Did you know the UK has one of the worst technology infrastructures compared with other developed countries? Quite a lot happened in 2017 so you could be forgiven for having missed that it was also the year parliament passed the Digital Economy Act (the 2017 Act) to redress this fact.
Among other things, the 2017 Act included a long-overdue reform of the Electronic Communications Code. The new Code, which came into force on 28 December, includes a range of measures that Ofcom and the Department for Digital, Culture, Media & Sport believe will make it easier for operators to roll out their infrastructure (such as phone masts, exchanges and cabinets) across the UK. But the reforms to the Code are wide-ranging and will be of particular significance for landowners, who should be aware of the key changes and how they may affect their rental income and property assets in the future.
What’s changing?
The basic principle of the Code is not changing: it is a statutory regime that grants telecoms operators the right to install, maintain and keep the equipment they use in the provision of a telecoms network on, in or over private land. It can only be invoked by operators approved by Ofcom and Code rights can be granted voluntarily by landowners or occupiers (we will call them site providers) or an operator can apply to the First-tier Tribunal to impose those rights. The tribunal has inherited the jurisdiction from the court to deal with telecoms matters under the new Code. Regardless of how an operator gets Code rights, they can only be terminated in accordance with the Code, even if the underlying contractual agreement which granted them has expired or been terminated.
Grant of rights
The primary method of obtaining Code rights will continue to be the voluntary grant by a written agreement between the site provider and the operator, such as a lease. Ofcom has published a Code of Practice to accompany the new Code, along with a suite of standard form documents, including terms that may be used by parties when negotiating agreements to confer Code rights.
Voluntarily offered sites are not as plentiful as they were, particularly as site providers become more aware of the difficulties associated with obtaining vacant possession from an operator at the end of the agreement, which has been the experience of many under the existing Code. This trend may grow as site providers realise the impact that the new Code may have on rents (see below).
So operators continue to benefit from the fall-back regime to apply to the tribunal to secure Code rights to place their equipment on the land of a site provider if an agreement cannot be reached. If the operator can establish that the prejudice to the landowner can be adequately compensated and it is outweighed by the public benefit of widening access to telecoms services, then the tribunal may order that Code rights are imposed on a reluctant site provider. The tribunal also sets the terms – including the rent – of the agreement to be imposed.
Sharing, upgrading and assigning
Operators entering into agreements under the new Code will now have the automatic right to share their sites with other licenced operators without the consent of the site provider, regardless of the express terms of agreement between the parties. There is no such provision under the previous Code and it is common that an existing agreement permits sharing only with the site provider’s consent and subject to payaway arrangements, by which the operator pays a cut of the site’s share income generated to their site provider. However, payaway arrangements will no longer be permitted under the new Code, as any terms that restrict the new automatic rights are void.
Operators also now have the automatic right to assign their rights without consent, and again, any restrictions to the contrary in the agreement will be void. However, site providers will be entitled to require the assigning operator to enter into a guarantee agreement in relation to the incoming operator’s obligations.
While technology is ever advancing and operators are increasingly able to maintain some of their equipment remotely, gone are the days where sites simply tick over with occasional site visits. A common complaint for site providers is a large volume of requests for access to telecoms equipment by different tiers of contractors and service providers that the operators employ. Under the existing Code, the site provider maintains some control if the operator may only upgrade equipment with their consent. However, that control will be removed under the new Code as there is an automatic right for operators to upgrade equipment without consent, provided there is no more than a minimal adverse visual impact and no additional burden on the site provider.
Rent (consideration)
Valuers will continue to calculate rents based on market value when negotiating a new agreement.
However, the new Code requires that the provision or use as a telecoms site has to be disregarded when calculating the market value for rights imposed by the tribunal. That means that any value that would have been attributable to the proposed network use, the valuable security of tenure and automatic rights that the operator will obtain to assign, upgrade and share the site, is irrelevant. Valuers must also assume there is no scarcity of sites for the operator to use. Therefore under the new Code, the market rent can only reflect the value of other possible uses to which the site could be put. There are potentially a whole plethora of alternative and innovative uses to which a site may hypothetically be utilised and these will need to be carefully considered on a site-by-site basis, as well as the subject property’s location and the likely disturbance over the term of the agreement.
It is important to note the distinction between this method of valuation and the calculation of compensation when compulsory purchase powers are used. While the imposition of Code rights by a tribunal against a reluctant site provider may look like a compulsory purchase power, it is not. Therefore, the site provider is not entitled to compensation, but consideration based on market value, with the above limitations and disregards.
There is an obvious paradox here. The new Code aims to facilitate better connectivity across the country, but forcing terms on a site provider and offering little consideration may only serve to alienate site providers and further decrease an already shrinking supply of sites being made available voluntarily, especially in urban areas.
There is a sense in the industry that the new Code may not have an adverse impact on market rents in the long term. However, that may happen in the short term, until such time as arm’s-length transactions under the new Code start to gather pace. The industry may see a trend start to emerge of parties going further down the formal tribunal procedure in attempts to set a desirable tone of rents.
Time to say goodbye?
Any site provider reading this article would be forgiven for thinking at this point: “Is there anything of benefit for me in the new Code?” Well, yes, there is. One positive change is the removal of the double security of tenure protection which operators enjoyed under the existing Code and the business lease renewal regime under the Landlord and Tenant Act 1954.
Agreements can now only have one or the other, with the default being Code protection. So that is one less hurdle to overcome for landowners seeking to obtain possession.
The Code also sets out a structured process for landowners to follow which, while it is not without its flaws, should be easier to navigate than the existing provisions, particularly for a landowner who has a genuine intention to redevelop their land. However, landowners should be aware that the process is now a two-stage one, the first being to terminate the Code rights and the second to secure the removal of the equipment. The whole process looks likely to take at least two years, with the possibility of needing to involve the tribunal at both stages unless an agreement can be reached with the operator. The two stages cannot be run simultaneously to reduce the time and cost of the process.
An important point for landowners is the lack of “lift and shift” provisions in the new Code. Under the existing Code, statutory lift and shift provisions can be invoked at any time during the agreement. While a landowner needs to cover the operator’s relocation costs, it is a useful tool for a landowner who inherits a Code agreement with a lengthy unexpired term that does not have any early termination or break rights, particularly if it wants to develop its property during that time.
Landowners should ensure that they have flexibility in new agreements granted to operators to terminate them early, so they may start the formal two-stage removal process under the new Code.
All aspects of the new Code are mandatory and cannot be contracted out by the parties. Love it or hate it, it’s now here to stay. The best landowners can do is to make sure that they fully understand the new provisions and set their property strategy accordingly.
The key changes
■ New agreements granted to operators will contain automatic rights to upgrade and share equipment and assign the agreement to other operators
■ Termination of Code rights will be a longer, two-stage process, but it should be easier to remove equipment for development purposes
■ There are no statutory “lift and shift” rights for new agreements
■ Operators can only have Code rights or protection under the Landlord and Tenant Act 1954 Act, but not both
Allison Mullen MRICS is a director at telecoms property specialist Telemaster and Shanna Davison is a senior associate in the real estate disputes team at Hogan Lovells
