Electronic Communications Code

Tuesday, 08 September 2020

Rent payable under a 1954 Act Renewal of a Telecoms Lease
Vodafone Limited and Hanover Capital Limited 2020

In this article Carlos Pierce and Jacinta Conway review how the County Court decided the first case dealing with the renewal of a telecommunications lease under the Landlord and Tenant Act 1954 (“1954 Act”) in Vodafone Limited and Hanover Capital Limited [2020] EW Misc 13 (CC) (“Hanover”).

The significance of this case

This was the first case since the Electronic Communications Code (“the Code”) came into force in December 2017 to determine the rent an operator should pay a landlord for a lease renewed under the 1954 Act.

This case is likely to have a significant impact on how parties approach the determination of rents in future 1954 Act lease renewals. We discuss below the potential ramifications of the decision.

Quick Read – What was decided

  • Rent at £5,750 pa for a 10-year term with a tenant’s break from year 5.
  • The figure of £5,750pa was assessed on pre-Code rents discounted by 20% but then increased by 5% to reflect the lack of any review in the agreement.
  • The Deputy President arrived at this figure because he said that evidence of actual sharers on the Site creates a hypothetical competitive open market and therefore ‘value to operator’.
  • The Deputy President concludes that the competitive market means that operators outbid each other to drive up the rent beyond the Code rate (which prohibits attaching value to rent by reason of a telecoms business being carried out). Notably, neither of the expert valuers put forward this hypothesis.
  • If there are no actual sharers, the Deputy President ruled that rent is more likely to be determined on Code principles – in this case an all-in figure of £2,200 pa – and this for a site of over 200m2 (more than twice the size of an average greenfield site).
  • Stand-back: Can it be right that competing operators, who know the market, and who (in the real world and the hypothetical world of rent assessed under section 34 of the 1954 Act) know that they can acquire the Site under Code drive up the rent by over 2.5 times from £2,200pa to £5,750pa?

The Facts

Vodafone was granted a 1954 Act protected lease of land at Bredbury, Manchester (“Site”) in 2008 for a five-year term (“Lease”). When the Lease expired, Vodafone held over and remained in occupation.

The Site is shared with Telefonica, EE and H3G.

The Lease was deemed a subsisting agreement (“Code Agreement”) under the transitional provisions1 and Part 5 of the Code did not apply2.

Following service of a section 25 renewal notice, Vodafone issued proceedings for a new 1954 Act tenancy in August 2017. The parties agreed that the new tenancy would be a Code Agreement and not a 1954 protected lease. On its expiry, it would be renewed pursuant to Part 5 of the Code3.

The case was heard by Martin Rodger QC, Deputy President of the Upper Tribunal (Lands Chamber) (“Deputy President”) sitting as a county court judge. Whilst not binding on other courts, the decision will carry weight given that it was heard by the Deputy President.

Issues in Dispute

The parties had agreed most of the terms of the tenancy by the time of the hearing. The only issues in dispute were:

  1. The length of the term;
  2. The break clause; and
  3. The rent.

Term and Break Clause

Vodafone’s case

Vodafone sought a 3-year term with a rolling 6-month break clause. It sought greater flexibility given the current uncertain legal landscape relating to in situ operators being able to acquire additional rights during their term and renew their agreements on Code terms. Ongoing appeals could change the law in this area (Compton Beauchamp4 - to the Supreme Court and Ashloch5 - to the Court of Appeal). Vodafone, therefore, wanted the ability to seek a new tenancy with Code valuation principles if such appeals are successful.

Hanover’s case

Hanover argued that a 10-year term with a break at the fifth year would be consistent with the original 5-year term and would provide certainty to the landlord, free from the possibility of further litigation.

The Decision – Term and Break Clause

The Deputy President ordered a 10-year lease with a 6 -month rolling break clause from the fifth year of the term.

The break clause was not conditional on the tenant giving vacant possession. The Deputy President said that a break without having to give vacant possession would present Vodafone with:

“…an opportunity for renegotiation at annual intervals after 5 years [and] will allow Vodafone to modernise both the agreement and its apparatus.”6

Determining Rent – Applicable Legal Principles

Hypothetical Letting – Section 34 of the 1954 Act

Section 34 of the 1954 Act requires the court to determine the rent as the amount that the Site might be let in the open market by a willing lessor (“Hypothetical Letting”).

