The Upper Tribunal's recent decision in EE Limited and Hutchison 3G UK Limited v London Borough of Islington provides the first guidance for landlords/site providers and operators as to how the revised valuation scheme set out in the new Telecoms Code will work in practice.

The Tribunal reference concerned the roof of a block of flats, Threadgold House, Islington (owned by the London Borough of Islington – "LBI") where the operators wished to install telecoms equipment because a nearby site (which housed their existing equipment) was going to be demolished.

LBI resisted siting the equipment on the roof of Threadgold House on the basis that it would be a significant inconvenience to them and the residential tenants of the block. However, the Code provides for the Tribunal to impose a Code agreement on a reluctant landowner in appropriate circumstances, and such an agreement was imposed here.

The more interesting parts of the decision relate to what consideration and/or compensation LBI would be paid by the operators in return for them being granted a lease of part of the roof for their equipment.

"No scheme" valuation

The Tribunal pointed out that under the old Code (superseded by the new Code in December 2017) landlords/site providers were used to negotiating rents with operators which took into account the value of the site to the operator for the purposes of its communications network.

However, under the new Code (paragraph 24) consideration for the grant of Code rights by a site provider is to be the "market value of the relevant person's agreement to confer the Code right". Such market value is, basically, such sum as would be payable in a transaction at arm's length between a willing buyer and a willing seller.

Importantly, however, under paragraph 24 it must also be assumed that the relevant transaction "does not relate to the provision of an electronic communications network". This "no scheme" assumption (called by the Tribunal a "no network assumption") works so as "to exclude from the assessment of consideration any element of value attributable to the intention of the operator to use the site as part of its network". This is the key element of the valuation principles under the new Code.

The parties' positions

As part of the negotiations prior to the Tribunal reference, the operators offered to pay a rent of £2,551 per annum whereas LBI (advised by its longstanding retained telecoms expert) sought a rent of £13,250 per annum. The adviser reached this figure based on rents for rooftops negotiated in the 1990s, when (the adviser suggested) the market was immature, and thus allegedly was the equivalent of operating on the "no network assumption".

The operators' expert indicated that, in reality, the roof of Threadgold House had no market at all for letting if it was not to a telecoms operator.

An artificial valuation approach based on storage value for ground floor /basement space required very substantial (99% in some cases, it was argued) discounting to reach any sort of comparable figure, thus illustrating the practical difficulty of valuing by comparable in this particular market.

Tribunal's decision

The Tribunal considered whether, given there was no market for the rooftop letting other than to telecoms operators (and that market could not be assumed because of the "no network assumption") that meant that the consideration should be nominal. However, the Tribunal was unable to conclude that a willing buyer would only be prepared to pay a nominal sum for the rights in question. The Tribunal considered that because it was inconvenient having a telecoms site on the roof of the building, the parties (as willing buyer and seller) would agree some consideration for the use of the roof.

This was assessed by way of a contribution to LBI's expenses of running the building and complying with the obligations that would go into the Code agreement (eg maintenance of common parts etc). The Tribunal noted that long leaseholders in the building paid an annual service charge of around £1,300 per year per flat, but the proposed agreement for the telecoms site on the roof had no service charge provisions in it. The Tribunal therefore settled at the somewhat arbitrary figure of £1,000 per annum rent as the consideration that a willing buyer would pay for the right.

Compensation for loss and damage

The Tribunal also considered the extent to which, in addition to consideration payable by the operators by way of an annual rent, LBI should also be entitled to a further compensation payment under paragraph 25 of the Code. This paragraph allows the Tribunal to order compensation to be payable "for any loss or damage" sustained as a result of the exercise of the Code right.

The Tribunal noted that under paragraph 85 of the Code, compensation for injurious affection to neighbouring land could be payable as under Compulsory Purchase Act 1965. That would allow the tenants of Threadgold House to make a claim, but no such third party claim was before the Tribunal in this case.

Paragraph 84, however, entitles a landowner to a payment for diminution in value of its land as a result of a Code right being exercised. This falls to be assessed in the same way as under the Land Compensation Acts.

LBI's adviser argued that such diminution could include a sum calculated by reference to the difference between the value extracted through the consideration payment and a value based on the land's value as a telecoms site.

The Tribunal easily dismissed this argument, which in effect was LBI seeking to claim by way of compensation what could not be claimed as the consideration for the lease, as the parties are deemed to be operating in a "no network" environment.

When that was taken away, LBI could show no other way in which they had suffered an immediate diminution in value that had not otherwise been compensated through the rental payment (eg there was no "aesthetic detriment" that the siting of the telecoms equipment would cause), so no compensation for diminution in value was awarded. The Tribunal did say, however, that there might be other circumstances where compensation would be payable, and indeed the Tribunal would have jurisdiction in the future to re-assess compensation at any time if the position were to change.

Summary and Comment

As the first valuation case to reach the Tribunal under the new Code, this decision will naturally gain a lot of attention within the industry. Any valuers working in the field, therefore, need to be aware of it.

Of particular note it is that the Tribunal assessed the rent at a sum more than 50% less than that which the operators were prepared to offer before the reference to the Tribunal at all. Although in this case the Tribunal ultimately ordered that the operators must pay what they had offered (£2,551 per annum and not the lower £1,000 figure assessed by the Tribunal), nevertheless the decision on consideration in this reference is a clear warning to landlords and site providers that, going forward, the Tribunal is likely to be assessing consideration for Code agreements at relatively low sums in circumstances where the site concerned has no real use other than as a site for telecoms equipment. This may well be an incentive on landlords and site providers to agree rentals offered by operators to avoid even lower figures being assessed by the Tribunal. It remains to be seen whether operators, in the knowledge of this decision, will start offering very low sums by way of consideration in any event, relying on the likelihood that a similar result as in this reference would occur if the site operative does not agree the consideration proposed.

Postscript – comply with the Tribunal directions or else!

A final word of warning to site providers and landlords that the case also provides; LBI failed to comply with directions given by the Tribunal to co-operate in the process of seeking to agree the form of a lease for the site. Their excuse was that they thought they had co-operated sufficiently, and that the Tribunal would make certain high-level decisions of principle which would then enable the parties to further negotiate the terms of the agreement. However, the Tribunal reminded LBI that under paragraph 97 of the Code and regulations made in connection with it, the Tribunal has to decide all applications for Code rights within six months of receipt. Thus there was no time for the rather relaxed procedure that LBI thought would occur, so the Tribunal struck out any objections that LBI had to the draft of the lease that the operators had put forward, and imposed all its terms on LBI.

The lesson from this to everyone running Code references in the Tribunal is clear – given the limited timescales, complete compliance with Tribunal directions is required otherwise the Tribunal is liable to punish non-compliance with the striking out of some or all of a party's case.