Telecoms: A realistic rent for rural mast sites

The valuation of rural mast sites under the Electronic Communications Code (“New Code”) has been under the spotlight again with a new decision from the Upper Tribunal in the case of ON Tower UK Limited v JH & FW Green Limited [2020].

The site in question was let on a contracted out 1954 Act lease with provisions which allowed the operator to share and upgrade the site, subject to “payaway” terms to the landlord.

The landlord accepted that the operator had the right to a New Code agreement but the issues in contention were:

• What equipment can the operator install;
• Should the operator’s right to upgrade equipment be limited;
• Should the operator’s right to share the site be limited; and
• What is the correct rent taking these 3 issues into account.

Equipment

The operator wanted freedom to add equipment to the site, whereas the landlord wanted to maintain the status quo, having taken a careful inventory of current equipment.

The landlord was willing to allow sharing and upgrading, but only on a strict interpretation of para 17 of the New Code, so that the changes had to have a minimal adverse impact on the visual setting and impose no additional burden on the landowner (burden meaning an additional adverse effect on enjoyment of the land or loss, damage or expense).

However, these New Code rights only form the statutory skeleton for the agreement between the parties. They are restricted rights and if any meat was to be added to these bones it had to be by way of negotiation or direction of the Upper Tribunal.

The operator’s position was that they were in the business of providing the infrastructure for broadband and mobile phone connections. Upgrading and sharing without limitation was essential, because technology and the market were moving quickly and unpredictably. This concern was exacerbated by the Court of Appeal’s decision in Compton Beauchamp[1] where it ruled that an operator cannot go back to the Tribunal for additional rights once an agreement is imposed.

The landlord had obvious concerns about the roll out of 5G, which requires larger and noisier equipment. Given the operator’s desire to go beyond the basic statutory right, the Tribunal had to consider the evidence from both parties.

The operator acknowledged that the 5G roll out would require a new mast, but argued that the South Downs National Park status of the site would act as a sufficient control.  The landlord stated its concerns about additional traffic, security risks, disturbance, visual appearance and radiation.

The Tribunal had to engage in a balancing exercise to determine the terms of the agreement. Under the New Code it may (not “must”) grant a New Code right, providing that the relevant conditions were met. These conditions are set out in paragraph 21 and are that the prejudice caused to the landlord must be able to be compensated by money and be outweighed by the public benefit that will ensue from the grant of the right. Further, New Code rights are not absolute and may be the subject of terms to ensure that the “least possible loss and damage is caused by the exercise of the code right.”

In exercising this discretion the Tribunal were not convinced that the site’s appearance would change drastically with the upgrade to 5G given its small size (70 sq ft), although acknowledged the other concerns of the landlord were relevant, albeit exaggerated. In any event, disturbance, noise and access issues were addressed in the proposed new lease, so any breach would entitle the landlord to damages or, where necessary, injunctive relief. The Tribunal did not, therefore, see a need to modify the rights to cause the least possible damage to the landowner arising from the grant of upgrading rights, which go beyond the basic terms of paragraph 17.

Site sharing

The Tribunal then had to consider the right to share the site.  This could not be done on the same basis, as sharing is not a New Code right; the Tribunal has discretion to grant a right to share on such terms as are appropriate to ensure that the least possible loss and damage is caused to the landlord. A balance has to be struck between enabling the operator to share the site in order to provide a high quality telecommunications service and the objections of the landlord.;

The operator in this case was an infrastructure provider (rather than a network operator) so its equipment (masts, cabinets and other equipment) were passive. The operator had to be able to share with any network operator or it could not continue its business.  The Tribunal decided the landlord’s objections were not well founded, so granted the operator an unrestricted right to share. The paragraph 17 conditions were not required, given the same safeguards of planning law and lease terms explained above.

Consideration & Compensation

The Tribunal confirmed the approach taken in the Islington[2] case, where any compensation for predictable loss and damage was included in the assessment of consideration, to avoid inevitable subsequent claims. This does not stop a landowner making later claims under paragraph 25, but a second bite only exists for those litigating and is not available if a deal is reached by agreement.

The Tribunal continued in assessing consideration by adopting a framework previously used in the Hanover[3] and London and Quadrant[4]cases:

1. 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 process would be heavily influenced by location and be a matter of evidence in each case;
2. Add a rental value to reflect any additional benefits conferred on the operator – in Hanover, the site was protected by a manned security gate; and
3. 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, then this should be reflected by a rental adjustment.

