Why you can’t put a price on telecoms clarity

Since the advent of the Electronic Communications Code on 28 December 2017, the underlying issue of most cases occupying the Upper Tribunal (Lands Chamber) north and south of the border and preventing renewals between landowners and operators has always been: “What should be payable for code rights?” The tribunal gave judgment recently in On Tower UK Ltd v JH & FW Green Ltd [2020] UKUT 348 (LC); [2020] PLSCS 229, the latest in a cluster of cases under the code which gives welcome clarification as to how this consideration is calculated under the assumptions and disregards in paragraph 24 of the code. What emerges could be regarded as a tribunal-approved indicative tariff for particular types of telecoms sites, devised to aid negotiations and unlock the impasse that has gridlocked the market since the code’s enactment. We look at how the decided cases have built on each other, developing to the present. The guiding principles The principles determining consideration under paragraph 24 of the code are largely conventional. It is a market valuation on familiar assumptions: the hypothetical parties are fully informed and willing, and the target transaction is the seller’s agreement to confer (or be bound by) the code right sought, so the valuer is directed to the value to the owner (as opposed to the operator) of the rights. However, the transaction does have unusual features. Although the buyer is after something that resembles closely a code right, and is looking to install things on to land, it is not looking to enter into the transaction for the purposes of providing a network (the no-network assumption). Further, even if the site is the only one available in reality, the buyer is deemed to be operating in a world where there is more than one site (the no scarcity/no ransom assumption). Nor must the buyer pay for the benefits of the rights to assign, share and upgrade conferred by the code, such as they are. The operation of these assumptions and disregards has been controversial, leading to consideration under the code being greatly reduced from what was historically paid under old code agreements, under which a “fair and reasonable” value was to be fixed, at any rate where the land has no alternative use. By examining 2019 and 2020 reported cases, a new “schematic” for valuation has emerged, with clear guidance as to the likely “price tags” to be attached to the main site types: rooftop and greenfield. Judicial guidance First was EE Ltd v Islington London Borough Council [2019] UKUT 53 (LC); [2019] PLSCS 191 concerning a new rooftop site in London, where the other tenants paid a service charge. The tribunal stated the value to Islington of the agreement comprised: a) the value of the land itself (which had no other use and was nominal); and b) the value of the services received and enjoyed by the operator. This produced a valuation of £1,000. Although the valuation exercise in Islington (absent comparables derived from other communications sites agreed under the code) focused on the site-specific value of the land and the services enjoyed, later cases show that it is a mistake to assume that the comparable valuation method is irrelevant to paragraph 24 valuations. The second decision, Cornerstone Telecommunications Infrastructure Ltd v Compton Beauchamp Estates Ltd [2019] UKUT 107 (LC); [2019] PLSCS 65, saw the tribunal provide guidance on what transactions might help derive a figure for consideration. It was not right to pro-rata the value of farmland to get to the value of a very small rural site, as that produced unrealistically low values. Equally, attempts to adjust old code rents were unprincipled and arbitrary. Non-code transactions involving small pieces of land were unhelpful where no realistic equivalent demand could be shown for the subject site (in essence, those transactions can only be helpful if they relate to a realistic alternative use for the site being valued). The tribunal expressed that, in future, it would like relevant comparable transactions for rural sites. Similar views were also expressed by the Scottish Lands Tribunal in EE Ltd v Manston Forests LLP LTS/ECC/2020/25. Next was Cornerstone Telecommunications Infrastructure Ltd v Fothringham LTS/ECC/2020/07, another Scottish case concerning a rural greenfield site. The case was decided on the papers and, acknowledging that the approach was more “art than science”, the tribunal fixed an annual consideration of £600pa, but with £1,500 payable in year one reflecting the installation period during which works to create the site would take place. A valuation framework had not emerged at the close of that case, but crystallised subsequently. Fourthly, in Vodafone Ltd v Hanover Capital Ltd [2020] EW Misc 18 (CC); [2020] EGLR 35, the tribunal sat as the County Court to hear the renewal of a business tenancy vested in a code operator under Part II of the Landlord and Tenant Act 1954. In undertaking the usual section 34 of the 1954 Act valuation, the court considered what would have been a paragraph 24 award. In doing so, the “Hanover framework” was born. This approach centres on comparable evidence, by adopting the first three categories relevant to assessing paragraph 24 consideration: a) The first step would be to assess the alternative use value of the site, which would be equal to the rental value of the holding for the most valuable non-operator use. This would be a matter of evidence and would depend entirely on the location of the property and land values in that location. Parking spaces next to a sports ground or an airport would have a higher value than on an industrial estate. b) Secondly, if any additional benefit was to be conferred on the tenant by the letting, an allowance would have to be made to reflect it. In one example … internal analysis showed that [the operator] was prepared to pay an additional £1,000 a year for the benefit of a manned security gate. c) Thirdly, if the letting would have a greater adverse effect on the willing lessor than the alternative use on which the existing use value was based, this should also be reflected by an adjustment (or the so called “additional burdens” category). Such evidence will help to fix the value of the alternative use value (if any) under category a), but may also shed light on the value of rights within category b) or burdens under category c). It may, of course, well be the case that stage a) produces no alternative use value, as in many cases the only realistic use to which the land can be put is to accommodate electronic communications apparatus. Fifthly, the Hanover framework was subsequently applied in Cornerstone Telecommunications Infrastructure Ltd v London & Quadrant Housing Trust [2020] UKUT 282 (LC); [2020] PLSCS 187 to produce a new rooftop value of £5,000. The working of the tribunal, and the evolution of its approach from Islington, is set out in the following paragraph: “[150] In our judgment