Negotiating telecommunication code agreements

CLA Senior Business Economics Adviser Charles Trotman blogs on factors affecting the valuation of telecommunication code agreements

One of the major obstacles when compiling telecommunication code agreements between landowners and operators has been the difficulties in agreeing on the level of valuation. Under the Electronic Communications Code (the Code), the value of the agreement is that which can be agreed between a willing seller (the landowner) and a willing buyer (the operator). This is the basis of a standard contract based on market conditions and creates a market price.

This, of course, is the theory. In practice, when we look at the mobile connectivity sector, there have been several examples of CLA members being pressed to sign Code agreements with a reduction in annual rent of up to 90%.

We need to remember that there are, in fact, two markets: the fixed-line market and the mobile market and that these work in very different ways. In the fixed-line market, there is an agreed national wayleave framework that sets out a structure for both site providers and operators, such as Openreach and Gigaclear. Essentially, the site provider confers a right of access to the land to allow for the deployment of fibre optic in return for a negotiated payment. However, the mobile market works in a very complex and very different way.

The first question to ask is why is the mobile market so different? Before the revisions to the Electronic Communications Code in 2017 (this regulates the telecoms market) there was the criticism that some landowners were forcing operators to pay what we call “ransom rents”. This is where the operator has no choice but to pay the proposed rent for the site because it is crucial to the operator network. This was very much anathema to government policy that recognised the need for greater mobile connectivity across the country. As a result, the Code was revised to give operators far greater rights in their relationship with landowners. However, in practice, the revisions mean that we have gone from one extreme to another, leading to confusion and suspicion.

The current situation

What should happen is that there should be a contract between a willing buyer and a willing seller. This sets the market price and becomes the basis of the agreement. However, operators are using the terms of the Code to whittle down the price paid to landowners. It can be said that rents before 2017 were inflated (although it could also be argued that it is the market that dictates the price). This was inferred by the government and the general consensus within the sector was that rents after 2017 would fall. Indeed, a report commissioned by the government by consultancy Nordicity recommended in 2014 that telecom wayleaves (the rent paid to landowners in return for conferring a right of access to the land) should be proportionate to those wayleaves paid to utility companies. This would nominally reduce rents to 60% of their previous level. So, if the original rent was £1,000 per year, the government believed that the rent for a renewed lease should be £600.

But this has rarely happened, and it is fair to say that operators have used their increased powers to put pressure on landowners to reduce rents. This has led to significant problems in deploying greater digital connectivity.

Impacts on the sector

Given that the government’s objective is to put in place a telecommunications network that meets the public need for greater connectivity and to give operators the policy and legal tools to do so, there is an argument that the reform of the Code went the right way. However, to make this work, there needed to be a balance between the wishes of operators and landowners. This is not what has happened. What we see now is a situation where not only is there ongoing distrust between those in the sector but also a failure to meet the objective of more deployment, particularly in rural areas. In a sense, since 2017, the telecoms sector has been in a state of confusion, leading to a lack of real progress. This means that there has been a significant drop off in both the number of lease renewals of mast sites and the deployment of new mobile masts.

But we have seen several important developments. The first is that there has been a number of rulings from the Upper Lands Tribunal which clarify the law regarding the Code. Secondly, for rural areas, the Shared Rural Network (SRN) is in the process of being created.

The SRN is important because it sets both goals and legal obligations. The objective will be to extend mobile coverage to 95% of the UK by all four operators. The deadline is the end of 2025. To meet these objectives and deadline there are legal obligations on the part of the operators, subject to the regulations from OFCOM, and means that progress needs to be made quickly.

The use of incentive payments and the Pippingford case

Over the last 12 months or so, we have seen the greater use of “incentive payments”. For operators to encourage landowners to renew telecoms leases quickly, an incentive payment is offered in addition to an offer for a revised rental payment. For example, under a current Code agreement, a landowner is receiving an annual rent of £5,000. The lease is up for renewal, and the operator has made an initial offer of £500 per year over a 10-year lease. That is 10% of the current rent. If the operator were to follow the government's view, it would offer 60% of the current rent - £3,000 per year. Quite naturally, landowners offered such a low initial offer have rejected it and disengaged from further negotiations. This means that extending coverage is disrupted, and deployment comes to a halt.

However, as a kind of sweetener, operators are now beginning to offer incentive payments to landowners to encourage them back to the negotiating table. So, in our example above, the operator is now making a combined offer – the initial offer of £500 per year and an incentive payment of £15,000 over the period of the lease (10 years). This equates to a total payment of £20,000, which is 40% of the total current rent (an annual payment of £2,000). Clearly, this could be seen as a more attractive offer with the idea of making it easier for both parties to agree.

But the use of incentive payments has been rather secretive and the county court was asked for its view in EE Ltd and Hutchison 3G UK Ltd v R Morriss, D H Tayler and Pippingford Estate Co (the Pippingford case). Here, the operators made an initial offer of an annual rent but also an Early Completion Incentive Payment (ECIP), which was not to be part of the annual rental payment but rather paid as a lump sum.

The court ruled that an ECIP should form part of the annual rent paid. This would raise the level of the rent paid per year and was more in tune with the objective of the government to see lower but realistic rental payments.

The decision in Pippingford is interesting for two reasons: firstly, it would simplify the negotiating process and makes it clear to the landowner that if incentive payments are made, they should be part of the formal Code agreement, which could affect any future rent review; and secondly, the process should be far more transparent. If Code agreements are to be made, they need to be open with no secret clauses. If a landowner wishes to have the incentive payment as a lump sum that is an issue for them within the negotiating process. But it is less than helpful if incentive payments become part of a murky world of secret negotiation.

Conclusion

There is little doubt that the telecoms sector can be extremely complex. It can be a legal minefield, and members need to have to hand as much advice and information as possible when negotiating lease renewals. Progress has been made but there needs to be more if digital connectivity is to be ubiquitous.

Ensuring a more transparent and open negotiating process should be seen as a major help in ensuring greater mobile deployment. As I have said before in other forums, there needs to be a balance between the rights and responsibilities of landowners and operators. If we cannot achieve this balance then progress will stall and the public need for connectivity, so evident during the Covid-19 pandemic, cannot be met.

Members should contact their regional office for advice and support relating to telecoms agreements.

Key contact:

Charles Trotman
Charles Trotman Senior Economics and Rural Business Adviser