How should rent be set on telecoms sites at lease renewal?

The first indication by an English court of how rent is to be valued on the renewal of leases of existing telecommunication sites under the Landlord and Tenant Act 1954 has resulted from Vodafone Limited v Hanover Capital Limited [2020] EWMisc 13(CC).

Since the introduction of the Telecommunications Code 2017, the basis on which rent should be determined on the renewal of a lease of an existing telecommunication site has been unclear, as rents have been protected by both the Code and the Act.

Peppercorn rent and restricted lease

In this case, Vodafone occupied a site in Manchester under a five year lease on a peppercorn rent.

Under the lease, Vodafone were contracted to use the site only for the purposes of its business of providing electronic communications network and therefore the provisions of the Code applied.

Due to Vodafone occupying the site for the purposes of its business, the lease was also governed by the provisions of the Act.

When the lease term expired, the lease continued under the Act at the same peppercorn rent.

Termination and renewal

Much later, Vodafone were served with a section 25 notice by the landlord to terminate the tenancy. The landlord did however note that it would not be opposed to renewing the lease.

Vodafone then issued renewal proceedings for the site under the Act.

Due to the renewal of the lease being protected by both the Code and the Act, both parties had reached an agreement that the renewal of the lease would be carried out in accordance with the Act. However, they could not agree on the term of the lease, the valuation mechanism to set the rent and the provisions of the tenant’s break clause.

Vodafone held that the rent should be determined in accordance with the Code by using the ‘no network’ approach in accordance with paragraph 24 of the Code; this would mean that the rent was set assuming that the transaction does not relate to the provisions of an electronic communications network.

The landlord disagreed, arguing that the rental value should be determined by how valuable the lease renewal was to Vodafone.

Furthermore, Vodafone, seeking flexibility, wanted a three year term and a six month rolling break clause, whereas the landlord wanted a ten year term with a five year break clause.

Judgment

When considering the valuation of the rent, the Upper Tribunal noted that the parties should take into account hypothetical competitive bidding when determining the value of rent. It was established that Vodafone had shared the site with competitors such as EE, Telefonica and H3G, so it would be reasonable to argue that there would be competition over the site.

The Upper Tribunal did note that in the case of a sole operator with no third party competitors to consider, the value of the site to the operator, and not the owner, would be a deciding factor in determining the valuation of the rent.

The Upper Tribunal held that the suitable term for the lease was ten years with a six month rolling break, exercisable after five years, due a minimum term length of five years being the standard practice across the industry.

Implications for landowner and operators

The judgement is not binding, as the court itself stated that the there is a possibility that appeals may bring further changes to the interpretation of how the Code is intended to work. However, this is the first lease renewal of an electronic communications site under the Act since the Code came into force and offers helpful guidance for both landlords and operators when it comes to negotiating renewal of leases.

The judgement will be welcomed by landowners as it increases their bargaining powers. Previously, landowners have been pressurised to accept lower rent offers from operators by relying solely on the Code and the ‘no network’ approach.

The case enforces the primary purpose of the Act, which is to protect the rights of the tenants but not to the detriment of the landowner. The court will therefore seek to balance the protection for the tenant and its business against the need to prevent that being unfair nor oppressive towards the landlord, whilst adding a level of stability for the landowner.