The Upper Tribunal (in England) recently issued its decision in EE Limited and Hutchison 3G UK Limited v The Mayor and Burgess of the London Borough of Islington, the first case to consider the valuation of rights under the new Electronic Communications Code.
Background – The Code
The Code governs the relationship between owners and telecoms operators in relation to the installation and operation of electronic communications apparatus, such as telecoms masts and fibre optic cables, on land and buildings, and allows operators to obtain Court imposed rights where agreement cannot be reached.
With the intention of reducing rents for telecoms operators, and bring them more in line with payments made for other utilities, the new Code changed the basis of valuation to a “no scheme” approach. In determining what is an appropriate consideration for rights under the Code, it is to be assumed that the transaction does not relate to the provision or use of an electronic communications network. The Tribunal referred to this as the “no network” assumption, in preference to the expression “no scheme”.
Since the new Code came into effect in December 2017 there has been considerable debate as to the effect of the new valuation provisions, with operators bullishly pushing for nominal rents and owners and their advisers holding out for sums closer to those paid previously. The resulting standoff has led to a stagnant market where leases are not being agreed.
The EE case concerned the proposed use of roof space on a block of flats owned by the Council. The Council refused to grant a lease on the terms proposed by the operators and so the operators applied to the Tribunal to impose terms. The main area of dispute was the level of rent to be paid. The Council proposed a rent of £13,250 per annum, relying on historic rents as comparables. The Council also argued that there was a level below which a “willing seller” would not deal, or a “floor level” consideration.
Whilst the operators’ application to the Tribunal proposed a payment of just over £2,500 per annum, their valuer argued that the roof space had only nominal value and suggested that £1 per annum would be appropriate.
The Tribunal favoured the operators’ arguments, attaching a nominal value of £50 to the rights granted and concluding that a fair consideration, inclusive of service charges and the inconvenience to the Council, would be £1,000 per annum.
In reaching its decision the Tribunal found that:
• Rents under the old regime cannot be used as comparables, as they run contrary to the “no network” assumption;
• The assumption that a market exists (willing buyer) does not increase the value, i.e. there is no additional assumption that the market is a competitive one;
• The fact that there may be only one willing buyer in the market will not necessarily result in a nominal rent;
• The rent may be nominal if the characteristics of the premises mean that, in reality, nobody would pay anything for them; and
• The consideration/rent should be inclusive of service charges where this would be expected in the market;
The decision was also important in other respects:
• The Tribunal confirmed that agreements under the Code can take the form of a lease (therefore creating a real right in property) and that the Tribunal has power to impose a lease on the parties as it did here;
• The Tribunal considered the entitlement to compensation for loss and damage arising from the exercise of the rights granted;
• The Council’s failure to comply with the Tribunal’s earlier direction to adjust the terms of the proposed lease to facilitate the disposal of the case within the six month period allowed under regulations resulted in the form of lease proposed by the operators being imposed on the Council.
The decision will be welcomed by operators and will, of course, be viewed as bad news for owners. Owners may well only be able to expect nominal rents for rooftop leases and agricultural use value for rural sites in future.
Whilst this is a particularly significant case, there are other areas of the new Code that have still to be explored and we expect it will take some time, and a number of further Court decisions, before the market reaches a settled position.
As for breaking the current standoff, it remains to be seen if this decision will improve the position. Owners will remain reluctant to grant leases if there is no real financial incentive to do so and following this decision there is a danger that operators will seek to drive rents down even further. Conversely, operators may be willing to pay more to secure agreements and avoid Court proceedings.