Telecoms: Upper Tribunal decides renewal terms for rural mast site including rent

The Upper Tribunal has published its decision in a reference by EE Limited and Hutchison 3G UK Limited under section 34 of the Electronic Communications Code (the “Code”), where the Operators sought to renew their lease of a rural mast site. Various renewal terms were in dispute, including rent. The decision contains helpful guidance on various issues including the Tribunal’s preferred rental valuation approach.

Background

• The reference related to an existing rural telecommunications mast site at Pendown Farm, near Truro in Cornwall (the “Site”) occupied by the claimant Code Operators, EE Limited and Hutchison 3G UK Limited, (the “Operators”).
• The Site was originally owned by the freeholder, Mr Stephenson, but in 2019 an intermediate lease was granted to AP Wireless II UK Ltd, who became the site provider and the appropriate party to confer Code rights (“APW”). There has of course been detailed judicial consideration of the definition of ‘Occupier’ under the Code. Please see our recent Law-Now of the significant Supreme Court decision recently handed down.
• The Operators’ lease was contracted out of Part II of the Landlord and Tenant Act 1954 and therefore they sought renewal under the Code.
• The parties agreed a new 10-year lease (subject to a tenant break option at year 5), but the Tribunal was required to consider:

1. The remaining disputed terms (including rent review, upgrading and sharing, landlord’s redevelopment break and indemnity provisions);
2. the rent payable under section 24 of the Code; and
3. whether any compensation was payable to APW under paragraph 25 of the Code.

1. Disputed Lease Terms

• Rent Reviews – the parties agreed 5-yearly RPI rent reviews but APW sought provision for further review(s) (to open market value) on the occurrence of certain contingencies, including a of the Operators losing its Code powers or assigning the lease to a non-Ofcom registered operator. The Tribunal agreed with APW and allowed this provision.
• Upgrading – APW sought a restriction on the Operators’ right to upgrade the equipment, proposing any upgrade should have “…no more than minimal adverse impact on the appearance of the equipment; and should impose no additional burden on the landlord” in line with the minimum rights guaranteed to Operators under paragraph 17 of the Code. In On Tower UK Limited v Green [2022], the Court of Appeal confirmed that paragraph 17 was the minimum rather than a ‘ceiling’. In the present case, planning permission had been granted for the addition of further equipment on the mast and APW’s adjacent land was not realistically capable of use for any activity which could be interfered with. The Tribunal therefore rejected the qualification on upgrading proposed by APW on the basis it would obstruct the Code’s objectives and would be liable to bring the parties into future conflict.
• Indemnity – APW sought an extension of the indemnity provision (which had the purpose of protecting APW against claims brought by third parties arising out of the Operators’ exercise of their Code rights) to cover any claims arising by reason of any “act, negligence, breach or omission” of the Operators. The Tribunal accepted APW’s proposal and confirmed that it was appropriate that the indemnity extended beyond just those claims arising from the Operators’ negligence.
• Sharing occupation – APW sought to restrict any sharing occupation to that of the equipment, rather than the whole Site and again proposed the inclusion of the paragraph 17 restrictions. The Tribunal took the same approach to upgrading and said that such provisions would impose a significant limitation on the opportunity to share the Site with other operators and would be inconsistent with the Code. The Tribunal also preferred the Operators’ proposed wording which permitted sharing of the Site, not just the equipment.
• Redevelopment break clause – APW sought the inclusion of a redevelopment break option after 5 years if it intended to redevelop all or any part of the Site, or any neighbouring land acquired during the term. It was not suggested that APW had any current redevelopment plans in the short term, although it pointed to the possibility of wanting to build its own mast on the site (as APW’s group companies were wholesale infrastructure providers) and the possibility of the Site being used for a wind turbine. Whilst the Tribunal was doubtful as to whether either of these scenarios were realistic possibilities, it held this alone was not a strong enough reason to refuse the inclusion of a redevelopment break option. The fact that the redevelopment break option would introduce a degree of uncertainty in the investment decisions of the Operators was also not enough to justify its refusal. It was noted that the inclusion of the redevelopment break option would not prevent an operator from applying to the Tribunal for a new lease and putting the site provider to proof of its intention to redevelop.

