When the new Electronic Communications Code (‘the Code’) first came into force on 28 December 2017 the Government hoped it would facilitate the faster roll-out of telecoms networks, leading to the UK being a world-leader in terms of digital connectivity and 5G coverage.
The reality has been quite the opposite, to date, with the number of deals completed being virtually none in 2018, and far fewer in 2019 and 2020 compared to pre-Code levels, notwithstanding that this year has been much better than the last.
The primary reason for the bottleneck? The introduction in the Code of a no-network assumption and a no-scarcity assumption to the assessment of rent (i.e. consideration and compensation), resulting in an impasse between operators - keen to benefit from the clear intention of the Code to reduce the level of rent they are paying - and site providers, unsurprisingly seeking means of clinging on to the rents they have grown accustomed to, or at least something as close as possible to that.
Direction of travel form the Tribunal
During the course of 2018 and 2019, the Upper Tribunal (Lands Chamber) began to provide clarity as to what it considered to be the appropriate approach to assessing consideration (defined in paragraph 24 of the Code as ‘the market value of the relevant person’s agreement to confer or be bound by the code right(s)’) and compensation (defined in paragraph 25 of the Code as ‘any loss or damage that has been sustained or will be sustained by that person [i.e. the site provider] as a result of the exercise of the code right(s)’). Through a series of judgments and observations, it became clear that:
- The Tribunal believes that, as far as possible, foreseeable future costs that may be incurred by a site provider should be wrapped up as consideration – a ‘single annual occupation payment’ (as it called it in the first case it heard on the issue, EE v LB Islington) to reduce the potential for future disputes over low amounts, see below);
- It is not appropriate for consideration to be solely based on the existing use value of a site;
- Valuers should stand back and consider whether their assessment is improbably high or improbably low and if so, make appropriate adjustments;
- Existing use value might be the appropriate starting point for assessments of consideration;
- It is appropriate to consider alternative uses and transactions relating to alternative uses may be of some benefit, as long as it can be demonstrated that there is a market for those uses at the subject site;
- Using old Code comparables as a starting point, and attempting to make adjustments to reflect the no network assumption, is not a reliable approach;
- Using other telecoms transactions as comparable evidence is not necessarily appropriate because the adjustments to be made to assess consideration will vary from site to site, depending on site-specific factors and the terms of the specific agreement.
Notwithstanding these useful pointers from the Tribunal, the extent to which valuers - for both operators and site providers - were following them, was variable, to say the least. It is only quite recently that a specific approach to assessing consideration has been endorsed by the Tribunal…details below.
Border country – Why are we using single annual occupation payments?
Before I get on to explaining the Tribunal’s preferred valuation approach, it’s worth clarifying why the Tribunal has taken to wrapping items which might more obviously appear to fall into the definition of ‘compensation’ within the awards it has made for ‘consideration’.
The reference to a ‘single annual occupation payment’ was first made in the EE v Islington case (relating to a rooftop site), in February 2019, when the Tribunal explained at paragraph 101:
‘both [expert valuers] considered that it would be appropriate for the claimants to make a contribution towards the respondent’s expenses of running the building and complying with its obligations as a payment to reflect its usage of the building. We agree. Both parties approached this topic as an aspect of compensation but we consider it more appropriately viewed in this case as relevant to the assessment of consideration for the rights conferred and obligations assumed under the agreement imposed. One consequence of treating the provision of services as a matter for compensation would be to increase the opportunity for disagreement with resulting unnecessary costs. The total sums involved are likely to be small and we consider that reasonable parties would wish to wrap them up in a single annual occupation payment for that reason”.
It would be fair to interpret that as the Tribunal making it clear it has little interest in hearing disputes about relatively low value elements of loss or damage, which could be submitted as compensation claims, in the future. Instead, where the extent of future loss or damage is predictable and foreseeable at the outset, the Tribunal’s preference is for it to be wrapped up in the consideration figure. It has reiterated that point subsequently, not least in its judgement in Cornerstone v L&Q (aka 'Maple House'), and again earlier this week in J H & F W Green Limited v On Tower Limited (aka 'Dale Park').
A full explanation of the Tribunal’s approach is found in paragraphs 98-103 of the Maple House decision. I’m not keen on copying large sections of judgements into an article, but as this point is of such importance, I’ve included the majority of those paragraphs below:
“It is at this point that we enter the border country between consideration under paragraph 24 and compensation under paragraph 25. The border is not a well-defined line on a map, and some of the financial consequences of a Code agreement may be equally well accommodated by additional consideration under paragraph 24 or an award of compensation under paragraph 25.
