of a data centre lease. Provisions covering these areas must therefore be included in the agreement. Specifically, the following topics should be discussed and agreed: power requirements, cost of power and uninterrupted power supply as well as redundant fibre access, multiple carriers and sufficient data capacity.
Service level agreements
The parties should also consider including service levels and reasonable support provisions. Moreover, the agreement should describe what happens if service levels are not met. For the customer, it might be desirable to include a termination right for continued breach of guaranteed service levels.
Liability, indemnification, data protection and security
A limitation of liability might be beneficial for both parties. The agreement should also include provisions regarding data protection, security (e.g. access to the building) and compliance with laws.
In addition to the key topics mentioned above, it might be advisable to incorporate other provisions, depending on individual circumstances.
Avoiding pitfalls in construction contracts
Unlike brownfield projects/transactions, developing greenfield data centre projects are challenging and come with various risks. The developer needs to decide on the right approach for such a development: Delivering the project with various (multilot) contractors and a potential designer/or engineer or choosing an turnkey approach whereby an EPC-Contractor delivers the whole projects and agrees to engineer, procure and construct the datacentre. While the first option may deliver a more cost-efficient solution, a turnkey EPC Contractor undertakes the full completion, turnkey and interface risk of such a highly complex project. One of the most obvious benefits of entering into such a contract is having one single point of contact and responsibility for the project, thereby avoiding having to manage various roleplayers that would otherwise have to be involved in the construction and setting up of such a project.
While it is, of course, commonplace for an EPC Contractor to engage various subcontractors to provide certain services or works, the EPC Contractor remains the single point that is directly responsible for ultimately delivering a project ready for operation. This means for the Employer in an EPC project that the added risk of liaising with various parties and allocating various risks is avoided.
Parties need to face reality in terms of construction of a data centre. According to KPMG International's 2015 Global Construction Project Owner's Survey,
- Major complex EPC projects fail more often than they succeed, resulting in disputes;
- 71% of owners in the energy and natural resources sector reported unsatisfactory underperforming projects; and
- 69% of all projects between 2012 and 2015 were reported to be more than 10% over budget
Having this in mind, a clear contractual framework including a fully functional and efficient claims and risk management can assist in avoiding pitfalls as well as significant delays and cost overruns.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.