How open is the open market? 1954 Act Valuation and the new Telecoms Code

Martin Rodger QC, Deputy Chamber President of the Upper Tribunal, confirmed in the opening words of his judgment in Vodafone Limited –v- Hanover Capital Limited (Aug 2020) why he personally was hearing this County Court lease renewal claim under the Landlord & Tenant Act 1954, and not one of the many Circuit or District Judges who normally decide such cases:

"This is the first occasion on which a Court has had to determine [a lease renewal under the 1954 Act] since ……. [the introduction of the] new Electronic Communications Code (the Code)".

Since the Code was introduced in December 2017, professionals involved in the negotiation of new Code rights between landowners and operators have wrestled with how the Code and the 1954 Act interrelate. Their effective mutual exclusivity (confirmed both in the Code itself and in the subsequent decision of Ashloch) is by now well known, but until now there was no answer to this key question:

How is the "open market" assumption for rents of telecoms leases renewed under the 1954 Act affected by the fact that, since December 2017, new rents for Code agreements have been artificially reduced by the "no network" assumption under paragraph 24 of the Code?

The Deputy Chamber President's resulting judgment is interesting both as an illustration of a standard 1954 Act lease renewal, and in what it says about open market rentals in a new Code world.

Background issues

The background was relatively straightforward; Vodafone sought to renew their 1954 Act protected lease of a site in Stockport owned by Hanover where Vodafone had installed a mobile telephone mast with associated equipment cabinets. The issues to be decided between the parties are encountered in many 1954 Act renewals.

• Length of new term to be granted.
• Whether there was to be a break right and if so on what terms
• Rent for the new lease.
• Length of new term and break right.

Vodafone wanted a short term lease (three years) with a rolling six month break. This was to provide them with maximum flexibility to terminate any renewal lease early and renew again, when various other aspects of the Code which are currently under appeal may be clarified in the next 18 months.

On the other hand, Hanover wanted a 10 year term, so as to postpone as long as possible the need to spend legal fees again on another lease renewal (this one was costing a disproportionate amount of money for Hanover in fees because it was a serious test case for Vodafone).

The Judge was not persuaded by Vodafone's wish for maximum flexibility, considering that it did not (as the 1954 Act requires) operate fairly as between landlord and tenant.

So the Judge ordered a ten year term with a break after five years and yearly thereafter, on condition that rents be up to date and there was no other material breach of covenant, but not vacant possession (as there was a likelihood that Vodafone would actually wish to stay on site after a break on revised terms).

Rent

The Judge's main problem was to reconcile the differing approaches of the legal requirements of the 1954 Act, and the on-the-ground reality that we are operating in a new Code world where rents are artificially depressed:

• Under the 1954 Act, the renewal rent must be set at the open market ie assuming a willing lessor and willing lessee
• However, all parties in such an open telecoms market would be aware that in any discussions between a landowner and an operator, the operator would (because of the effect of the Code) not be prepared to pay more than the value of the site to the landowner, as opposed to the value of the site to the operator, ie a rent assessed on the "no network" assumption.

Hanover's valuer submitted that:

• His own wide experience of negotiating with Code operators showed that there had been little or no softening of rents since the days prior to the new Code.
• Such rents were not negotiated on the "no network" assumption so were illustrative of the value of the land to the operator
• Such comparables were, therefore, of key importance in assessing an open market rent under the 1954 Act.

By contrast, Vodafone's valuer argued that:

• Nowadays an open market rent would inevitably be assessed between landowner and operator on the basis of the value of the land to the land owner, ie on the "no network" assumption
• This was because both parties would be aware of rents under the Code and would take such into account
• So the "no network" assumption in paragraph 24 of the Code would provide the framework for any negotiation under the open market.

The judge's decision

The Court was largely unpersuaded by Hanover's valuer's approach, preferring to a large degree the approach of Vodafone's valuer. However, that did not mean that the Judge accepted that the open market rent to be set under the 1954 Act was effectively the same as that which would be assessed under the Code under the "no network" assumption.

Rather, the Court adopted the following approach:

• First, make an assessment of the alternative use value of the site ie the rental value of it for its most valuable non-operator use; this would require an analysis of comparable evidence
• Make appropriate adjustments from comparables to reflect additional benefits to the operator or particular adverse effects on the landowner that the new lease would cause
• Do not take into account the fact that, very often, inducements are payable by operators to landowners, as this would go against the "willing lessor" assumption required by the 1954 Act
• On these factors alone, the rent would be £2,250 per annum
• However, and crucially, this figure does not take into account potential competition for the site between rival operators (the evidence suggesting that four or five operators might have been interested in this particular site)
• Such competition would push up the sums which a willing tenant would be prepared to pay to the sort of rents that were paid by operators prior to the new Code coming into effect
• Accordingly, such historic pre-Code comparables were very relevant to an assessment of current open market rent (especially when there was no evidence of a softening of the market)
• Taking such comparable evidence and reducing it to strip out elements of any inducement payment that it might contain, the relevant annual rent on the open market would be £5,750, considerably in excess of the £2,250 figure based simply on the value of the land to the landowner.

Conclusions

The key factor in the Court's decision was that the site in question would be of interest to multiple Code operators, so that there would be an element of competition which would push up the open market rent that a willing tenant would be preferred to pay.

That element of competition was enough to ensure that Vodafone were ordered to pay a sum much closer to what they would have had to have paid before the new Code came into effect, even though the current market for new Code agreements is fettered by the "no network" assumption at paragraph 24.

The case represents, therefore, neither an outright victory for landowners or Vodafone (for whom it was an important test case given the number of other similar renewals it has across its portfolio). As the Judge remarked competition for the site "would push up the rents to levels reflecting the value of the site to the successful bidder" but "the same may not be true for sites which satisfy the needs of only one operator…… in such cases the fact that negotiations would be conducted against the background of the Code's no network assumption may cause the parties to agree a rent reflecting only the value of the site to the owner……. ."

Given this result, this case may join the list of several other important Code cases on appeal. However, for the time being, we can expect the issue of competition for sites to be of key importance in any open market rental assessments under the 1954 Act, overarching the depressive effect of the no network assumption of paragraph 24 of the Code.

That said, and as Martin Rodger QC reminds us all at the start of his judgment, this is only a County Court decision and is not binding on other courts, which are free to take a different view. Only if the decision and its stated methodology is confirmed on any appeal will the decision have binding status.