An update on the latest telecoms lease renewal case

Sixteen months on from the case of Hanover v Vodafone (“Hanover”), which established the six-stage valuation framework for the assessment of new rent in relation to 1954 Act protected lease renewals of telecoms sites –reduced to three stages for new Code agreements – we now have the long-anticipated decision of EE and H3G v Morriss and others (referred to as “Pippingford” after the estate within which the site is located). I refer to EE and H3G jointly as MBNL in the remainder of this article.

Amongst  other  interesting  aspects  of  the  decision  (discussed  below),  the headlines are that Martin Rodger QC (Deputy President of the Upper Tribunal Lands  Chamber  but sitting  in  his  capacity  as  a  County  Court  judge  in  this case) has now provided a clear steer that:

1. The   comparable valuation approach  should be adopted where appropriate transactional evidence is available, and
2. Alternative  valuation  frameworks,  such  as the six-stage  framework adopted in Hanover, should only be relied upon by exception.

What’s gone before

Before I get into the detail of this case,it’s worth providing a reminder that the six-stage framework was established in Hanover as a means of accounting for the factors that would likely be in the minds of willing parties, in the absence of useful comparable evidence relating to new telecoms leases (the Court being of the view that evidence of renewals is far less useful than evidence of new lettings -of which there were hardly any at the time of the Hanover trial-due to parties’ different negotiating positions and legal frameworks relating to each scenario; a view that has been underlined in Pippingford).

The first three stages of this process have subsequently been adopted by the English and Scottish Tribunals as a means of assessing consideration (under paragraph 24 of the Code) in the context of Code agreements (in such cases professional fees are accepted as being claimable as compensation under paragraph 25 of the Code, and inducements are not a relevant factor in the context of assessments of consideration determined by the Tribunal, whereby stages 4-6 are not relevant).

The three / six stage framework has been widely adopted by valuers in the market over the past year or so. Very broadly speaking, in my experience it has resulted in the following:

However, in my experience, relatively few site providers have been willing to agree deals at these levels, particularly in relation to rural greenfield sites, and as such further annual amounts have either been added to the annual rent (sometimes referenced in leases as a ‘commercial top-up payment’ or similar), or a one-off capital payment (or a series of payments) has been made in order to convince unwilling site providers to become willing. As such, in my experience, most consensual deals (whether renewals or new lettings) negotiated between knowledgeable agents, have been agreed within the following ranges:

All of that said, whilst the number of post-Code completed lease renewals now stands in the high hundreds, there are still relatively few new Code agreements for new sites. Of those that I’m aware of, the majority relate to sites acquired by EE  for the Emergency Services Network, and as we will see, it seems that much of the evidence in Pippingford related to such deals.

Before coming on to Pippingford, an important point to note –which perhaps has still not been made clear to the Courts –is that, in my experience, different operators and infrastructure providers employ different approaches. As we will see, the evidence in Pippingford demonstrated that EE has, at least in some cases, agreed low annual rents (with examples showing consideration and compensation recorded at low figures and stated in the lease as having been assessed in accordance with the Code, and with an annual commercial top up payment added to increase the ‘rent’ to a more palatable figure for the site provider), but with significant one-off  ‘Early Completion Incentive Payments’  paid in addition. The evidence in Pippingford showed “the up-front payments which featured in those [EE] transactions were usually £15,000”(paragraph 100).

In my opinion, EE genuinely make those payments for the purpose of incentivising landowners to agree terms quickly due to the commercial pressure EE is under in relation to that particular programme, whereas it is my experience that other operators and infrastructure providers tend to pay lower one-off payments. Unsurprisingly, each business has its own commercial priorities and objectives, although it is unlikely that evidence to demonstrate that will have been presented to the court in Pippingford.

Overview of the site being considered in PippingfordThe description in the Court’s judgment is as follows (paragraphs 8-10):

The Pippingford Park Estate is a small mixed rural estate situated about 10 miles south west of Tunbridge Wells. It generates income from conventional woodland management and agriculture as well as from a great variety of commercial and sporting activities; parts of the Estate are used for fishing, horse livery, hosting music festivals and sporting events; the former manor house and County Court approved Judgment converted farm  buildings are let as commercial offices. Since the Second World War, large areas of the Estate have been let to the Ministry of Defence and these are used frequently by Army reserve units and cadets for military training. A helicopter landing site is used by the RAF and other services for exercises, including some conducted at night.