Paragraph 24(2)(c) directs that consideration be determined on the basis that the transaction is subject to the provisions of the agreement to be imposed. In a real negotiation, the rent which the parties agreed would reflect any adverse financial consequences for the landlord which were not separately accounted for. If the proposed use was expected to create an administrative burden for the landlord or to have an impact on other property belonging to the landlord, those would be part of the package of advantages and disadvantages to which the parties would attribute a single composite price. But where the Tribunal imposes an agreement under paragraph 20, it is given power under paragraph 25(1) to order the operator to pay compensation to the site provider for any loss or damage that has been or will be sustained as a result of the exercise of the code rights to which the order relates. Moreover, the Tribunal retains the power to order the payment of compensation at any time after imposing the agreement, and may do so by a lump sum, by periodical payments, on the occurrence of an event, or otherwise as it determines.
The existence side by side of an entitlement to consideration reflecting the provisions of the agreement and a right to claim compensation for loss and damage sustained as a result of the exercise of the rights conferred by the agreement is a peculiarity of Code agreements imposed by the Tribunal under paragraph 20. It requires care by the Tribunal to avoid double counting when making the original order or in the event of a claim for compensation at a later date.
The fact that the landlord under a Code agreement imposed by the Tribunal will have a continuing right to claim compensation also requires care in the assessment of the evidence of transactions involving consensual Code agreements. Compensation under paragraph 25 is available only “If the court makes an order under paragraph 20” and the statutory right to compensation for loss and damage caused by the exercise of Code rights does not apply to voluntary agreements under paragraph 9 of the Code.
The parties to a consensual Code agreement must therefore either make contractual provision for compensation or must reflect the risk of loss and damage caused by the exercise of the code rights in the consideration they agree. This difference in the availability of compensation is an important distinction between an imposed agreement and a negotiated agreement. It means that evidence of the headline figure payable under a negotiated agreement is unlikely, without access to a detailed breakdown from at least one side, to provide much useful evidence for the Tribunal. The loss and damage anticipated in any particular case will depend on the characteristics of the particular site. Unless the Tribunal has access to the parties’ own analysis of the sum agreed between them it may be difficult to analyse comparable transactions.
Whether it is by an additional sum by way of consideration, or in the form of an award of compensation payable at the time of the agreement, or the acknowledgement of a prospect of compensation in the future, an assessment of any additional adverse effect the Code agreement may have on the site provider should therefore be accounted for in the determination under paragraph 24”.
The Tribunal clarified once again in paragraph 79 of this week’s Dale Park decision that “in setting the level of consideration we expect to include an allowance for loss or damage that can be predicted, so as to save the respondent from having to make almost inevitable claims later”, but clarified “that does not prevent it from making claims under paragraph 25 for anything that cannot now be anticipated and quantified."
The three-stage valuation approach
The Tribunal’s favoured approach was first referenced in the County Court case of Vodafone v Hanover Estates, in which I gave evidence for Vodafone and Martin Rodger QC (Deputy President of the Upper Tribunal (Lands Chamber)) sat in his capacity as a County Court judge.
Credit must go to Stephen Jourdan QC, as it was Stephen who first set out the approach that the Tribunal has subsequently adopted and endorsed. For the purpose of the Hanover case, which related to the assessment of rent for a new lease under section 34 of the LTA 1954, the methodology was set out as a six-stage process, although for cases that solely relate to the assessment of consideration under paragraph 24 of the Code, only the first three steps are required. Those are:
- The first stage is to assess the alternative use value of the site, which would be the rental value of its current use or of the most valuable non-network use. This is a matter of evidence and depends entirely on the location of the property and land values in that location. Parking spaces next to a sports ground or an airport would have a higher value than on an industrial estate, for example.
- Secondly, if additional benefits would be conferred on the tenant by the letting an allowance should be made to reflect it.
- Thirdly, if the letting would have a greater adverse effect on the willing lessor than the alternative use on which the existing use value was based, this should also be reflected by an adjustment.”
In the Hanover case, I had identified that the site could be suitable for parking or open storage, and I considered that there were no additional benefits of the site to the operator that necessitated adjustments, or any burdens on the site provider for which any additional sum should be paid. Martin Rodger QC agreed that if it had only been necessary to follow the first three of the six steps, in that case, the appropriate consideration would have been £1,715, as per my valuation. As it was, due to the peculiarities of section 34 of the LTA 1954, the court applied some surprising assumptions in reaching its judgement, but the three-stage approach had been established.
