Calculating Code right values

Posted on 12 March 2019. Source: Estates Gazette

Calculating Code right values

It is now 15 months since the new Electronic Communications Code (the Code) came into force and in that time there has been much heated debate between agents for both operators and landowners. That debate has predominantly related to the level of consideration and compensation payable to landowners on the grant or imposition of a Code agreement.

On 18 February 2019, the Upper Tribunal (Lands Chamber) (the UT) handed down the first decision on the point in EE Ltd and another v Islington London Borough Council [2019] UKUT 53 (LC). In headline terms, the outcome is very much “operators 1 – landowners 0”, but the decision left many issues unaddressed. One thing is, however, clear: landowners who had been hoping to receive sums under the Code approximately only 40% lower than those payable under the old code are in for quite a shock.

Operators will no doubt be optimistic that this decision lifts the valuation roadblock that has stalled the conclusion of numerous Code agreements. But this is far from the last hurrah. The operators may have drawn first blood, but there is still much for landowners to fight for.

This article will consider the valuation conclusions reached by the UT and highlight areas that might form the battleground for further litigation under the Code.

The background

The operator claimants sought Code rights enabling them permanently to install and operate telecommunications equipment on the roof of Threadgold House, which is a block of flats on a residential estate between Dalston Junction and Canonbury. The landowner was the London Borough of Islington. Interim rights had been granted at an earlier hearing.

Prior to the commencement of the new Code, the parties had agreed in principle a payment of £21,000 per year for use of the rooftop site. Negotiations recommenced when the new Code came into force, but the parties were unable to agree on terms, primarily the consideration and compensation that would be payable to Islington.

Terms of the agreement

As to the other terms of the agreement, Islington was debarred from making submissions on these, save for consideration and compensation, due to its failure to comply with the UT’s directions previously.

This should serve as a stark warning to parties in relation to compliance with tribunal directions. Tribunal applications for certain Code rights must be determined within six months of the application being lodged, and it seems that the UT will require strict compliance with directions, and debar defaulting parties, in order to achieve this timeframe.

The UT also confirmed that an imposed Code agreement may be in the form of a lease.

Consideration

Under the old code, parties were free to agree the amount that should be paid for the rights conferred. If agreement could not be reached, the court could step in to confer rights on an operator and determine the terms on which such rights could be exercised, including the payment of consideration. That consideration was to be such a sum as the court considered would have been fair and reasonable had the agreement been given willingly.

Under paragraph 24 of the new Code, in contrast, the consideration to be paid must be an amount representing the market value of the landowner’s agreement to either enter into a Code agreement or be bound by the Code right. The market value assumes that there is a willing buyer who is prepared to pay a willing seller for that agreement. The transaction in question is to be at arm’s length – and it is assumed that both parties act prudently and with full knowledge – but, crucially, is subject to a “no network assumption”.

The UT reached the following headline conclusions in relation to the valuation exercise to be undertaken:

1. “No-network assumption” – the rights being granted are for a purpose of use that is not connected to an electronic communications network. This was to exclude any element of value attributable to the intention of the operator to use the site as part of its network. The price that an operator wishing to use the site is willing to pay in order to provide a network must therefore be ignored. The “no network” value of a site will depend on the facts of each individual case, but for sites like the one in this case (the roof of a 10-storey residential building with no evidence of demand for use of rooftops in the area) the value is likely to be very low, if not nominal.

2. Out with the old – historic rental evidence in relation to agreements under the old code are not useful comparables for assessing consideration under the Code (as such evidence was not subject to the no network assumption).

3. Effect of lone bidder on value – the fact that there may only be one bidder in the market does not mean that the consideration paid will only be nominal.

4. Effect of willing bidder – the fact that there is a willing bidder does not necessarily mean the consideration will be more than nominal.

5. “Floor level” consideration – the assumptions provide that there is both a willing buyer and a willing seller. The concept of floor level consideration (ie consideration below which the willing seller would not transact) is therefore flawed; it must be assumed that a transaction will take place.

In the present case, applying these principles and balancing all the circumstances of the case, the UT determined that the consideration payable would be £1,000 per annum – less than 5% of the pre-Code negotiated figure.

This figure included a contribution towards the landowner’s expenses of (1) running the site and (2) complying with the terms of the Code agreement (for example, by keeping the communal areas in good repair and procuring insurance for the building). The UT also clarified that such matters are to be dealt with under the consideration provisions of the Code rather than the compensation provisions (as both parties had assumed in this case).

Compensation

Paragraph 25 of the Code sets out the basis on which the amount of compensation payment is calculated and when payment of the same is to be made.

In its decision the UT confirmed that:

l the approach that will be adopted to compensation is a very flexible one and, if damage is sustained by a landowner, then compensation should be payable;

l if a landowner does not put forward credible evidence to support a claim for compensation then this is very unlikely to get off the ground;

l the assumptions to be taken into account when assessing consideration (including the no network assumption) do not apply when assessing compensation; and

l if loss is sustained by the landowner in the future, then an additional claim would be admissible in principle (ie loss could not only be assessed at date of Code agreement).

In this case, Islington put forward 29 separate claims for compensation on a variety of bases (including 16 separate events where disturbance might be caused that would entitle Islington to compensation). The UT rejected all but two of these and limited the compensation to reasonable legal and surveying costs and any damage flowing from the installation of apparatus on the building.

Issues on which further guidance may be required

The UT parked consideration of a number of issues for another day, including:

1. Assignment assumption – paragraphs 16 and 17 of the Code confirm that an agreement is void if it prevents or limits the assignment of a Code agreement or the sharing or upgrading of apparatus. It remains unclear what effect this might have on valuation.

2. Making the no-network assumption and the contractual terms fit together – the UT did not address the approach that should be adopted in making the no-network assumption fit with contractual terms that restrict the user to only providing a telecoms network. In the present case, it agreed with the parties’ implicit acknowledgment that there must be some notional relaxation of the contractual terms. But it made it clear that it had reached no final conclusion on this.

3. Compensation for injurious affectation of neighbouring land – the UT confirmed that in this case it would cover a claim by the residents of Threadgold House for any loss or damage sustained as a result of the rights exercisable by the operators. It did not, however explore how such a claim might be valued.

Takeaway

The new valuation provisions in the Code as interpreted in EE v Islington present rather a double-edged sword. On the one hand, operators will have to pay only a fraction of what would be the market value for a site absent from the no-network assumption. On the other, the valuation is so unfavourable to landowners that it removes the historic monetary incentive for landowners willingly to offer up sites for use by a telecoms operator.

To date, operators have faced difficulty in finding suitable sites without becoming embroiled in a contested application. Is this dynamic here to stay; or may it even get worse? For want of a better option, will landowners resort to tactical and procedural “guerrilla war” to extract concessions from operators by agreement? Or is now just the bedding-in period of this controversial piece of legislation? Only time will tell.

Mark Reading is managing associate at Mishcon de Reya LLP and Philip Rainey QC is a barrister at Tanfield Chambers

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