Telecoms Code – the price is right. Or is it?

Landowners have historically put unproductive parts of their land to use by allowing telecoms operators to site apparatus on them and charging the operators market rents. Increasingly, digital communication is perceived as a basic need, similar to gas, electricity and water, therefore demand for suitable sites to provide the infrastructure will only increase, particularly with the projected introduction of 5G technology.

In anticipation of this, the new Electronic Communications Code (the Code), introduced in 2018, changed the basis on which the valuation of such potential sites is calculated. It was felt by government that the value of agreements between landowners and telecoms operators should closer reflect the price that utilities companies pay landowners for wayleaves. While a landowner and operator would usually agree the terms of a deal, the Code provides a mechanism for an imposed settlement which produces a result much less generous to the landowner. Essentially, the value of the site to the telecoms operator must be ignored and instead only  the bare value of the site to the landowner is assessed.

The recent case of EE Limited and Hutchison 3G UK Limited v. The Mayor and Burgess of the London Borough of Islington concerned the use of roof space on a 10-storey block of council flats and offers the first example of the difference in valuing land use under the Code. Beyond its primary architectural purpose, the roof space was deemed to have negligible value to the landowner. The telecoms operator had offered the London Borough of Islington an annual rent of just over £2,000 for a 10-year lease, which the local authority had rejected.

During the course of the trial, after hearing expert evidence which differed greatly, offering rental values ranging from £1 to £13,250 per annum, the tribunal concluded that the roof space had nominal value only and found that an annual rent of £50 was appropriate. However, as well as any rent-like payment, the Code requires the tribunal to make an assessment of any loss or damage a landowner might suffer from the equipment being sited on its roof. For this, the tribunal must take into account the actual situation.

In this case the tribunal concluded that the actual loss to the landlord was also nominal, but felt that it was appropriate that the operator should contribute towards the cost of maintaining the building. The tribunal assessed this cost by reference to the actual service charge paid by the residential leaseholders in the building. On average, this was about £1,300, which the tribunal discounted for the services that the operator would not actually use, arriving at a sum of £1,000 per annum. A further compensation claim by the landlord, to try to take the sum back to pre-Code calculations was refused.

Economically, this is a very significant decision for both telecoms operators and landowners, as it sets the new criteria on the basis of which parties will be able to negotiate. Operators and landowners will of course seek to avoid litigation and come to an agreement wherever possible, but the line has now been drawn in the sand, so all parties should be aware of just how much the machinery of the Code could affect their deals.

How frustrating is Brexit?

In a painstaking judgment handed down yesterday morning, Marcus Smith J held that in the event that the United Kingdom does leave the European Union, as it is set to do on 29 March, this action does not operate to frustrate a lease entered into by the European Medicines Agency (EMA).

The EMA is an agency of the European Union, and holds a 25-year lease in Canary Wharf, which was granted in 2014. After the referendum in June 2016, the EMA decided that, under European law, it had to move its headquarters to a location still within the European Union. It found alternative premises in Holland, and sought a declaration from the court that it would be relieved of its tenancy obligations under the doctrine of frustration.

The doctrine of frustration, where contracts can be set aside if an unforeseen event either renders contractual obligations impossible, or radically changes a party’s principal purpose for entering into the contract, can apply in relation to leases. Case law, however, suggests that only something as extreme as the physical destruction of the subject matter of the lease will do. The courts have given examples, such as the upper floors of a block of flats being destroyed or the loss of a building to the sea.

A central plank of the EMA’s case was that, under European law, it was not allowed to sublet its premises. The judge rejected this argument for reasons that are beyond the scope of this blog, and concluded that subletting was not outside its powers. However, he then went on to hold that in any event the situation was not so unexpected that the lease could be held to have been frustrated. Indeed, he pointed out that the landlord had made elaborate provision in the lease to protect its position should the EMA wish to assign or sublet its lease.

This ruling will be a relief for landlords, who otherwise feared that any tenant badly affected by Brexit would be able to argue that their lease was frustrated. However, this is unlikely to be the end of the matter for the EMA given its particular circumstances. It remains to be seen whether the EMA will apply to the European Court of Justice for a declaration under European law on the EMA’s power to sublet, or whether it will seek leave to appeal to a higher court. However, the scope of the doctrine of frustration is unlikely to be extended to cover substantial political events, such as Brexit.

Commercial service charges – a case for transparency

The RICS Professional Statement on Service Charges in Commercial Property (the Professional Statement) comes into force for service charge periods commencing on or after 1 April 2019.  What is it and why should we take notice?

Unlike previous codes of practice on service charges, this one has been published as a professional statement, meaning it contains mandatory requirements or rules that a member or firm is expected to adhere to.  Only if there is a justifiable good reason for not following it can it be avoided, and in that case the surveyor’s clients must be specifically informed in writing.  As such it is hoped that it will have the teeth that previous codes have perhaps lacked, in order to tackle the lack of transparency that still plagues this area of commercial property practice.  It aims to promote best practice, uniformity and fairness and to improve professional standards.

