Valuation under the Electronic Communications Code

Thursday, 23 April 2020

What we've learned so far

In this article, Carlos Pierce considers and gives his view on the approach to valuation taken by the Tribunal in the two key cases so far; Islington and Compton Beauchamp.

Consideration

Islington Case

EE Limited and Hutchison 3G UK Limited v The Mayor and Burgesses of the London Borough of Islington [2019] UKUT 53 (LC))

As a recap - as there was no alternative use for the rooftop, the expert acting for EE/Three assessed this at nominal value and suggested a figure of £1 per annum. LBI took a different approach and arrived at a figure of £13,250 per annum. LBI’s argument that there was a figure below which a seller wouldn’t go was rejected by the Tribunal.

The Tribunal confirmed that the nominal value of the Code rights is £50 but arrived at a total consideration figure of £1,000 per annum for an ‘all-in’ agreement to reflect the costs of LBI’s expenses of the running of the building from which EE/Three benefitted. The calculation figure was referenced by what the residential tenants in the building paid by way of a service charge.

Although the Tribunal assessed Consideration as £1,000 per annum, the sum specified in the Lease will be £2,551.77 per annum – being the amount proposed in MBNL’s paragraph 20 notice.

Consideration is £50 but…. really it’s £1,000 per annum

The Tribunal concluded that given the existence of the service charge levied on other users of the building, where an agreement was imposed by the Tribunal on terms that do not include such a service charge, the willing parties would agree an “all-in” payment that took this into account. An operator would be prepared to pay more than nominal value for such an “all-in” agreement with unsupervised access, like any normal demise. In the words of the judge, the operator being able “to come and go in the same way as a leaseholder of one of the flats…”

The Service Charge provided a mechanism for the Tribunal to quantify the consideration for the “all-in” agreement.

Compton Beauchamp Case

Cornerstone Telecommunications Infrastructure Limited v Compton Beauchamp Estates Limited [2019] UKUT 0107 (LC))

As the case was dismissed, the Tribunal made no decision, or binding direction, on valuation. But the comments made by Deputy President Martin Roger QC in this decision are interesting.

CBE’s Approach

The judge dismissed:

  • the approach taken by CBE’s valuer to arbitrarily discount Old Code agreements by 35%; and
  • his approach of discounting new Code agreements.

So, it seems clear that evidence of rent paid under old Code Agreements cannot be used for new Code consideration calculations. The judge went further by saying that new Code agreements might only be persuasive as market evidence, where it could be demonstrated that they were agreed having regard to the statutory assumptions.

Cornerstone’s Approach

In the absence of any potential alternative use, Cornerstone’s approach was to use evidence of freehold sales of arable land (existing use), decapitalise this to an appropriate rental value and then pro-rata it for the Site based on its area.  This approach seemed to properly reflect the ‘value to owner’ principle of the Code.

Whilst the Tribunal acknowledged that, for a site with no alternative use, existing use values may be an appropriate starting point, it was not attracted to the ‘low’ value such an approach generated. Having noted “technical valuation difficulties” over the decapitalisation rate used, the Judge said:

“[the parties have to] stand back and look at the product of the valuation method…if it seems improbably high or low it is necessary to ask critical questions...” (paragraph 110).

Therefore, it seems that, whilst the Tribunal in the Islington case found that there was no floor below which the willing seller wouldn’t go, in Compton Beauchamp it inferred that this might not be the case for rural landowners, who have an understandable reluctance to lose control of their land. Can that be right? Let’s explore further.

Compensation

Compton Beauchamp – Tribunal dismissed only claim - loss of rent from existing telecoms

The Tribunal dismissed the only claim for the loss of rent from the existing operator lease (Vodafone).

Islington Case

In this case, the Tribunal had more to go at and took the following comprehensive approach to Compensation:

  • No Compensation Award - the Tribunal dismissed LBI’s compensation claims and did not make a compensation award.
  • Diminution in value – resulting from the loss of income that the telecoms site would have produced was rejected. Parliament’s intention was not for this to be recovered ‘through the backdoor’.
  • Compensation for Reinstatement/Other claims for damage - viewed as unnecessary as the imposed code agreement contained clauses dealing with these.
  • Professional Fees - LBI was entitled to its reasonable professional fees incurred in seeking to agree to the terms of the Code Agreement.
  • Temporary Use of working areas - compensation permitted when the Operators requirements became known. The parties can revert to the Tribunal if these figures cannot be agreed.
  • Loss of ‘sharer income’ - rejected as double counting and other heads of loss were deemed to be speculative or contingent
  • LBI can also revert to the Tribunal – at any time in the future for a court-imposed agreement if it can substantiate any true losses or damages.

Practical Application of Principles Established

There is a lot that both operators and landowners can learn from these cases.

Some points of principle

  • Where there is no alternative use for the site the value of Code rights – i.e. Consideration - is nominal i.e. £50.
  • To arrive at an ‘all-in’ figure for the agreement – the parties need to combine elements of compensation - such as the provision of services and access – the Tribunal preferring ‘true compensation’ to be reserved for real items of damage.
  • The analysis of an existing service charge is a useful mechanism to arrive at such a figure.

Rooftop sites – using a Service Charge to arrive at an ‘all-in’ figure

  • Where there is a service charge, the parties need to consider what costs are appropriate for a rooftop site which benefit its user. Then analyse these to arrive at an all-in figure, giving the Operator unlimited access, with no further costs. This isn’t a difficult exercise and can be based either on the rooftop as being one unit within the overall building (the approach in the Islington case) or upon a rate per m2 (appropriate in most commercial properties).
  • In the absence of a service charge, an owner should be able to easily identify what costs it incurs in running its building and provide these to the Operator. Again, not a very difficult exercise.
  • So, the industry should feel like it has the makings of a solution. And there are specialist Service Charge surveyors who routinely do this work. Progress.

Greenfields – for sites with no alternative use

  • The starting point is the existing use value (excluding telecommunications use).
  • New Code agreements of similar rural sites concluded on statutory assumptions might be persuasive as market evidence.
  • In the absence of true Code comparables, and any alternative use, the question remains ‘how can the consideration be greater than existing use?’ To arrive at an ‘all-in’ figure the parties have to assess the ‘burden’ on the landlord by the operator being there – i.e. those risk factors that might give rise to a loss.
  • With a proper discussion between two willing parties, who understand valuation – this really shouldn’t be a difficult exercise.
  • Any argument that consideration should be much more than the existing use value requires proper justification. Why would a willing buyer pay more than existing use value? And why would a willing seller expect more, when it has full knowledge of the transaction and knows the market? If it wants more, it’s no longer willing, so there really can’t (or shouldn’t) be a level below which it won’t go – arguably, even if the figure is ‘tiny’…. even as uncomfortable as that may sound.
  • It seems that by imposing risk factors upon the minds of the hypothetical parties when negotiating consideration, the Tribunal has ignored the background against which such negotiations take place. Both parties know full well the extent of the compensation provisions of the Code and the remedy these provide against losses arising from such risk factors.

At Cornerstone, we are always willing to have a discussion with landowners on the value of sites, and their alternative uses.

Carlos Pierce is Head of Legal projects, Strategy and the Code programme at Cornerstone the UK's leading mobile infrastructure services company set up as a joint venture between Vodafone and Telefónica. www.cornerstone.network

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