consideration under the paragraph 24 hypothesis would be agreed between willing parties at £5,000 per annum. This would reflect a nominal site value. It would also take account of the benefit to the operator of the site provider’s responsibilities for building maintenance and insurance in the order of £1,500. An allowance of £1,000 would reflect the additional burdens of managing access across the common parts and on to the roof. Finally, it would include an allowance to reflect the anticipated costs to the site provider of the operator’s rights to share the benefits of the agreement with up to two others and to upgrade the apparatus at the site without restriction.” No doubt mindful of wanting to help valuers and reduce the number of valuation cases reaching the tribunal, it went on to note that it had no reason to expect that rooftop sites on any different residential building, in London or elsewhere, would attract a market value of “much more or less than the sum of £5,000” (comprising site value, benefit and burden). The latest, and sixth, decision to land is On Tower, the first reference where the tribunal has had to determine the value of a renewal agreement under Part 5 of the code and the first valuation of a rural greenfield site in England and Wales. Unlike Fothringham, it was determined after a three-day hearing with oral evidence of lay and expert valuation witnesses. It is, therefore, an important and missing piece of the jigsaw. The tribunal again applied the three stages of the Hanover framework, further cementing it as the preferred approach, delivering a consideration of £1,200pa. Following its theme of volunteering further guidance as to the value of similar sites, it added that for a rural site without nearby dwellings (a special feature of this particular case) a figure of £750 would be appropriate. The table below shows how this was calculated. The tribunal was helped by On Tower providing a comprehensive schedule of 86 real world transactions (ie consensual deals) entered into since the commencement of the code. Like London & Quadrant, this case re-emphasised the value of comparables in setting values for the additional benefits and burdens referred to in the framework. However, beyond that, real-world code agreements were approached cautiously. The tribunal accepted that such transactions, the vast majority of which rested around £1,500pa, included some inducement, which was not to intrude into the hypothetical transaction posited by paragraph 24 where the fictional parties are willing. The tribunal additionally accepted the invariable real-world market practice that sums are also agreed as a unitary blended “rent” or “site payment” including both paragraph 24 consideration and paragraph 25 compensation. To be meaningful comparables, those sums needed to be disaggregated. As no scientific breakdown of such sums could be discerned in many cases, the tribunal did its best and arrived at a conclusion that the maximum inducement required in order to have reached a consensual deal may be the doubling of the strict no-network consideration. Recognising that £1,500 seemed to be evidently sufficient to induce landowners, this fitted its suggested no-network consideration of £750. This is further helpful guidance, given the tribunal also granted unlimited sharing and upgrading rights, though this aspect of the decision is now subject to appeal. Welcome clarification The tribunal has been helping the parties understand how paragraph 24 works. In so doing, the parties now have a series of building blocks that, when assembled together, give a consideration price level. The tribunal has rejected the value of comparables deriving from old code valuations, whether the deal was undertaken before or after the new code came into force. It has cautioned against unrealistically low valuations, of the kind that are produced by applying pro-rata land values for very small parcels of land. Instead, it is now clear that the parties should follow the Hanover schematic for identifying the value of the hypothetical code agreement. It is also clear that, in light of the modest sums produced, the tribunal has moved towards an indicative tariff for particular types of site (see below) subject to site specifics. This is welcomed, as it ought to dissuade parties from expending disproportionate costs, and consuming tribunal time, arguing over what are, on any view, relatively small values. The valuer’s perspective: a worked example The three-stage approach (Hanover framework) for assessing consideration endorsed in case law provides: Assess the higher of a) the site’s existing use value and b) its value for some viable alternative use, disregarding telecoms use. Location and viable uses are relevant as is the likelihood of planning consent for any alternative use and evidence of market demand. Identify any additional benefits conferred. The tribunal has directed us to a useful ballpark by awarding £600pa in On Tower for the additional benefits to the operator (see table, above). Those rights are typical, but if more or fewer benefits are conferred, the £600pa figure may vary slightly accordingly. Assess additional burdens over and above the use assumed in point 1. If so, adjust as necessary. The reported cases so far have set out rents for rooftop and rural greenfield sites. But what about an urban industrial site? Unlike the former site types where alternative uses are limited, meaning a nominal figure at stage one, ground-level urban sites are more likely to have a higher existing use value and/or be suitable for alternative uses, so the value to be taken forward to stage two on those sites could be markedly different from site to site. Using the Hanover framework approach: a) Assume a site on an industrial estate, say a demise of 50 sq m, which could have been let as four car-parking spaces, or for open storage. If open storage values indicate £15 sq m per annum (ie £750pa for the site) and car-parking values £160 per space per annum (ie £640pa for the site) it would be appropriate to take forward the figure of £750pa, based on open storage values, to the second stage. b) Assuming that the agreement conferred similar rights to those in the On Tower case referenced above, it would seem appropriate to add a further £600pa. c) Finally, it would be necessary to consider whether the letting for telecoms use will have additional burdens on the landowner compared to if let for open storage. On an industrial estate that would seem unlikely (indeed, that was the conclusion reached by the court in Hanover), so no further adjustment would be required. In this example, then, the appropriate annual consideration would be £1,350. Jonathan Stott MRICS is a valuer and managing director of Gateley Hamer Oliver Radley-Gardner is a barrister at Falcon Chambers, Alicia Foo is a partner and Pierre Smith is an associate in the property dispute resolution team at Pinsent Masons LLP Picture © Canadian-Press/Shutterstock