Landmark 1954 Act renewal of a Code Agreement

Vodafone Limited – v – Hanover Capital Limited

Following the introduction of the new Electronic Communications Code in 2017 (“ECC”) there has been significant uncertainty in the telecoms renewal market owing to a lack of clarity as to the proper valuation mechanism to be applied to existing agreements that have protection pursuant to the Landlord and Tenant Act 1954 (“the 1954 Act”) and which, ordinarily, would have been subject to a s.34 valuation with market comparables providing evidence of the “open market”.

In CTIL v Ashloch it was determined that operators with a 1954 Act protected agreement are unable to use paragraph 20 of the ECC to secure a new agreement in respect of an existing site. A new agreement must therefore be sought consensually or if the agreement is protected by the 1954 Act, through this more traditional route. This led to a number of questions about the terms of a new agreement and the proper valuation to be applied by the County Court and what parts of the ECC would be taken into account in any determination. To date there has been little to no clarity on the proper way to proceed and whilst this decision is a County Court judgement without the power to bind others, as it was made in the Lands Tribunal, (sitting as a county court) it will certainly be very persuasive.

The Facts

Vodafone Limited was granted a lease of a communications site in 2008 for a term of five years ending on 6 February 2013. The rent reserved by the lease was a peppercorn and a £10,000 premium was paid.

Upon the expiry of the contractual term the lease continued under the 1954 Act and on 6 December 2016 the owner of the land served a section 25 notice on Vodafone terminating the tenancy. The owner did not oppose the renewal of the tenancy and in August 2017 Vodafone issued renewal proceedings in the County Court.

The Vodafone lease was both a 1954 Act protected lease and a subsisting agreement under the ECC. The parties agreed that that the renewal of the lease must take place under the 1954 Act, that the rights granted by a new lease would, from commencement, be code rights and that the new lease would be a code agreement without ongoing protection under the 1954 Act. Any subsequent renewal of the new agreement would therefore be dealt with under part 5 of the Code.

The parties had agreed the terms of the new lease save for:

1. The length of the Term
2. The tenant’s
3. The Rent

An interim rent had been agreed at £6,750 pa and the parties had used evidence of leases granted before the commencement of the Code to reach this figure.

Martin Rodger QC, the Deputy President of the Upper Tribunal (Lands Chamber) determined the application in his role as a County Court Judge.

The Term and Tenant’s Break

The duration of a new lease under the 1954 Act is required to be such a term as is determined by the Court to be reasonable in the circumstances. The duration of the existing lease may be a factor to be taken into consideration but there is no presumption that a new lease must be for the same term as existing.

The parties agreed that Vodafone could terminate the new lease on three months’ notice in the event that it lost its operating licence or on twelve months’ notice in the event that the site became unsuitable for telecommunications for technical reasons.

In addition Vodafone sought a rolling break on six months’ notice and as the old lease did not include an unconditional break clause it was up to Vodafone to justify any departure from the existing terms.

Hanover offered a break on the fifth anniversary of the term on twelve months’ notice and subject to conditions.

Vodafone argued for a three year term with a rolling break on the following basis:

1. A five year term was sought in 2017 however due to the time since proceedings were issued and the substantial period of holding over since the expiry of the contractual term in 2013 a short term of three years was appropriate;
2. The ECC had altered the legal landscape for the terms of code agreements and there was uncertainty as to the relationship of the ECC with the 1954 Act. A shorter term would allow Vodafone flexibility to deal with the new code rights awarded in any new agreement and allow it to seek new rights should the legal landscape change. This was said to be particularly important given the pending appeal of the CTIL v Ashloch decision;
3. Vodafone was concerned that a new lease would be granted at the rent sought by Hanover and such rent was considerably higher than that assessed under the ECC. A short term and unconditional break clause would allow Vodafone to end the new lease as soon as possible and then potentially claim a renewal under Part 5 of the ECC. This would then allow the rent to be assessed under ECC principles; and
4. Flexibility was required in the event that additional rights were later required by Vodafone. They asserted that they should be able to serve notice to terminate the new agreement and seek a new agreement with additional rights under the ECC should they require these.

The reasons given by Hanover to justify a ten year term with a break on the fifth anniversary of term commencement on twelve months’ notice were:

1. It would give a reasonable balance between Vodafone’s business interests and Hanover’s desire for stability.
2. Hannover would have a guaranteed income for five years and the parties would avoid further expensive litigation for the same period.
3. The original term was for five years and the break clause would reflect

Hanover sought a break clause that was conditional upon vacant possession. This was to prevent Vodafone from terminating in order to seek better terms under the ECC.

Decision

The Court concluded that a the new lease should be for a ten year term with a twelve month break for the tenant exercisable on the 5th and any subsequent anniversary of the term commencement date. The break was not conditional upon vacant possession but was conditional on compliance with other terms.

The Court agreed with Hannover that there should be a period of certainty for the parties and that a five year period was sufficient to give respite from the disruption and expense of further litigation.