The three-stage approach was subsequently endorsed in the Tribunal’s decisions in both Maple House and Dale Park.
In the Dale Park judgement, the Tribunal provided some particularly insightful commentary about what it considers to be benefits to be taken into account under step 2:
“We take the view that the additional benefits conferred on the claimant…include the rights to keep there the existing mast or other tall structure, to maintain connections to an electricity supply, to enter onto the other land of the landlord - for temporary works or to install an emergency generator - and to carry out pruning or trimming of the landlord’s trees.
All of those ‘benefits’ are fairly standard in new Code agreements, although in that particular case the Tribunal also noted that “there is also the benefit of the tenant’s rolling break clause after five years”.
A nudge towards rate-cards?
There are generally three different types of site:
- Rural greenfield sites (i.e. usually in rural locations where there is generally no prospect of the site being used for any alternative purpose);
- Urban greenfield sites (i.e. ground level sites where there is more likely to be some feasible alternative use); and
- Rooftop sites.
The Tribunal members have now heard cases relating to all three types of sites and the judgments they have published suggest that they consider that in the majority of cases the appropriate consideration for rural greenfield sites should be around £750 p.a., and for rooftop sites around £5,000 p.a.
In relation to urban greenfield sites, where the site has an alternative use value, quite obviously the level of consideration will differ, potentially quite considerably, from site to site, depending on where it is, its size, what it could be used for and whether there is a market for that use at that location.
£750 for rural greenfield sites?
The Tribunal’s view that £750 p.a. is the appropriate level of consideration for the majority of rural greenfield sites was made very clear in this week's Dale Park decision.
In actuality, the Tribunal awarded £1,200 p.a. in that case, made up of a) £100 p.a. as a nominal figure for the existing use value, b) £600 for the benefits of the site to the operator (as referenced above), and c) £500 for the burdens of the agreement on the site provider. The mast, in that case, happened to be in close proximity to residential properties within a National Park and the Tribunal made it clear that the burdens it identified in this case would not normally be applicable.
You may note that the maths doesn’t quite add up (i.e. £100 plus £600 = £700, not £750). The Tribunal stated at paragraph 142 of the judgement:
“Without those special circumstances the value of burdens might well be no more than a nominal £100, and a figure of £750 reflecting a nominal site value, general additional benefits and nominal burdens would be appropriate”.
It is apparent that the £750 figure was arrived at on the basis that the Tribunal, having been presented with evidence of a significant number of consensual deals having been agreed at around £1,500 per annum, took the view that ‘the level of consensual rent agreed by the claimant might feasibly be double that of a strictly no-network consideration'.
For what it’s worth, my personal view and experience is that operators’ willingness to conclude rural greenfield deals around the £1,500 p.a. mark is not arrived at because that is twice the figure they consider would be awarded by the Tribunal – in many cases operators have anticipated that the amount the Tribunal would award would be much less than half that figure, not least because operators have not generally attached a value of £600 p.a. to the ‘benefits’ that the Tribunal referenced in Dale Park. Instead, the willingness to complete consensual deals at around £1,500 p.a. has been driven by other commercial factors. You may consider this a minor point, but it is something that requires attention because it seems highly unlikely that operators will be willing to agree consensual deals for rooftop sites that are twice the figure that the Tribunal might be expected to award in those cases, particularly following the Cornerstone v L&Q case that I’ll come on to.
The commercial incentives that the Tribunal felt may be leading operators to offer twice as much for a consensual deal as they expect the Tribunal might award are summarised in paragraph 126 of the Dale Park judgement:
“the claimants’ approach was to make offers at a level sufficient to achieve agreement with site owners whose rent was being reduced, and that those settlements will have reflected commercial reality rather than consideration of the no-network assumptions required under paragraph 24. The commercial realities were that the claimants were able to secure immediate savings in the levels of rent being paid, whilst avoiding the costs and delays of reference to the Tribunal. For their part, the site providers were able to gain certainty of future income, protection from the costs of a reference to the Tribunal and protection from exposure to the Tribunal’s interpretation of consideration with a no-network assumption”.
£5,000 p.a. for a rooftop?