There are various assumptions made for the Hypothetical Letting such as the parties being well informed about the Site, the Site having being marketed, the lessor and lessee being willing to transact and the Site being let on the terms of the new tenancy (including the now settled 10 year term with a break from the fifth year).

Rent - Vodafone’s case

Vodafone’s expert valuer – Jon Stott of Gateley Hamer – argued that the valuation principles in the Code (existing use - value to owner) would provide the commercial framework for the rent negotiation. The willing parties would be aware of the provisions of the Code - and that the hypothetical lessee could acquire rights to the Site under the Code - with both parties taking these into account when agreeing the rent.

In a report that the Deputy President noted as being “thorough and well researched7”, Mr Stott considered the most valuable alternative use of the Site to the lessor – underlying land value (excluding telecoms) – as being car parking. He calculated the value of the Site to be £1,715pa. Mr Bodley-Scott agreed with this assessment, if that was the correct approach to take.

To Mr Stott’s figure of £1,715pa, the Deputy President added £445pa (to give £2,160pa) – converting the contribution of £4,000 towards professional costs into an annual figure. He does this because in the rent assessed under the 1954 Act, he can only award rent, not costs. Knowing that the lessor could claim these costs should the lessee claim rights under the Code, he says that, in the Hypothetical Letting, the parties agree to roll these up in the rent. The Deputy President rounds up the £2,160 figure to arrive at an annual rent of £2,200 (or £2,250).

Rent - Hanover’s case

Hanover’s expert valuer – Tom Bodley-Scott of Batcheller Monkhouse – took a completely different approach.

He relied on using evidence of rents agreed in transactions that had been agreed prior to the Code coming into effect - but completed afterwards - all of which contained a caveat agreed between the parties that the terms “do not set any precedent for the terms which the parties would have otherwise agreed under the new Code”.

These are the deals that operators had agreed with landowners pre-Code - but agreed to ‘honour’ them after the Code was introduced to the extent that the negotiations were well advanced and completion of the leases was delayed due to reasons outside the control of the landowner – without wanting to set a negative precedent before the courts. This fact is well known and accepted across the industry.

Mr Bodley-Scott took an average across those rents arriving at £6,000pa added a further £2,000pa to account for what he described as ‘beneficial sharing’ rights, arriving at an annual figure of £8,000.

The Deputy President criticised Mr Bodley-Scott for not providing persuasive evidence to support his notion that rent would be higher for a shared site. Indeed, the Deputy President was unconvinced by Mr Bodley-Scott’s approach saying at paragraph 80:

”…the weaknesses in his [Mr Bodley-Scott’s] valuation methodology which I have mentioned above were striking...”; and

“…I do not have much confidence that his starting figure of £6,000 is a reliable one…”.

He also said that Mr Bodley-Scott made a number of unconvincing additions to a rent based on the value of the Site for storage or parking and said at paragraph 85:

“…[Mr Bodley-Scott] proceeded by making a number of unconvincing additions to a rent based on the value of the Site for storage or parking. I do not give weight to that part of Mr Bodley Scott’s evidence; it was theoretical and remote from the market practice on which he otherwise relied, and did not survive cross-examination”. 

Rent - The Decision

The Sharer Hypothesis

Despite disparaging Hanover’s expert, the Deputy President did not think that the figure of £2,200pa arrived at by Mr Scott was correct either. The judge noted at paragraph 97:

“If the only factors to be taken into account were those identified by Mr Stott and Mr Jourdan [QC for Vodafone] the hypothetical parties would be likely, in my judgment, to arrive at [a] figure of £2,160, which they would be likely to round up to an annual rent of £2,200 or £2,250”8

However, the Deputy President determined that the rent should be £5,750 pa noting that there should be no expedited payment or inducement figure, as the parties are willing.