One of the less conventional uses of the Estate is as a venue for “hostile environment  training” for the staff of Government departments,  private security companies, journalists and others wishing to experience a simulated hostile  situation in preparation for postings  abroad.  For up to four days a week, different training providers run exercises creating mock border crossings, vehicle checkpoints and encampments. Pyrotechnic charges are used to simulate roadside bombs and blank-firing weapons are discharged to add authenticity to mock hostage situations. These are profitable activities which contribute significantly to the Estate’s income. 

The land which is the subject of these proceedings is situated in a wooded part of the Estate regularly used for hostile environment training. It comprises an area of approximately 130 square metres which has been let by the Estate Company as a telecommunications site since 1996 (the  Site). Equipment cabinets and a 30m lattice mast stand on a concrete base within a small fenced compound on the Site. Access to the area is available directly from the A22 through a gate which is kept locked. Once through the gate, the Site is about 75m from the boundary of the Estate and is reached along a tarmacked road then by a short stretch of unmade track.

So, there is nothing out of the ordinary about the site itself, but the unusual uses of other areas of the Estate introduced a number of points that needed to be taken into account in relation to various elements of the case, as we’ll see.

What was Pippingford about?

The case related to a 1954 Act protected lease whereby the new tenancy rent was to be determined under s.34 of the 1954 Act.

As paragraph 6 of the judgment explains “tenancies of such sites must be renewed under the 1954 Act but any new tenancy granted on a renewal will be subject to the Code and will not be one to which the 1954 Act applies (for a fuller explanation see Cornerstone Telecommunications Infrastructure Ltd v Ashloch  Ltd  [2021]  EWCA  Civ  90).  The claimants can thus achieve a transition to anew Code agreement, but only by first exercising their rights under the 1954 Act”.

At paragraph 20, the Court reiterated how paragraph 24 of the Code interacts with s.34 of the 1954 Act:

“The statutory basis of assessment of rent under section 34 of the 1954 Act is very different from a determination under paragraph 24 of the Code, which contains highly favourable valuation assumptions for the benefit of operators, but the principles of valuation under the Code are indirectly relevant to a determination under the 1954 Act”.

As paragraph 21 explains, in Hanover the Court “assumed that Code valuation principles, and in particular the “no-network” assumption in paragraph 24, would provide the framework for the hypothetical parties’ negotiations in the open market, and that the same principles ought therefore to be kept firmly in mind when determining a rent under section 34”.

I’ll  come  back  to  valuation  shortly,  but  will  first  summarise  the  Court’s judgment in relation to other points that were in dispute:

Upgrading rights

MBNL sought unrestricted rights to upgrade whereas the site provider sought a number of restrictions, including on the height of equipment in view of the fact that helicopters regularly fly over the site and land on other areas of the estate. 

The Court found that there was no reason to restrict MBNL’s ability to upgrade its equipment, save for concerns about height of equipment, which it said ‘can be catered for by an express limitation’.

Right to claim compensation

The Court explained that because the Code only provides for compensation to be claimed under  paragraphs 25  and 84 of the Code if an  agreement is imposed by the Tribunal, and because almost all new Code agreements are consensual, it follows that “site providers entitled to statutorycompensation are a tiny minority” (paragraph 30).

Nevertheless, the site provider in this case had sought an express provision to be included in the lease to enable it to claim compensation in the future, notwithstanding that there was nothing in the existing tenancy that would entitle it to do so. The Court therefore explained within paragraph 34:

“At least in valuation theory the consideration agreed in the market for consensual Code agreements will include the monetary  value of the risks associated with the grant of the rights. Where a new tenancy is entered into following proceedings under the 1954 Act the rent will be determined having regard to market evidence and will therefore take account of the market’s assessment of the value of assuming those risks. There is no evidence before me that consensual Code agreements negotiated in the market include contractual compensation provisions. Had there been such evidence I am sure it would have been drawn to my attention. The exceptional cases in which compensation is available occur  where an agreement is imposed  by the Upper Tribunal. Market practice is not necessarily determinative when it comes to the fashioning of terms under section 35, but nor is it irrelevant, especially where the introduction of anunusual term would create an additional valuation issue (rent is determined under the 1954 Act on the hypothesis of a consensual arrangement, mirroring the norm rather than the exception). Rather than attempting to replicate paragraph 25 in contractual form, with all its uncertainties and opportunities for disagreement between the parties, the better course seems to me to be to ensure so far as possible that the rent payable under the new tenancy is rooted in the market evidence. That will place the defendants on the same footing as almost all other site providers and will be consistent with the current tenancy. I see nothing unfair in that and any suggested unfairness is the consequence of decisions made by Parliament when it enacted the Code”.

Although the Court did cave at that by saying that “if,  in  future,  there  is evidence that contractual compensation schemes are being incorporated into agreements in the market, it may be necessary to revisit this issue”. For what it’s worth, my experience is that such provisions are not generally included in consensual agreements.

Indemnity

At paragraph 40 the Court made clear that in its opinion, notwithstanding the forms of indemnity that may have been included in other Code agreements (including through decisions ofthe Tribunal), unless there is a clear reason to adjust the level of indemnity from that which was specified in the existing tenancy then “it will remain in its original form”.

Rolling break

MBNL sought a rolling break provision to be available after the fifth year of the term; a fairly common provision in my experience. However, it was suggested by the site provider that MBNL’s reason for seeking the clause was to enable it to take advantage of the more favourable valuation regime provided by the Code (inanticipation that the Court may determine a rent that is higher than would be determined under the Code, as occurred in Hanover). The site provider argued: “No such provision was included in the current lease or its predecessor and there was no good reason to allow it. Nor was it reasonable for the defendants to be left in the uncertain position of not knowing during the last five years of the term whether their income from the Site was secure or could be cut off at three months’ notice”.

On the other hand, MBNL’s evidence explained that it wished to have the flexibility of being able to break the lease after five years in the event that technological advancements meant that the size of equipment has increased in five years or later, such that the subject site might no longer be suitable in view of the restriction in relation to height. The Court determined as follows (paragraphs 50-52):

As in Hanover Capital I give little weight to the claimants’ supposed commercial interest in terminating the lease in order to secure a more favourable rent; I agree with Mr Wills that it is an unattractive stance, but more importantly I think it unlikely in practice that the claimants would exercise such a right for the suggested reason. Whatever rent I determine the sums involved are not large and any notional benefit of securing the opportunity to negotiate a reduction would probably be extinguished by the administrative inconvenience and professional fees involved. I am more influenced by the possibility that technological changes may render the site unsuitable or that upgrades may not be capable of being accommodated within the terms of the new lease without giving rise to a significant dispute or a ransom situation.

Since an important part of the justification for a rolling break clause is to enable the terms governing the claimants’ occupation to keep pace with the development of telecommunications apparatus, it would not be appropriate to introduce a requirement that they must give vacant possession if they exercise theright of early termination. The defendants’ wish to impose such a condition is intended to discourage the use of the break as a means of securing a more favourable rent, and I have already explained why in practice I think it is improbable that the claimants would seek to adopt that tactic.

The lease will therefore include an unconditional break clause exercisable on three months’ notice expiring on the fifth and subsequent anniversaries of the term”.

Rent review

The parties had agreed that a review would occur on every third anniversary of the lease, but whereas MBNL sought the reviews to be pegged to the CPI rate the site provider sought for  it to be pegged to the RPI rate, as per the existing tenancy.

The Court took the view that “the parties made a choice in 2004 when the original lease was granted and the evidence shows that other parties entering into transactions in the market frequently adopt RPI as their index of choice. In the absence of any persuasive reason for changing the original basis of review I determine that rent under the new tenancy will be reviewed at three yearly intervals in line with increases in RPI”.

Valuation

As promised, I now return to what was decided in relation to the rent.

MBNL’s expert, who followed the six-stage framework,was of the view that the appropriate rent was £950 p.a.The site provider’s expert, relying on the comparable method of valuation and making various adjustment, thought that the correct figure would be £12,000 p.a.

