Significant Electronic Communications Code decision on terms of telecoms lease

Summary  

The Upper Tribunal has delivered a significant decision on the terms of a lease renewal of a greenfield telecommunications site under the Electronic Communications Code. In particular, in deciding the terms of a landlord’s break right the Tribunal determined that proof of the relevant intention to redevelop was required only at the time any dispute was heard by the Tribunal, and not when notice was given to terminate the lease. The Tribunal’s determination relating to the amount of rent under the lease is also significant since it is the latest in a line of decisions applying paragraph 24 of the Code, adopting the "no-network" assumption for valuation of the rental amount. The Tribunal concluded that the previous annual rental figure of £750, based on case law and used as operators’ invariable offer for rural sites, should be reconsidered and the appropriate annual consideration for a rural mast site is £1,750. The uplifted figure was partly because of inflation, but also in the light of the evidence of non-telecommunications transactions for unexceptional small rural sites.

Subject matter

The Tribunal considered the terms of a lease renewal under Part 5 of the Electronic Communications Code (“Code”) of a greenfield telecommunications site. It made important observations on the terms of a landlord’s break right and the Tribunal was given its first opportunity since EE Ltd and Hutchison 3G UK Ltd v Affinity Water Ltd [2022] (“Affinity”) and EE Ltd and Hutchison 3G UK Ltd v Stephenson [2022] (“Stephenson”) Telecoms Upper Tribunal decides renewal terms for rural mast site including rent (cms-lawnow.com) to determine the appropriate rent or consideration for such a site under paragraph 24 of the Code. The site had three phase power and two separate fibre connections with the equipment on site being a 20 m high lattice steel mast, standing on concrete, to which were fixed a number of antennae and microwave dishes. At ground level, several cabins housed electricity and telecommunications apparatus.

Terms of landlord’s break right

A point of particular importance in this case was the Tribunal’s determination of the terms of the landlord’s break right in the renewal lease. The issue was whether the landlord should have the right to terminate the new lease for redevelopment sooner than at the end of the term in ten years' time. The answer involved balancing the need of the operator for a reasonable period of security, with the entitlement of the landlord/site provider to have the opportunity to redevelop the site if it can obtain the necessary consents and can persuade the Tribunal at the appropriate time that its intention to do so is genuine.  In answering the question, the Tribunal also had to have regard to the direction in paragraph 23(5) of the Code that the terms of the new lease should ensure the least possible loss and damage is caused by the exercise of the Code rights conferred by the new lease to those who own interests in the site.

The Tribunal inferred from the operator’s own proposal for a five-year break clause that a minimum term of that duration would satisfy its own business requirements. There was no evidence that the landlord would be in a position to implement a redevelopment scheme at the site in the short term, but to provide a degree of certainty for both parties it should be exercisable by not less than 18 months' notice expiring on the fifth anniversary of the term or on any subsequent anniversary.

The Tribunal made important observations on whether proof of the relevant intention to redevelop was required both when notice was given to terminate the lease, as well as at the time any dispute was heard by the Tribunal. The Tribunal stated that there was no reason why a landlord/site provider should be required to demonstrate the appropriate intention by reference to more than one date, and the date of hearing of the application was the appropriate date since that was the relevant date for the purpose of a determination under paragraph 31(4)(c) of the Code. Given that choice, there was no reason why the contractual language of the break right should not mirror the language of the Code by referring to intention (rather than “desire” to redevelop), which would be required to be proved at the date of the hearing, to satisfy both the statutory and the contractual requirement to break.

The operator had argued that the landlords’ break should not be available to allow AP Wireless or other associated companies to develop a duplicate mast on the site. If that situation occurred, the operator would change from being the occupier of land under the Code to becoming the occupiers of a mast which would put them outside the Code. However, the Tribunal’s view on that point was that, provided the landlord’s intention to redevelop the site was genuine, it could see no reason why a different approach should be taken where the intended redevelopment is for a telecommunications use, even if the result is that an operator may in future enjoy less favourable terms at that site than if its previous lease of the land had continued. So the Tribunal saw no good reason to limit the break clause so that it was exercisable only if the intended redevelopment is for a purpose other than for a telecommunications use. It is not the policy of the Code to stand in the way of the redevelopment of sites.