He arrived at the £5,750pa figure by identifying one key omission in Mr Stott’s calculation: the requirement to assume that the Site had been marketed9 allowing those with an interest in the Site to make an offer. When questioned about this in cross-examination, The Deputy President said that Mr Stott responded by saying:

“In the real world he [Mr Stott] thought that operators would not compete with each other for sites, and he was unaware of a situation in which operators bid for the same site. Instead, operators would enter into sharing agreements” (emphasis added).10

Deputy President’s Reasoning behind Sharer Hypothesis

The Deputy President explained that:

  • The existence of actual sharers on the Site (Telefonica, EE, H3G) demonstrates that there are other operators who are interested in the Site;
  • Given that interest, and the need to assume that the Site has been actively marketed, the Deputy President assumes that other operators would be interested in bidding for the Site; and
  • The Deputy President says that the existence of interest from other sharers means that they have a need for the site which creates a competitive bidding situation which in “practice would be likely to push up rental values”11 to a level higher than under the Code. This results in a shift from a rent determined on a ‘value to landowner’ basis to a ‘value to operator’ basis.

Deputy President’s calculation of ‘Value to Operator’

To arrive at ‘value to operator’ the Deputy President took the value of the rent calculated by Mr Stott for the purposes of calculating the Interim Rent (agreed on a no-admission basis) and reduced that figure by 20% to eliminate the incentive element (as an incentive is indicative of a non-willing lessor which must be disregarded). This gave a figure of £5,388pa, rounded up to £5,500pa.

He adds to that by adopting Mr Stott’s approach of factoring in a 5% adjustment over the 10-year term to take account of the fact that there is no rent review arriving at £5,750pa. (Although arguably the parties would have applied the 5% adjustment to the £5,388 figure arriving at £5,658: this may have been rounded up or down).

Commentary – Why £5,750pa and not £2,200pa in this case?

The Deputy President essentially took two paths.

Where there are no actual sharers on a site or no evidence of competitive demand
The existence of actual sharers on this Site was the only reason why the Deputy President arrived at a rent higher than the all-in figure of £2,200pa which was assessed following Code principles – see paragraph 97 of the judgment.

It stands, therefore, that had there been no actual sharers on the Site, or no evidence of competitive demand from other operators, he would have imposed the figure of £2,200pa. To this figure, it is reasonable to add the rent review adjustment of 5% but calculated on the exact rental figure of £2,160pa before any rounding (including downwards rounding) to arrive at a figure of £2,268pa: this may have been rounded up or down).

We can be confident therefore that where there are no actual operator sharers on the Site or no evidence of competitive demand, the willing parties would agree a rent on the following basis:

  1. Using alternative use to arrive at a figure calculated pursuant to the Code (adjusting that figure, if appropriate, to reflect the effect of the agreement on the landlord);
  2. Not include any Expedited Completion Payment or inducement; and
  3. Wrap up in the rent any contribution towards professional fees.

Where there are actual sharers on a site or evidence of competitive demand for the site
The decision seems confused on this aspect. And it seems that the Deputy President makes a ‘wrong-turn’.

Whilst neither Mr Stott, nor Mr Bodley-Scott, adduced any evidence that the existence of actual sharers, and possibly other interested operators, would mean that the operators would competitively bid against each other, the Deputy President nonetheless concludes that the existence of interest was enough to make them competitive bidders whereby they outbid each other to drive the rent up from a Code value of £2,200pa to £5,750pa.

However, in a typical open market, competition exists because the object of purchase can only be enjoyed exclusively by one party. The parties therefore compete to enjoy the object to the exclusion of the others, resulting in a possible bidding war. This is not the case with telecommunications sites, as sites can be – and commonly are – shared. Further, the significant build, acquisition, and possible litigation, costs of acquiring a site are another reason why operators may not in fact bid against each other and might prefer another operator to pursue a site (to the Tribunal if need be) and then share that site.

The ‘wrong-turn’ – ‘value to operator’ where the Code exists
It can also be noted that the pre-Code comparable rents the Deputy President uses to arrive at the figure of £5,750pa represent the value to operator under the Old Code.12 Rents under the Old Code, however, do not mirror the market of the Hypothetical Letting identified by the Deputy President. They are therefore arguably not relevant here.