If the Tribunal was quite clear about its opinion of the appropriate level of consideration for rural greenfield sites in Dale Park, it was absolutely categoric about its opinion regarding the appropriate level of consideration for rooftop sites in Cornerstone v L&Q; the final paragraph of the judgement reads as follows:
“We would add, for the assistance of parties in other cases, that while each reference must be determined on the basis of the evidence presented to the Tribunal, the evidence we have considered in this case gives us no reason to expect that the market value of a site provider’s agreement to confer code rights over a rooftop site on any different residential building will be much more or less than the sum of £5,000 we have determined. As the comparison between Brookstone Court and Maple House indicates, there may be features of a particular building which justify a modest range, but we would not expect variations to be significant one way or the other. The evidence does not suggest that there is much difference between the value of a site on a residential building in Inner London or in Sheffield and we would be surprised if values in other parts of the country were not in the same narrow bracket.”
The reference to Brookstone Court relates to a consensual agreement reached between Cornerstone and the London Borough of Southwark, about which the Tribunal had heard evidence that it leaned heavily upon in reaching its judgement. In short, having followed the same three-stage process established in the Hanover case, the Tribunal applied the following figures and assumptions:
- The site value was nominal.
- The fact that the site provider was obliged to insure and maintain the building is a benefit to the operator (paragraph 96 states: “The benefits to the tenant of those obligations would be a factor in the negotiation of consideration, unless they were taken into account by a different term of the agreement, such as a fixed or variable service charge. Consideration of the value to the tenant of those benefits is therefore the second stage of the assessment”).
- The Tribunal considered that it was reasonable for the landlord to supervise the operator’s access to the roof (not least because Maple House is an eight-storey residential block and the Tribunal was mindful that the recommendations in the post-Grenfell Hackitt Report are expected to be bound into legislation next year, including increased accountability for landlords of high-storey residential blocks), which would result in a financial burden for the site provider. Similarly, noting that the agreement provides for Cornerstone to share the site with up to two others and to upgrade the apparatus at the site without restriction, the Tribunal identified a ‘facilities management’ burden on the site provider in relation to those upgrades.
In the Maple House decision, £50 p.a. was included to reflect the site’s nominal value, £1,500 was included to reflect the fact that the operator benefits from the site provider insuring and maintaining the building (worth noting in this case that access to the roof necessitated the operator accessing through internal areas of the building), and further amounts of £1,000 p.a. and £2,500 p.a. were included to reflect the burden on the site provider of having to supervise access to the roof, and the burden of the site provider of providing ‘facilities management’ services in connection with future upgrades. £5,000 p.a. in total.
In the Brookstone Court assessment, the items which the Tribunal referred to as ‘facilities management’ included reviewing and approving risk assessments and method statements and liaising with residents (noting that a significant amount had been allowed for that task in the Brookstone Court agreement, because areas of residents' car-parking would be used by the operator’s crane, as a set-down area).
Having heard the relatively limited evidence that was available to it, the Tribunal concluded that £5,000 p.a. was not only the appropriate figure in this case, but that sort of figure ought to apply to all other rooftops. For what it’s worth, I strongly suspect that won’t be the case; in most cases, I expect the appropriate figure may be lower, and I expect there will be more litigation to come in relation to the value of rooftop sites, not least in relation to the following points:
- Is it always reasonable for a site provider to require supervised access to the roof? On what basis can that be justified if the site provider has not historically supervised access and the property is not of the type caught by the recommendations of the Hackitt Report?
- How many upgrades are anticipated over the course of a term, and what constitutes an upgrade (I’ve seen definitions of major and minor upgrades, for example)?
- When an upgrade takes place, to what extent is the site provider required to provide ‘facilities management’ services? In many cases, a crane may not be needed, and even where a crane is required, in most cases the set-down area will not interfere with car-parking areas.
- What difference does it make if a rooftop is accessed via an external staircase, rather than through the building? Should an operator pay less in that scenario because they don’t benefit from the landlord’s maintenance of the building to the same extent? Conversely, should the figure be higher on buildings where a concierge is employed – does the operator benefit from an increased level of security?
- The cost of insuring buildings will vary considerably depending on their size, location and use, not to mention how they are clad. Should that affect the amount to be paid for the benefit of the landlord insuring the building?
- Should the amount differ depending on the extent of sharing and upgrading rights?
- I’m probably only scratching the surface here, but suffice to say I see far more reasons for why the Tribunal’s attempt to set a £5,000 p.a. ballpark for rooftop sites will be challenged, as compared to its suggestion that £750 p.a. is the appropriate level for rural greenfield sites.