So the Tribunal determined that the landlord would have the right to terminate the new lease on giving 18 months' notice expiring on the fifth or any subsequent anniversary of the term commencement date if it intends to redevelop all or part of the site and could not reasonably do so while the new lease continues.

A history of decisions on rents in telecoms leases

The rent or consideration payable under a new Code lease is to be assessed under paragraph 24 of the Code, adopting the "no-network" assumption.  The policy to which the assumption gives effect is that the fair return to the site provider "should not, as a matter of principle, include a share of the economic value created by very high public demand for services that the operator provides".

The no-network assumption has given rise to difficulties because parties have struggled to produce  relevant evidence for the value of a site suitable for telecommunications use, when the fact that the intended use is for telecommunications must be disregarded. The Tribunal has had to do its best with a more theoretical valuation model.

So in Cornerstone Telecommunications Infrastructure Ltd v London and Quadrant Housing Trust [2020] What terms can be imposed on site providers under the Electronic Communications Code? (cms-lawnow.com) the Tribunal adopted a three stage approach to the assessment of consideration under paragraph 24, which involved determining the existing use value of the site (or any alternative use value, if higher), to which were then added a sum to reflect any additional benefit which would be conferred on the tenant by the letting (such as the benefit of occupying an already secure site), and a sum to reflect any additional adverse effect which the activities on the site would impose on the site provider when compared to the existing, or alternative, use value. It was intended to arrive at a value which took account of the factors which would be uppermost in the minds of negotiating parties if they were required to leave out of account the value to the operator of the right to use the site for the purpose of a telecommunications network. 

In the cases that followed, experts generally agreed to adopt the three-stage approach in their assessment of consideration and in Affinity the Tribunal included a table summarising the figures determined in its own earlier decisions and those of the Lands Tribunal for Scotland for residential, commercial and rural property referring to them as "guidance on the levels of consideration which parties can expect the Tribunal to determine in other cases".

In Stephenson, the Tribunal stated that, looked at in the round, there was no reason to depart from a figure of £750 a year which the Tribunal had previously identified in the case of On Tower v Green as the letting value, based on the paragraph 24 assumptions, of an unexceptional rural site remote from any housing.

This has led to operators adopting £750 a year as their invariable offer for rural mast sites. However, if a challenge to that figure is mounted, the Tribunal's mind is not closed. In this decision the Tribunal, on the basis of transactional evidence, has revisited what has become a relatively settled value for unexceptional rural sites.   

Decision in the case on rent

The Tribunal stated that it is important to keep the level of consideration paid for sites, in all situations, abreast of the high rate of inflation over the last three years.

The Tribunal considered, for the first time, evidence from non-telecommunications transactions (in particular, the Central Association of Agricultural Valuers (“CAAV”)'s schedule of open market agreements for small sites), with a view to establishing a value for small rural sites in non-telecommunications use, which may then be used to arrive at a no-network value.

The challenge posed by the evidence of small sites let for non-telecommunications purposes (where it is not suggested that the site to be valued is suitable for any of those uses) is to adjust the agreed rents to remove so much as is attributable to the financial benefit accruing to the tenant from the intended use of the land.  If that can be done, then what is left, because it is based on real transactions, is likely to provide a better measure for a paragraph 24 valuation, than a figure built up solely by attributing values to benefits and burdens in the abstract. This is a valuation judgment, but the Tribunal was satisfied that this was a useful corrective to the Tribunal's previous figure of £750 in the earlier cases.

The Tribunal noted the onerous burdens accepted by a landlord entering into a lease of the site under the Code such as the potential difficulty of regaining possession for redevelopment at a site which enjoys statutory security of tenure; and the anticipation of significant additional access and activity involved with future upgrade work.

The Tribunal concluded that its earlier figure of £750 in its decisions was too low and should be reconsidered, not only because of inflation but in the light of the evidence of non-telecommunications transactions for unexceptional rural sites. That material had to be heavily adjusted having regard to the artificial paragraph 24 valuation hypothesis, but it enabled the Tribunal to conclude that the appropriate annual consideration for a rural mast site is £1,750.

The Tribunal did not consider it necessary to update the table of figures in Affinity from January 2022, nor to identify any particular relativity between consideration for rural sites and those in other situations, other than to reiterate the impact of inflation on figures determined in previous years.

Decision: EE Limited (1) and Hutchison 3G UK Limited (2) v AP Wireless II (UK) Limited [29 July 2024] Upper Tribunal