The tangled world of telecoms: ask the specialist surveyor

Since the Upper Tribunal handed down its decision in Cornerstone Telecommunications Infrastructure Ltd v Ashloch Ltd [2019] UKUT 338 (LC); [2019] EGLR 2 last November, operators and site providers alike have responded to the shifting landscape that is the application of the Electronic Communications Code. Operators in occupation under a subsisting agreement which is a 1954 Act-protected lease need to use the 1954 Act procedure to obtain new rights, rather than navigating Code procedures (Ashloch will be heard on appeal in January). If successful, the operator will establish its right to new rights, which will take effect as a new Code agreement. In August, in Vodafone Ltd v Hanover Capital Ltd [2020] EW Misc 18 (CC); [2020] EGLR 35, the deputy president of the Upper Tribunal (Lands Chamber) – Martin Rodger QC, sitting as a judge of the County Court – dealt with the issue of valuation arising on application to renew a business tenancy in such circumstances. The deputy president had to reconcile the “no network” assumption in paragraph 24 of the Code with the accepted approach under the 1954 Act, which assumes an open market and willing parties. In giving judgment, the court factored into the valuation analysis potential competition from other occupiers, taking the view that this would push consideration up. So where does this leave the question of valuation? I asked Kenny Munn, director and head of Savills Telecoms Group, for his thoughts: LW: What is going on in the market and has Hanover had an impact? KM: All too often, market activity is paralysed as a result of an entrenched and difficult impasse existing between the parties. What we are seeing is operators demanding wider rights – often referred to now as “Code plus” – for new leases at peppercorn rents, that is, less than £200 pa. What is interesting is that operators are generally focusing on applying the Code to existing sites and driving down rents rather than investing in new sites – which is where there would be greater public benefit because it would enhance coverage across the UK. From the property owners’ perspective, initial approaches from operators are often intimidating and adversarial as they are generally accompanied by notices threatening court action. This is a successful tactic by operators as many owners feel compelled into agreeing whatever terms are proposed. Where they do so, operators will usually achieve significant rent reductions. Where the property owner does attempt to negotiate, in general the operators are reluctant, or simply refuse to budge on rent payments. This appears to be as a result of the operator not permitting their agents the flexibility to do so. This is frustrating for landlords, as the same peppercorn rents are being offered irrespective of the rights being demanded. We have yet to see any real impact from Hanover, however we are aware of other follow-up cases creating similar precedents and this will hopefully give the operators the opportunity to align their offers which will lead to more consensual deals being agreed in similar 1954 Act scenarios. LW: Has there been an effect on valuation? KM: Yes. In relation to 1954 Act occupation, Hanover has helped set some precedents on the valuation approach, particularly with regard to the impact of competition. As a consequence, we have seen subsequent settlements reflecting higher rental figures. It is likely that these will help set a tone for consensual deals between the parties, going forward. In addition to Hanover, the recent decision in Cornerstone Telecommunications Infrastructure Ltd v London & Quadrant Housing Trust [2020] UKUT 282 (LC); [2020] PLSCS 187 gives the market some helpful guidance, making it clear that rents should reflect: (a) the benefit to the operator from the owner’s responsibilities for building maintenance and insurance, etc; (b) additional burdens of managing access at the property; and (c) anticipated costs to the site provider arising due to the operator’s right to share the benefits. Sums paid for benefits provided by, and burdens suffered by, the property owner will vary from property to property depending on use and nature of the building and layout of apparatus. Time will tell whether parties will start to agree consensual deals based on these more recent cases. Typically, since the implementation of the Code, we have seen the annual rents offered increase from £1-£200 to £200-£1,000. This is still some way off the rents determined in Hanover and London & Quadrant: £5,750 pa and £5,000 pa respectively. LW: So operators are more willing to discuss levels of consideration that landowners will feel more comfortable with, and there has been a softening of the position since EE v Islington London Borough Council [2018] UKUT 361 (LC); [2018] PLSCS 191, which caused such waves. That will certainly help more landowners get comfortable