This case was the first one arising on a lease renewal, as opposed to a new agreement for a previously undeveloped site. The operator’s expert determined a rental value of £500 p.a. after carrying out the 3 stage process, with half the value attributed to stage 3, to reflect a rolling break clause after 5 years and a right to enter other landlord’s property.

Comparables

Comparable evidence of other rural sites on similar lease terms was also considered by the expert.  Of these 23 renewal agreements, 16 of them contained caveats which made clear that the operator in each case was agreeing a rent higher than that which would be determined by a Tribunal in accordance with paragraph 24 of the New Code.

As such, the expert considered the comparables to be unreliable in terms of arriving at a true paragraph 24 valuation. They were also considered to be too high because they were a blend of consideration and compensation, so the expert deducted the value of what he called an “incentive payment” made by the operators to oil the wheels of commerce.

These deductions were around £1,000 in each case and resulted in rental values of £500 for 16 sites and £1,000 for a further 4, with outliers at greater sums of £1500 and £3,000 for 4 further sites.

Landowner’s expert’s approach

The Landowner’s expert took two approaches to the valuation. The first was market value based on evidence of 15 transactions.  The Tribunal rejected 11 of these, as they were deals that were completed after the New Code came into effect, but implemented terms that reflected the old regime, to which the parties were contractually committed.

The Tribunal pointed out, that in both Hanover and London and Quadrant, evidence of this sort could not be taken as a reliable guide to no-network assumption valuations required by paragraph 24. The expert’s justification for persisting in presenting such evidence was that further research had shown that the rents were, despite the caveat, actually calculated on the basis of the New Code.

This argument was rejected by the Tribunal in terms that thinly disguised its exasperation at having to explain for a third time that such evidence is useless.

The remaining transactions were also not helpful, as they were either 1954 Act renewals to non-Code operators, urban sites or sites with significant alternative use value. The landowner’s expert figure was £5,500 based on these comparables, with an additional £1,500 pa to reflect the grant of access and use of a generator.

The second approach valued the alternative use of the site at £50, with an ultimate consideration of £7,800 pa. This was based on agreements granting access rights to third parties like Network Rail and Northumbrian Water, the granting of non-network benefits by the landowner and compensation to reflect health and safety concerns.

The Tribunal found the evidence presented by the landowner’s expert to be of very little help, with both his proposed valuations being higher than the passing rent. The Tribunal said that this told them that the expert had not accepted or understood the paragraph 24 valuation process.  Under lengthy cross examination the expert remained insistent that his evidence was relevant and the Tribunal fired a clear warning shot in saying that if this happened again, such evidence would be rejected without the need for further cross examination.

Operator’s expert’s approach

In contrast the operator’s expert evidence pointed to the fact that rents of £1500 or above were the norm, ignoring the effect of transitional incentive payments. These were commercial deals struck to avoid the cost of Tribunal proceedings and do not reflect the paragraph 24 reality.

However, the Tribunal considered that the operator was underestimating consideration values and overstating how much was paid as a commercial inducement – a doubling of the consideration was thought to be more realistic.

Tribunal’s approach

Taking the 3 stage approach set out above:

1. The experts agreed a nominal £100 pa alternative use value;
2. Additional benefits conferred on the operator included a right to keep a mast on the site, electric supply, right to enter other property of the landowner and tenant’s rolling break clause after 5 years. The operator said £400, the landowner said £1300 and the Tribunal ruled £600; and
3. Adverse effect on landowner was considered by the Tribunal to be caused by the access rights (to the “heart of a private rural estate”) and the loss of amenity caused by likely replacement of the mast for 5G upgrade purposes. This was valued by the Tribunal at £500, although it stated that if rents of nearby properties were negatively affected, this could form the basis of a subsequent compensation claim.

The cumulative consideration was therefore £1200 pa, which seems right when considered against a comparable put in evidence comprising a consensual deal at £2,500 for a similar wooded site on a rural estate. Compensation was awarded for legal and professional fees. The legal fees were allowed in full but a breakdown of the valuer’s fees was required as the landowner was not entitled to be reimbursed for any litigation related expense.