It would have made more sense to have looked at the evidence of ‘value to operator’ under the current market i.e. one where the Code exists. This would reflect the hypothetical market the Deputy President identified.

The Deputy President did not do this, saying that the evidence of value to operator in today’s market is limited. This stands to reason because the market of today is one where the parties negotiate on value to landowner (as Mr Stott’s evidence confirms) and not value to operator.

Evidence before the court

And yet, the Deputy President had this evidence before him in the hearing. The comparable information referred to by the Deputy President in para 109 of the decision shows that both Arqiva (£900pa) and Cornerstone (£6,000 capital payment – i.e. £668pa) will, on some occasions, as a matter of fact, sometimes agree a total payment that is above, or outside of, the combined calculation of paragraph 24 consideration and para 25 compensation (true Code valuation figure) – this excess must therefore represent the value to operator element which is sometimes paid (in the current market), not a calculation based on historic telecom rentals.

Even if such a payment was by way of an Expedited Completion Payment or inducement (which we know is a payment for willingness and therefore not a factor in agreeing the rent) – it is nonetheless, for the purposes of the 1954 Act assessment, evidence to show what an operator may sometimes be prepared to pay above the Code valuation when it wants a site (possibly to avoid going to Tribunal) i.e. value to operator.

This must be right. Why would an operator pay much more than a Code valuation, when it knows that it, or another operator, can obtain rights by enforcing its rights under the Code to acquire a Site on a Code valuation? A lessor would know this too.

We believe that if the Deputy President had considered this further, he would have arrived at a completely different figure for the Site, arguably something in the region of £2,250pa plus a ‘value to Operator’ payment of between £600pa and £900pa: say £3,000pa or thereabouts, in total.

The Final Word – the Stand back

As a reminder, the willing parties are prudent, knowledgeable and well-informed. The willing lessee does not pay more than it has to, and the willing lessor does not accept less than it needs to.

Intuitively, and standing back, and looking at the Deputy President’s figure of £5,750pa compared with the Code figure of £2,200pa, his figure seems incorrect, and applies assumptions that simply do not exist in the telecommunications market.

It simply cannot be right that, knowing that an operator can obtain £2,200pa, or thereabouts, under Code, that another operator outbids the other by so much. This is particularly so given that, in the real world, operators do not compete with each other for sites. Even more so given the current climate of uncertainty over Code valuations: Operators are not likely to bid strongly for a single site to the detriment of their whole estate and Code strategy.

Carlos Pierce is Head of Legal Projects, Strategy and the Code programme, and Tina Middleton is Senior Code Lawyer, at Cornerstone the UK's leading mobile infrastructure services company set up as a joint venture between Vodafone and Telefónica.

Follow Cornerstone on LinkedIn

 

[1] Code - Schedule 2 paragraph 1(4)

[2] Code - Schedule 2 paragraph 6(2)(a)

[3] Section 43(4) of the 1954 Act (inserted by the Digital Economy Act 2017)

[4] Cornerstone Telecommunications Infrastructure Limited and Compton Beauchamp Estates Limited [2019] EWCA CIV 1755

[5] Cornerstone Telecommunications Infrastructure Limited and Ashloch Limited and AP Wireless II (UK) Limited [2019] UKUT 0338 (LC)

[6] Paragraph 44 - Vodafone Limited and Hanover Capital Limited [2020] EW Misc 13 (CC)

[7] Ibid, per para 86

[8] Ibid, per para 97

[9] Lynall v Inland Revenue Commissioners [1972])

[10] Ibid, per para 100

[11] Ibid, per para 103

[12] The Telecommunications Act 1984 (as amended by the Communications Act 2003)

LinkedIn
Introduction

The Code introduction

Get an overview of the Electronic Communications Code and what it means for mobile connectivity in the UK.

Videos and Podcasts

Videos and Podcasts

Watch our Code video insights and listen to podcasts where and when you want.

FAQs

FAQs

What is the Code and what will the changes mean for Landlords and mobile communications.

Contact us

Cornerstone
Hive 2
1530 Arlington Business Park
Theale
Berkshire
RG7 4SA
Contact Cornerstone

Site Reporting

To report a site issue click here.

London Site Audit

To request site access or cancel a visit click here.