Renewal of telecommunications leases

A key judgment dealing with the interaction of the Electronic Communications Code and the Landlord & Tenant Act 1954 (“the Act”) has been handed down by the Upper Tribunal.

It addresses the term length and rents in connection with the renewal of a telecoms lease where the Act applies to that lease.

The Code

The updated Electronic Communications Code was introduced by the Digital Economy Act 2017. It regulates the grant and renewal of telecoms operators’ rights in relation to land for the purpose of the provision of electronic communication networks and infrastructure systems.

The Code contains transitional provisions that govern agreements already in place when the Code came into force on 28 December 2017 (“the Transitional Provisions”).

The Code contains a revised scheme of valuation on a “no network” basis that focuses on the market value of the landowner’s agreement to confer or be bound by the relevant Code right (“the New Valuation”). It does not take into account the value attributable to the high demand for telecoms services. This method inevitably results in lower valuations and commensurate lower rents for operators.

Key Facts

In Vodafone Limited v Hanover Capital Limited, a lease of a mast site was granted to Vodafone in 2008. The lease expired in 2013 but Vodafone’s statutory tenancy continued pursuant to the Act. A notice under section 25 of the Act was served on Vodafone, stating that the landlord would not oppose a new tenancy. The lease was a subsisting agreement for the purposes of the Code, and the renewal governed by the Transitional Provisions.

The parties were able to agree all terms in connection with the renewal agreement, save for the rent and term. Accordingly, Vodafone commenced proceedings in Manchester County Court. The proceedings were subsequently referred to the Upper Tribunal.

Based on an earlier Upper Tribunal decision, renewals of leases where the Act applies must be via the Act, rather than the Code (albeit the new lease would not benefit from the protection of the Act, as any lease entered into after the Code came into force cannot be one to which the Act applies, assuming its primary purpose is to grant Code rights). The renewal of Vodafone’s lease was therefore to be determined by the court with reference to the Act.

Rent

In determining the rent which ought to be payable by Vodafone under the new agreement, the court had to consider whether the existence of the Code (and the operator’s rights under it) should be taken into account. The parties’ valuers agreed that the parties to the hypothetical negotiation would have regard to the Code. The parties could not agree, however, whether the negotiation should be based on transactions that were carried out consensually on a New Valuation basis (as submitted by Vodafone) or transactions that took into account the value to the operator (as submitted by Hanover).

The court determined that:

• The existence of the Code, and the willing tenant’s rights under it, should be taken into account as part of the hypothetical negotiation.
• A “strict” approach under the New Valuation would have produced an annual rent of £2,250.
• This approach had to take into account the fact that Vodafone was, in this case, sharing the site with EE and H3G. The Court determined that this would yield a higher rental payment as a result of a hypothetical bidding process in respect of the lease.
• The court used evidence of transactions based upon valuations under the old Code to reflect the value to the operator/tenant aspect of the hypothetical transaction, awarding an annual rent of £5,750.
• The court noted that the method adopted in this case may not be the same for sites which cater for one operator only, and which would not therefore be attractive to competitors as part of a hypothetical bidding process. In such cases, the determined rent is likely to be lower.

Term

Vodafone required a three-year term and six-month rolling break clause. Hanover required a ten-year term with a five-year break. The court struck a balance between the operator’s commercial needs and the landlord’s requirement for stability and granted a ten-year lease with a six-month rolling break exercisable after the fifth year of the term.

Comment

The judgment in Hanover gives a very useful indication for landowners, operators and practitioners as to how the court may apply the Act and the provisions of the Code when it comes to settling the terms of a new agreement where the Act remains relevant under the Transitional Provisions.

Whilst the Code is operator friendly, it will be of some comfort to landowners that the courts are implementing a degree of cushioning in determining rents where operators are sharing sites. Landowners will also welcome the fact that the courts are taking the commercial objectives of landlords, and their need for stability, into account when it comes to term duration and the insertion of break options.

It should be remembered, however, that case law in relation to the New Code is still very much in its infancy; many more judgments will be necessary to confer a degree of certainty as to the approach the courts will take. Until then, each case will very much turn on its own facts and we recommend that legal advice is sought before commencing negotiations.

Vodafone Limited v Hanover Capital Limited [2020] EW Misc 13(CC)