Question

Case 1
A telecommunications operator (BarleyCo) enters into an indefeasible rights of use (IRU) contract with TomCo (the incumbent telecommunications operator) for a dark fiber route between two cities. The agreement is for a term of 19 years, which is the expected service life of the cable. The arrangement specifies the exclusive use of a distinct fiber within the TomCo fiber cable, and BarleyCo is responsible for the installation of transmission equipment in TomCo’s buildings in order to light the fiber. TomCo has the right to swap BarleyCo over to an alternative fiber, but only for reasons of repair, maintenance, or malfunction, in which case it must compensate BarleyCo for financial loss. In addition to a single up-front payment, the contract provides for TomCo to charge BarleyCo for a share of maintenance costs and for space, power, and cooling within the TomCo buildings. BarleyCo is responsible for the installation and maintenance of its transmission equipment and is free to upgrade that equipment during the life of the contract. There are no restrictions on how BarleyCo may use or resell its capacity.
Analyze whether the arrangement contains a lease.

Answer 1

A lease is a contractual arrangement whereby the leasee is entitled use an asset of the leasor for a agreement lease payment. A lease is has three components (a) transfer of ownership of asset (b) transfer of possession and (c) transfer of control. A lease is revocable and is for a shorter period of time.

Indefeasible rights of use (IRU) given above is not a lease due to the following reasons -

1. The IRU is for the entire useful life of the asset as against a shorter period incase of lease.
2. There is no complete transfer of control for the asset and BarleyCo retains control over management
3. Under lease there is only one lease rental payment however in current case there are multiple payments such as maintenance and repairs
4. Lease is revocable but here IRU is not revocable here.