2. Rental valuation under paragraph 24

The Operators’ expert proposed a rent of £625 per year. The expert made use of two valuation approaches, firstly the comparative method (using recent Code transactions as evidence) and then the ‘structured’ approach as first set out in Vodafone Ltd v Hanover Capital Limited [2020] which arrives at a valuation by attributing a value to each of the factors which would be likely to influence parties negotiating a letting on the paragraph 24 assumptions. APW’s expert relied on the structured approach only and had proposed a rent of £7,500, which included an element of compensation.

Whilst acknowledging that the structured approach can be cumbersome and artificial, the Tribunal confirmed this was the preferred approach as it placed little reliance on real-world transactions. The Tribunal reiterated earlier comments in EE Ltd and Hutchison 3G UK Ltd v Affinity Water [2022] that evidence of real-world transactions for telecommunications sites should not be used to base a valuation under paragraph 24. This is to be contrasted with the decision in EE v Morris [2022] which involved the rent being determined under s.34 of the Landlord and Tenant Act 1954 and in turn means the main commercial purpose of the transaction does not need to be ignored. The Tribunal did confirm that a comparable assessment can however be appropriate where it can be said that a particular site has an alternative use value (e.g. commercial car park).

When adopting the ‘structured’ approach from the Hanover Capital decision, the parties’ experts both largely used the Tribunal’s decision in On Tower UK Ltd v JH & FW Green Ltd as a reference point. On Tower also related to a rural mast site and in that reference it was held that, in the absence of special features, a rural site which was not in close proximity to housing might expect to be let on paragraph 24 assumptions at a rent of £750. On the basis there was nothing unusual about this rural mast site, the Tribunal did not see any reason to depart from this figure.

3. Compensation to APW

The Tribunal also considered whether any assessment of compensation under paragraph 25(1) of the Code was appropriate (being payable where a site provider has sustained or will sustain loss or damage as a result of the exercise of the Code rights imposed by the Tribunal). The Tribunal looked at diminution in value of the land as a potential head of loss under paragraph 84(2)(b) of the Code.

APW argued that it should be awarded compensation by reason of its inability to make profitable use of that land following the imposition of the agreement (referring to its wholesale infrastructure provider group company business).

Applying the reasoning in EE Limited & Hutchison v Islington LBC [2019], the Tribunal acknowledged that the “no network” assumption prevented APW from realising the true value of the Site but held that this did not give rise to a loss, and therefore a claim for compensation, under paragraph 84. APW would receive consideration at the level prescribed by parliament and could not claim to have suffered a loss in being unable to exploit the Site for some alternative use.

The Judge did however distinguish this reference from that of EE v Islington as APW also held a lease of neighbouring land. Despite the redevelopment break option, if APW was prevented from implementing a genuine scheme of development by the exercise of Code rights, any claim for compensation could be properly formulated and brought at that time.

Kay take-aways

The Tribunal has given clear guidance to parties negotiating renewal terms (particularly on rural mast sites):

• Indemnity provisions need not be limited to third party claims arising from the operator’s negligence;
• The threshold for insertion of a redevelopment break option is relatively low;
• The conditions in paragraph 17 on the operators’ power to upgrade or share apparatus should be treated as a minimum and not a ceiling on the operators’ rights and the Tribunal is unlikely to be willing to impose significant restrictions on those rights.
• In respect of rental valuation under paragraph 24 of the Code, the Tribunal sent a clear message that parties should not use the comparative method and instead the preferred approach is the ‘structured’ approach as set out in Hanover Capital. Any party seeking to rely on the comparable method of valuation under paragraph 24 should take heed of the Tribunal’s comments in this reference regarding avoiding incurring unnecessary time and costs;
• Relying on the decision On Tower as a reference point, where the structured approach was applied, a rental figure of £750 per annum is likely to be appropriate for a typical rural mast site.
• As in EE v Islington, the Tribunal has restated that while the valuation assumptions in paragraph 24 prevent the site provider from realising the true value of its land, this does not give rise to a loss for which compensation is payable under paragraph 84 of the Code.