Rulings address the rental value of telecommunication sites

Property dispute resolution and telecommunications expert, Alicia Foo of Pinsent Masons , was commenting after the County Court in England and Wales and the Upper Tribunal (Lands Chamber) (England & Wales) both issued decisions relevant to the rental value of telecommunication sites under the Electronic Communications Code (ECC) 2017.

EE Limited (1) and Hutchison 3G UK Limited (2) v Richard Morriss and others

In a case before the County Court, telecoms operators EE and Three sought a renewal lease to entitle the operators to host and maintain telecoms equipment within the Pippingford Park Estate in East Sussex, England – a small mixed rural estate frequently used by the UK armed forces for military training.

Whilst the operators’ existing tenancy of the site was governed by the Landlord and Tenant Act 1954 (the 1954 Act), and the operators’ claim for a renewal lease was therefore made under the 1954 Act, the renewal lease was to be subject to the ECC, in line with the Court of Appeal’s rulling in the case of Cornerstone Telecommunications Infrastructure Ltd v Ashloch Ltd. The ECC was designed to make it easier and cheaper for telecoms operators to roll-out next generation digital infrastructure deemed vital to the UK's economic growth.

The parties were unable to agree on various terms of the renewal lease including, amongst others, the terms for the installation and upgrading of telecoms equipment at the site and site access.

Alicia Foo said: “On adjudging between lease terms argued for by each party, the judge carried out a balancing act between the differing demands of the operators, for operational flexibility, and the landlords desire for certainty and avoidance of disproportionate expense. At the same time, the judge took into account the requirements of the 1954 Act, which requires the party seeking change to justify the changes where these differed from the terms of the original lease.”

The most significant disagreement between the parties was over the rent to be payable under the renewal lease. The operators argued that an annual rent of £950 was appropriate, while the landowners said the annual rent should be set at £12,000.

The County Court, in the case of Vodafone v Hanover Capital, had previously developed a structured valuation approach for determining the annual rate payable under 1954 Act renewals to which the ECC would apply. This approach involves consideration of various factors the court thought would be relevant to parties negotiating such a renewal, including the influence the ECC would likely have on parties negotiating in the open market. In this case, an expert engaged by the operators said that the County Court should again have reference to the structured valuation approach when determining the rent payable, while an expert for the landlords argued there was now sufficient market evidence to enable a rent to be determined through a comparative assessment.

The sitting judge, Martin Rodger QC, who is deputy chamber president of the Upper Tribunal (Lands Chamber), said the use of the structured valuation approach “is only necessary where reliable transactional evidence is missing”. He assessed the rent payable for the Pippingford Park Estate site with reference to the available market evidence.

Property disputes specialist Connor Merrifield of Pinsent Masons said: “Martin Rodger QC has taken the position that the structured approach to valuation is an artificial ‘stop-gap’ to be used only until a sufficient pool of market evidence was available for lettings of telecommunications sites under the 1954 Act. Now that comparable evidence is available, such evidence should be used as the starting point for the determination of rent under section 34 of the 1954 Act for lease renewals subject to the ECC.”

Martin Rodger QC also found that “substantial and arbitrary adjustments” were made to the comparable evidence relied on by the landlords’ expert. For example, the landlords’ expert sought to increase the rental value of the site by £5,500 due to the operators’ ability to generate income by sharing use of their telecommunications apparatus with other providers. Due to the applicability of the “no-network” assumption in the valuation of rent for new sites under the ECC, which made up and will make up the majority of comparable evidence in future, the right to share apparatus is to be disregarded. The commercial value in sharing apparatus is therefore not generally reflected in comparable evidence and an uplift of £5,500 was deemed erroneous.

Rodger QC set the annual rent rate for the site at £3,500 a year.

Alicia Foo said: “The rent determined for a 1954 Act renewal is higher than tenant operators would like but still significantly lower than previously under the old Code from 2003. We are beginning to see the impact of the ECC on rental rates.”

EE Limited and Hutchison 3G UK Limited v Affinity Water Limited

The question of the rent payable by telecom operators for telecommunication sites in the context of an application for a new Code agreement under paragraph 33(5) of the ECC was also in dispute in a case before the Upper Tribunal.

In that case, EE and Three occupied a telecommunications site on a water tower at a reservoir at Allenby Road near Southall under a lease contracted out of the 1954 Act. The lease expired in 2018 and, therefore, constituted a “subsisting agreement” for the purpose of the transitional provisions of the ECC, which entitled the operators to exercise Code rights at the site notwithstanding the expiry of their lease.

Whilst the operators were entitled to a new Code agreement under the ECC, the operators failed to reach a consensual agreement with the site owner, Affinity Water, over the rent payable. Before the tribunal, EE and Three argued that the annual rent under the proposed agreement should be £2,787, whilst Affinity Water argued for an annual rent of £6,560.84 per annum.

Due to the applicability of the “no-network” assumption in the valuation of the rent payable under paragraph 24 of the ECC, the tribunal was unable to simply refer to comparable market transactions as “lettings on Code terms in which the rights being conferred on the tenant do not relate to the provision or use of an electronic communications network are unknown in reality”.

The tribunal applied a hybrid approach, whereby it first applied the structured valuation approach developed in the Vodafone v Hanover Capital case, and then applied a sense-check by assessing the provisional rent against evidence of the rents set in other cases which concerned different types of telecommunications site – specifically commercial rooftop and greenfield sites.

Connor Merrifield of Pinsent Masons said: “This case illustrates the difficulty the tribunal faces in balancing its requirement to apply the artificial ‘no-network’ assumption whilst acknowledging the usefulness of market evidence in generally corroborating the levels of rent which should be payable.”

In setting the annual rent payable for the Affinity Water site in this case at £3,300, the tribunal provided more general guidance on the rent rates that might apply in other renewal cases at water tower sites.

It said: “The consideration likely to be agreed for a water tower under the statutory hypothesis should fall somewhere between that of a greenfield site, and an office or commercial building. We would expect it to be closer to the upper end of that range than the lower, because the tenant is being provided with a ready-made structure on which to install its apparatus (for whatever purpose it wishes to use it) and because the site provider has greater involvement in providing access and maintaining the site.”

The £3,300 figure set in this case included a 10% uplift to account for the break clause included in the renewal agreement.

Alicia Foo of Pinsent Masons said: “We already had tribunal guidance on the levels of rent likely to be awarded for commercial or office buildings – £5,000 per annum – and a greenfield site – £750, or £1200 if inclusive of residential elements and now we have guidance relevant for a water tower in a residential area – £3,300pa. It remains to be seen whether there will be any more appetite for operators and site providers to take matters to tribunal with the attendant costs involved now that parameters have been set in these cases.”