This blog looks at telecommunications leases, specifically the renewal of leases and how rent is calculated.
How are telecommunications leases renewed and how is the rent calculated?
The case of Vodafone Ltd v Hanover Capital Ltd (August 2020) considers these questions relating to telecommunications leases.
Martin Rodger QC, sitting in the Upper Tribunal in Manchester, gave a useful judgment in Vodafone Ltd v Hanover Capital Ltd on 21 August 2020 that will be generally well received by landowners faced with rent negotiations with network operators. Whilst there has been at least one unreported case in the county court (Vodafone Enterprise UK v Portsmouth Water Ltd – 8 January 2020) in which it was found that the valuation mechanism must be under the Landlord and Tenant Act 1954 (“1954 Act”) this latest decision of the Upper Tribunal provides welcome clarification as to the influence of the Electronic Communications Code 2017 (“2017 Code”) on a 1954 Act valuation under section 34.
In addition, it was confirmed that business tenancies with the right to a renewal under the 1954 Act would be determined by the provisions of the 1954 Act regardless of an operator’s rights under the 2017 Code. Once renewed the tenancy would then be one to which the 2017 Code applies and the rights conferred would be code rights.
Rent Calculations on telecommunications leases
Rent payable by a tenant calculated under the 1954 Act considers what rent might reasonably be expected to be negotiated in the open market between a hypothetical landlord and tenant taking in the particular circumstances of the site and parties.
Some network operators have sought to argue that rent on 1954 Act renewals should be artificially low, because the market place now consists of operators who can use the 2017 Code to acquire code rights over sites at artificially low rents resulting from the assumption applied to new agreements imposed on landowners which supposes that the market for the site does not include the communications network industry and that there are therefore no other network operators competing for the same premises.
Conversely landowners have pitched for a higher rent which takes account of the strong marketplace, particularly pre the 2017 Code. They argue that the market is highly competitive with operators, despite the 2017 Code, still being prepared to pay much higher rates than would be the case on a no network basis. Faced with these conflicting arguments the court’s decision steered a line that gave some recognition to both. Overall the final result, in the facts of this case, fell on the high side of the possible outcomes.
It was acknowledged by the Court that negotiating terms for a mast site was different to other property markets because of the impact of the 2017 Code’s no network assumption which would probably result in a rent reflecting only the value of the site to the owner in circumstances where the site in question satisfied the needs of only one operator.
In this case however the Court accepted that there were a number of operators who would be in the hypothetical market for this site and the Court accepted that this would increase the open market rent the hypothetical willing tenant would be prepared to offer. Where the landlord can show there is competition in the hypothetical market place the rent on renewal will be more reflective of the value of the site to the tenant operator and of the site’s importance to the communications industry generally.
Length of telecommunication leases
The court also considered the duration of the lease. Vodafone sought a 3-year term of lease for flexibility, but the landlord desired a longer term for certainty. The court’s responsibility was to determine what was reasonable in all the circumstances considering the particular facts of this case, in accordance with section 33 of the 1954 Act. The court granted a 10-year term with a break clause on the 5th anniversary on 6 months’ notice. The court considered the needs of the operator’s business, the rights which Parliament intended operators to enjoy under the 2017 Code, the cost and time of the renewal proceedings, the income received by the landlord in relation to the lease, uncertainty for the landlord, flexibility for the tenant and the significance to wider interests of the parties.
As welcome as any decision is on the uncertainties of the 2017 Code it should not be overlooked that this is only an Upper Tribunal decision. It remains to be seen whether this or subsequent cases take these issues to appeal and so the game is by no means over.
This blog has been written jointly by David Eminton, Dispute Resolution Partner, and Lisa Busby, Commercial Property Partner – both specialising in advice to landowners and operators in connection with telecommunications property matters.