Upper Tribunal decision provides key insights on telecom lease renewal and redevelopment rights

July 31, 2024

The decision of the Upper Tribunal (Lands Chamber) in EE Limited and Hutchison 3G Limited v. AP Wireless II (UK) Limited [2024] UKUT 216 (LC), published on 29 July (https://www.bailii.org/uk/cases/UKUT/LC/2024/216.pdf), provides useful guidance as to the Tribunal's thinking on two important aspects of leasing within the telecoms industry, and will be of interest to landowners, operators, and infrastructure providers alike.

The case relates to the renewal of a lease of a greenfield rural mast site at Vache Farm near Chalfont St Giles in Buckinghamshire. EE Limited and Hutchison 3G Limited (the Operators) are the tenants of the site, with AP Wireless II (UK) Limited (APW) their immediate landlord in terms of an overriding lease.

The Operators and APW had agreed most terms of the renewal lease before the Tribunal hearing, with only two significant terms remaining to be determined: the amount of rent and whether APW should be allowed to terminate the lease on grounds of redevelopment.

Redevelopment break right

The parties had agreed in principle that APW would have a right to terminate the lease on 18 months' notice, but needed the Tribunal to decide on the circumstances in which they would be allowed to exercise that right.

APW wanted to be able to terminate the lease whenever they wanted to redevelop the mast site or any neighboring land owned or controlled by the landowner, for any purpose.

The Operators had proposed a redevelopment break clause exercisable by APW where it could show a settled intention to develop the land or any land under the ownership or control of the landowner, and could not reasonably carry out that development without making use of the land on which the Operators' equipment was located. The Operators' proposal was that this right could only be exercised after the fifth year of the term of the lease, and specifically that the development proposed could not include development for the purpose of providing or operating an electronic communications network, or electronic communications services, or the provision of an infrastructure system.

The Tribunal determined that the break clause should be drafted on the basis that APW could terminate on 18 months' notice, to expire on the fifth or any subsequent anniversary of the lease start date, if it intended to redevelop all or part of the mast site (including for telecommunications purposes) and could not reasonably do that without the lease coming to an end.

In coming to this conclusion, the Tribunal considered that it was not the policy of the electronic communications code (the Code) to stand in the way of a genuine intention to redevelop land, even for telecommunications uses.

This is an important distinction, given that, as highlighted in the decision, a key part of the business of which APW is part (via a related entity, Icon Tower Infrastructure Ltd) is the construction of its own telecommunications infrastructure to replace and upgrade existing infrastructure on sites at which Icon or APW has acquired an interest. Operators at the existing sites will then be invited to relocate their equipment to Icon's new mast or tower - and, importantly, this would be at a price which is not regulated by the Code, given that the Code relates to the grant of rights relating to "land", which specifically excludes electronic communications apparatus of this type.

Comment

In stating, at paragraph 21 of the decision, that redevelopment for telecommunications uses should be permitted "even if the net result is that a particular operator may in the future enjoy less favorable terms at that site than if its previous lease of the land had continued", the Tribunal appears to be suggesting support for this business model.

This may be a cause for concern for operators, if the business model were successfully to be rolled out at scale, given the savings afforded to operators by current Code-based site valuations, but will offer encouragement to APW and others in this space.

Rent

The proposal from the Operators was that the annual rent payable under the new lease should be £1,000, as compared with APW's proposal of £2,850.

The Tribunal noted that this case gave it its first opportunity since Affinity Water (EE Ltd and Hutchison 3G UK Ltd v. Affinity Water Ltd [2022] UKUT 8 (LC)) and Pendown (EE Ltd and Hutchison 3G UK Ltd v. Stephenson and another [2022] UKUT 180 (LC)) to determine the appropriate rent or consideration for a site like this one under paragraph 24 of the Code.

The Tribunal therefore took the opportunity in this decision to summarise its previous thinking on the matter of site valuation, leading up to the guideline figures set out in Affinity and Pendown, and considered whether there was a basis for revising or updating those figures (including the £750 annual rent for an "unexceptional rural site" in Pendown).

The Tribunal took account of two principal factors in its deliberations: firstly, the impact of inflation on the base figures and, secondly (and perhaps more interestingly), evidence of non-telecommunications transactions for unexceptional rural sites (i.e. alternative use value).

The Tribunal set out that alternative use values had been previously put before it and generally had not been taken into account in determining valuations under the Code. In this case, however, the Tribunal noted that an attempt was made to analyse such transactions with a view to establishing "a tonal value for small rural sites in non-telecommunications use which may then be used to arrive at [a Code valuation]". Where evidence could be provided which was rooted in real transactions, but then adjusted to discount the value to the tenant of the particular activity being conducted from the land, the Tribunal concluded that this was a useful consideration in updating the £750 figure from Pendown.

The Tribunal was persuaded in this decision that the Pendown figure of £750 was too low. It decided that an inflationary increase was warranted, but also that an increase should be brought about due to the evidence of non-telecommunications transactions for unexceptional rural sites put forward by APW's expert witness. When that material was considered alongside what is described as "the artificial paragraph 24 hypothesis under which the valuation must be carried out", the Tribunal concluded that the appropriate annual consideration for a rural mast site is £1,750.

Comment

The decision sets out the detail behind the Tribunal's decision-making process regarding valuation, which will be useful to surveyors and valuers working in this space.

While it is likely that neither APW nor the Operators will be entirely satisfied with the decision, guidance such as this from the Tribunal about value could be considered helpful to operators, landowners and the public as end-users, despite grievances around the amount decided on.

This may be particularly helpful in the context of sites in rural areas, where connectivity can be a challenge, if it allows parties to reach agreement on the terms of new leases more quickly. That in turn will allow operators to continue to roll out their networks and offer their services in wider areas, while balancing that against the need to appropriately compensate landowners for the use of their land.