The break after the fifth year was also sufficient to allow Vodafone flexibility and the Court acknowledged that there may be an operational need to terminate and seek additional rights in the event that upgrades to the equipment could not be installed in compliance with the paragraph 17 conditions. Hanover’s agent provided evidence to show that CTIL (to whom Vodafone would be immediately assigning the lease) had agreed a number of code agreements with breaks that could only be exercised after three or five years and the Court was satisfied that Vodafone or CTIL did not have an operational need (in terms of upgrade requirements) to immediately terminate and seek additional rights. A requirement for vacant possession would prevent the tenant from terminating the agreement early and seeking additional code rights should it later require them and for this reason this was rejected by the Court.

The Rent

The 1954 Act requires the Court to determine the rent at which the holding might reasonably be expected to be let in the open market by a willing lessor on the terms of the tenancy.

Any improvements of the tenant are to be ignored along with any effect on rent of the tenant’s occupation.

It was assumed that the hypothetical tenant was a code operator and would be able to seek rights under para 26 and 20 of the ECC however negotiations are assumed to be fair and friendly and the willing parties must be willing to enter into a tenancy of the site at a rent which reflects the open market.

Vodafone argued that the ability of the tenant to use the ECC meant that the valuation principles and the no network assumption in para 24 of the ECC would be the starting point for the parties negotiations. It cited eleven transactions that had completed since the introduction of the ECC which gave rents typically in the range of £1,000 - £2,000 pa. The value of the land to the owner in this instance was determined by reference to an alternative use as a car park and a rent of £1,715 pa was proposed for a three year term, reduced to £1,386 for a ten year term. Vodafone gave six steps as a framework to negotiations under the ECC. They used the first three in this instance and disregarded the last three on the basis that they would not be paid in an open market negotiation. The steps are:

1. the alternative value of the site should be
2. any additional benefit to the operator by the particular letting, such as security at the premises, should be taken into account
3. there should be an account for any increased adverse effect on the site provider caused by the use of the site
4. an operator would routinely make a contribution to the site provider’s costs to negotiate the rent and this should be taken into consideration
5. an operator would routinely make a contribution to the site provider’s legal fees to negotiate and complete the agreement. This should be taken into consideration
6. consideration would need to be given to the possibility that the operator will pay an additional amount by way of an inducement to the site provider.

Hanover submitted that rents under the old Code reflected the value of the site to the operator for use as part of its network and used transactional evidence to show what would happen in a hypothetical negotiation in the open market. It believed that the market had not sufficiently changed since the ECC came into force. Thirteen lettings were used to show sites completed between January 2018 and July 2019 with rents from £4,500 to £8,500. Hanover took £6,500 as the mid-point of this range and added £2,000 in order to account for an increase in value to the operator as a result of beneficial site sharing provisions. All of the thirteen sites were negotiated before the ECC came into force and each of them included a caveat to say that the terms did not set a precedent for the terms they would otherwise agree under the ECC.

Decision

The Court found the six steps put forwards by Vodafone useful however it did not agree that steps four and five should be disregarded. The payment of such fees was usual in the market and would be expected in an arm’s length transaction.

One important factor that had been omitted by Vodafone was that the negotiation must be assumed to take place in the open market. In the open market a landowner would advertise a property for sale and would sell to the highest bidder therefore any competition in the market should be considered. There are a number of operators who may want the site and whether or not they would compete for a site in practice (instead of coming to an agreement for one party to share on the others mast) is not relevant when assessing the open market value.

The Court was prepared to take into account evidence of valuations that has been agreed before the ECC came into force. This was on the basis that there was a lack of relevant transactions and the market cannot (yet) be said to have significantly moved on. Vodafone had used nine comparable sites to assess the interim rent to be £6,735 and adjusted it by 20%, to

£5,388, in order to take into account the disregard of any inducement given to the tenant. This was slightly lower than Hannover’s base valuation and the Court attributed the difference to the amount each party placed on an inducement payment that would be given by the operator.

The Court used Vodafone’s interim rent calculation as opposed to the valuation provided by Hanover and rounded it up to £5,500. The Court also awarded a 5% increase to this base figure to reflect the lack of a rent review clause, which it considered would ordinarily be in order at year 5, and this gave a figure of £5,775 which was rounded down to £5,750 pa.

Outcome

The decision provides some much needed certainty as to the potential outcome of any renewal of any pre-ECC telecommunications agreements under the 1954 Act.

There are many cell sites occupied by protected tenancies and also a number of ongoing claims in the County Court which have been stayed pending clarification of the proper valuation mechanism.

The outcome has to be seen as a win for the landowner community given that:

1. the rent was assessed on the basis of pre-ECC rent valuations and provides a significantly higher figure than those that may have been agreed on purely ECC principles; and
2. the Court was unwilling to grant a short term or a break clause which would allow the operator to quickly trigger a renewal and determination of rent under the ECC.

The Court cited the lack of recent comparable negotiations for the reason why it was prepared to taken into account valuation evidence from over three years ago and this will put even more pressure on the operators to agree lower rents under the ECC for use as comparable evidence in 1954 act renewals.

Useful commentary from the Court also suggests that Operators are likely to use break clauses in order to end Code Agreements and seek a renewal where para 17 does not afford the Operator scope to make upgrades to their equipment. This suggests that although helpful for operators, para 17 does have its limitations and that paragraph 17 may act as a limiting factor when it comes to installing new equipment whether to undertake upgrades or add new third party operators to a site.