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Lawbite: First lease renewal of an electronic communications site under the Landlord & Tenant Act 1954 - guidance for renewals

  • UAE
  • Litigation and dispute management
  • Real estate
  • Real estate litigation - LawBite

26-08-2020

Vodafone Limited -v- Hanover Capital Limited [2020] EW Misc 13 (CC)

These were County Court (as opposed to Upper Tribunal) proceedings in which the Court was required to provide guidance upon term length and the proper approach to the determination of rent in the renewal of leases of existing telecommunication sites under Part II of the Landlord & Tenant Act 1954 (“the 1954 Act”).

The parties had agreed most terms of the new tenancy, save for rent, duration and the details of a tenant’s break clause.

Duration/Break Clause

In the absence of agreement, the duration of new tenancy fell to be determined under section 33 of the 1954 Act. Vodafone as tenant wanted a three year term and a six month rolling break clause. Hanover as the landlord sought a ten year term with a five year break clause.

Vodafone relied, in part, upon the need for flexibility and its wish to take advantage of the more favourable regime under the Electronic Communications Code (“the Code”) if the operators’ view of how the Code applies to such tenancies prevails in appeals pending in both the Court of Appeal and the Supreme Court.

The Court determined that in order to strike the appropriate balance between Vodafone’s commercial needs, the rights Parliament intended operators to enjoy under the Code and the Landlord’s interest the appropriate term length was ten years with a six month rolling break, exercisable after five years. This provided a minimum commitment of five years and provided Vodafone with flexibility thereafter.

The Court noted that the evidence in the case demonstrated that operators in the market had regularly entered into new Code agreements with a minimum certain term length of five years.

Rent

In the absence of agreement, section 34 of the 1954 Act requires the Court to determine the rent at which the holding might reasonably be expected to be let in the open market by a willing lessor on the terms of the tenancy.

The question for the Court was how to operate the hypothetical negotiation under section 34 of the 1954 Act in the light of the Code, which both negotiating parties would be aware of and the hypothetical negotiation would have regard to. The existence of the Code, and the willing tenant’s rights under it, were to be taken into account in the hypothetical negotiation.

The rival valuation approaches were:

Vodafone: a valuation based upon an awareness of the Code and the ‘no network’ assumption at paragraph 24 of the Code.

Hanover: a valuation based upon transactions concluded since the reforms to the Code which took into account the value to operator and so were not negotiated on the basis of the ‘no network’ assumption.

A rent of £5,750 was ultimately determined under section 34 of the 1954 Act by the Court, based upon the value to the operator, not the value to the owner.

In reaching that conclusion the Court determined that:

  • The site must be assumed to have been exposed to the market for a reasonable period and, taking into account the fact that Vodafone was, in this case, sharing the site with EE and H3G, there would be competition and so the Court determined that this would produce a higher rental payment as a result of a hypothetical bidding process.
  • However, the Court noted that there is a distinction to be drawn and the same might not be true for sites which satisfy the needs of only one operator and which would not be of interest to competitors. In such cases the Code’s ‘no-network’ assumption may cause the parties to agree a rent reflecting only the value of the site to the owner and other considerations which Vodafone had identified in its valuation framework in this case.
  • The Court took account of market evidence of transactions based upon ‘Old Code’ valuations, so reflecting the value to the operator in the hypothetical transaction.
  • The more favorable ‘no network’ assumption under the Code’s valuation approach would have produced an annual rent of up to £2,250.

Key Points:

  • One of the key (and unintended) consequence of the new Code seems to be the “stagnation” of the market in agreeing renewal terms for leases which are subsisting agreements under the Code and to which the Code requires the 1954 Act is applied on renewal. The interaction between the 1954 Act and the Code remains unclear.
  • The Lease in this case was a subsisting agreement under the Code and therefore fell to be renewed under the 1954 Act. One of the common issues in such cases is the extent to which the parties should have regard to the Code when seeking to agree terms in accordance with sections 33 – 35 of the 1954 Act.
  • This case follows the Tribunal’s decision in Ashloch that a renewal of a subsisting agreement must be via the 1954 Act lease renewal process rather than pursuant to Part 5 of the Code. The decision in Ashloch flowed from an earlier Court of Appeal decision in Compton Beauchamp. Appeals are pending in the Court of Appeal and the Supreme Court against both of those decisions, so there remains uncertainty as to the interaction between the 1954 Act and the Code.
  • This case is a useful indication of the Court’s approach to duration and the determination of rent in the renewal of leases of existing telecommunication sites under the 1954 Act, but it is not a definitive guide.