Having referred back to the lack of available evidence at the time of the Hanover trial, the judgment explained at paragraph 58:

“Fortunately, lettings of sites for the provision of electronic communications networks on terms which will be subject to the Code are now quite common, and the Court has evidence of the rents at which transactions take place. In principle, because of the   absence of artificial valuation assumptions, evidence of rents agreed in the market is the best evidence on which to base a rent determined under section 34. There maybe reason to make adjustments to the evidence, but it provides a reliable starting point”.

At paragraph 62 the judgment goes on to explain:

“The same right to resort to the Upper Tribunal and eventually to obtain a determination by it of the consideration payable  under an imposed Code agreement are known to real parties negotiating new Code agreements (at least where the site provider  is knowledgeable or professionally advised). The effect of negotiating in the shadow of the Code can therefore be expected to be reflected in the rents agreed between parties in reality (evidence I have heard in other cases confirms this).  If sufficient evidence of those rents is available there should be no need to resort to other valuation approaches”

And within paragraph 65:

“Section 34 does not require that the existence of the Code be ignored, or that the parties must be assumed to be ignorant of its provisions. They will reach  agreement, but in the course of their negotiations they will both be aware of the valuation approach which would  be taken if the consideration was to be determined by the Tribunal under paragraph 24. That does not involve the threat of a transaction outside the framework of the putative letting and carries with it no danger that the tenant will have to pay the rent appropriate to a more valuable tenancy, nor does it increase the range of the relevant evidence. It involves no more than assuming that the parties will make full use of their respective bargaining positions”.

So, the Court  had made clear that  it considered that  comparable evidence should be relied upon, at least as a starting point, if it exists (and it does, in relation to woodland sites). However, at paragraph 69 it reiterated that “a renewal is a poor comparator for a new letting of a bare site [as is required to be assumed in accordance with s.34 1954 Act] between parties negotiating at arm’s length in the open market and such evidence must be therefore viewed with circumspection.......Because the parties are moving from one statutory environment to another, telecommunications lease renewals, to a much greater extent than lease renewals of other types of property, are poor comparables for section 34 valuations. Weight ought not to be put on them if sufficient evidence of lettings of new sites is available”. 

Having made those points clear the Court went on to state / accept the following points (in some cases reiterating what other Courts / Tribunals have said previously):

Based on the evidence before it (which, as mentioned above, is unlikely to have included examples of sites let by parties other than MBNL, and primarily included sites let by EE for the emergency services network) the Court determined that “A  premium  of  £15,000  would  be  typical  and  the  willing parties would know it; if it was accounted for by a straight-line apportionment it would add £1,500 a year to the rent. But the willing parties would also know that a sum paid over 10 years would beworth less to the recipient than the same  sum  paid  at  the  start  of  that  period.  To  receive  the  equivalent  of £15,000 by instalments over 10 years, assuming a 5% yield, would require an addition to the rent of £1,943 a year” (paragraph 111).

As such, it added that sum to MBNL’s expert’s assessment and concluded that an annual rent of around £3,000 would likely be agreed between hypothetical willing parties.

Having done so, the judge noted that figure is somewhat higher than the range of rents that had been agreed for comparable sites which, once adjustments had been made to include an annual equivalent of the one-off capital payments that had been in each case, fell between £1,750 and £2,500 per annum. However, it explained that it was satisfied with its conclusion, noting “a rent of £3,000 reflects the significantly greater than average management time, inconvenience and potential for interference with other more profitable activities on the Estate that  are a feature of the use of this particular Site for telecommunications purposes” (paragraph 112).

The court then that an amount to reflect the annual equivalent of the contribution towards professional fees which the site provider would receive if the letting took place off market. It concluded that “the work involved on this Site would be more complicated than on a more straightforward letting (not least because  of the involvement of the  MoD) and an allowance of  £500 a year would be justified” (paragraph 114).

As  the  final  paragraph  of  the  judgement  concludes,“the resulting total is £3,500 a year which I determine is the annual rent for the Site payable under the new tenancy to which the claimants are now entitled”