with new agreements, and shows a degree of pragmatism on the part of the operators, who, after all, will be pushing hard to increase 5G rollout. But what about landowners with existing kit on their land? How should they react on receipt of a paragraph 33 notice for modified terms – usually an extension of rights? KM: I hope you are correct. Islington seems to have been quite polarised and subsequent judgments have indicated that rent or consideration should not be payable in such “tiny” sums. Understandably, there are two separate camps assessing rents, however it is worth noting that prior to the introduction of the new Code, the government stated that it expected rental levels to drop by only around 40%. At the very least, this set a level of intent and therefore expectation. The awards in Hanover and London & Quadrant are considerably closer to these levels than the figures that the operators are demanding in attempted consensual approaches. Turning to paragraph 33 notices, there have been hundreds received across the UK. On the face of it, this appears to be a “mailshot” exercise. As a result, many of these notices are not competent as they have been served on the wrong party or with invalid dates. But many landlords have been intimidated by the notice and accompanying covering letter and have simply signed up to the terms put forward rather than incur costs of negotiating. The terms generally offered are at peppercorn rents. Fortunately, the recent decision in Duncan has given some clarity on the validity of these notices. LW: So EE Ltd and another v Duncan and others LTS/ECC/2019/0012 was an application to the Scottish Lands Tribunal for a determination under paragraph 34 of the Code, which allows an application to be made to the same where a paragraph 33 notice has been served, but after six months, no agreement has been reached as to the proposals set out in the notice. In Duncan the site providers raised technical issues, in relation to whether the agreements were “subsisting agreements” (having been held over at the end of the term); whether paragraph 33 applied with reference to whether the site providers had to be in a position to terminate the existing agreements under paragraph 31 of the Code (that is, whether one of the grounds for termination set out in paragraph 31(4) applied); and whether the dates specified in the operators’ notices were valid). They were unsuccessful on all three of those points. On a fourth argument however, the site providers were successful. That argument was that there was an absence of “sufficient justification” which is required under paragraph 34(6) before the tribunal can impose an agreement on the unwilling party. Faced with a lack of evidence going to particular needs in relation to the sites, the tribunal felt that there was no evidence that any change was needed to give the existing agreements business efficacy or to better serve consumers. Accordingly, the operators’ applications failed. Kenny, have you seen any fallout from the decision in Duncan, and how might the market respond to the appeal decision in relation to the same? KM: Pursuant to the drafting of the Code, the majority of paragraph 33 notices demand that the existing agreement is terminated in favour of an entirely new agreement. The spirit of the Code, however, is about encouraging a consensual approach. The Duncan case picks up on this tension. In a normal commercial property negotiation where a tenant needs a variation to their rights, would the parties terminate the existing agreement and negotiate an entirely new lease? The answer is “no”. The parties would cost effectively and quickly agree a variation to the existing lease, the simpler approach. Typically lease variations cover extensions to term, variation of access etc. To vary is far more pragmatic and commonplace practice. Parties should collaborate and explain what they need and why and then simply vary the lease. As a result, what we now expect to see is the withdrawal of paragraph 33 notices, the vast majority of which have been served in similar scenarios and in an almost identical format to those in Duncan. Thereafter, we would expect the operators to identify what they need (and have sufficient justification for) that they cannot obtain through the existing agreement. If operators were to adopt that practice, the parties could simply agree a variation to the existing lease to accommodate the operator’s needs in terms of being able to provide a better communications service. Ideally the decision in Duncan would prompt a step change in the approach commonly adopted by operators, from an adversarial approach via a paragraph 33 to notice, to more collaborative practices. Only time will tell whether the market will see such a change. Laura West is a senior associate (barrister) in the real estate litigation team at Pennington Manches Cooper LLP Picture © Photo: Canadian-Press/Shutterstock