Service charges are designed to cover the maintenance, repair and replacement costs of fabric and services within a property.  They should never encompass improvement costs or fees relating to the owner’s investment interest, such as asset management fees and rent collection costs.

The Professional Statement contains nine mandatory requirements (or core principles), which are supported by best practice principles focussing on matters such as:

  1.  the transparency of service costs;
  2. timeliness in issuing budgets and statement of actual expenditure;
  3. the fair and reasonable apportionment of costs between occupiers; and
  4. ensuring the cost of works represents value for money and is not profit-making.

As with previous codes, the Professional Statement cannot override the terms of a lease, but specific reference to code compliance in leases and in heads of terms is becoming increasingly common. For many years management contracts have demanded that managing agents comply with the RICS codes of practice.  With the application of professional sanctions if the Professional Statement is ignored, this requirement will now be more meaningful than ever.

An issue that has been highlighted by Peter Forrester, chairman of the RICS Commercial Service Charge Professional Group, is the move in recent years towards shorter lease lengths, which makes it more difficult to manage and recover the costs of long-term major repairs and replacements.  The tenant under a five-year lease is not going to accept liability for the replacement of a boiler or re-covering of a roof with a 25-year life span.  This, Peter points out, could be readily addressed by the proper use of sinking and reserve funds in leases.  These funds are strangely misunderstood, or not understood at all, by both the surveying and legal professions, but essentially can be described in the following way:

A sinking fund is intended to provide for the one-off cost of replacement of a wasting asset, usually plant and equipment, the life cycle of which would ordinarily run beyond the term of the lease.  A reserve fund in contrast is intended to meet the cost of future maintenance and upkeep of the fabric and equipment, such as periodic redecoration during the term of the lease, in order to smooth out any variations in the amount of service charge payable each year.  Tenants do not like surprises and planning for expenditure in this way at the outset of the lease would help to avoid disputes arising further down the line.

So, who holds the money in these funds and what happens at lease expiry?

Sinking funds should specifically be held on trust for the owner and occupiers from time to time, such that they effectively belong to the building and can be transferred with the building on sale if necessary.  There is therefore no requirement for any part of the fund to be repaid to a tenant upon lease expiry, as it exists for the benefit of the building.  Conversely, as a reserve fund relates to those costs that are reasonably incurred during the term of the individual lease, it is to be regarded as belonging to the tenant.  If the fund has not been exhausted by expiry of the lease, the tenant is entitled to repayment of any monies it has contributed to the fund.

This article was originally published by CoStar News.

The Telecoms Code – A New Human Right?

The first substantive decision under the new Electronic Communications Code (the ‘Code’) was given by the Upper Tribunal on 30 October 2018 and it’s not good news for landowners. This judgment confirms that any ambiguity in the Code’s wording will be resolved firmly in favour of operators delivering electronic communications.

We now live in an age where it is assumed that it is in the public interest to have a choice of high quality electronic communications services – amusingly referred to by the claimant’s counsel as the ‘human right of mobile telephony’.

The case was a stark warning for landowners that Code agreements don’t only come about between willing parties – the Tribunal may impose agreements by which unwilling landowners may be compelled to grant Code rights to operators.

Here, the winning operator was Cornerstone Telecommunications Infrastructure Limited (‘Cornerstone’). At this stage, all Cornerstone wanted to do was have a look to see if the University of London (‘University’) building would be a good place to install new telecommunications apparatus. However, the University was loath even to let Cornerstone get its foot in the door.

Cornerstone applied to the Tribunal to compel the University to grant it interim rights of access under the Code.

The Upper Tribunal clarified that the Code does indeed confer power on it to compel a landowner to grant interim rights to an operator for preliminary investigations. The only bit of good news is that interim rights do not carry any right of statutory continuation.

Cornerstone needed only to demonstrate ‘a good arguable case’ (i.e. a lower standard than for permanent Code agreements) that it could satisfy the two-limbed test under the Code for the imposition of interim rights of access. The two limbs are:

  • can the prejudice that Cornerstone’s access causes to the University be compensated adequately by money; and
  • was there a public benefit likely to result in the making of the order.

In applying the first limb, the Tribunal held that allowing Cornerstone access to the University’s building to carry out non-intrusive surveys could clearly be compensated by money.

It follows that as there is only a minor prejudice being caused, the level of public benefit required to satisfy the second limb needed only to be relatively modest to succeed. Loss of capacity and coverage on a neighbouring site was held to be sufficient to discharge this limb.

Developers should note that the Tribunal may not impose such an agreement if the landowner intends to develop the land to which the Code right would relate, but the level of intention required has yet to be tested. It is not yet known whether the tests generated from years of case law under Landlord and Tenant Act 1954 will apply in the same way here.

Leaving would-be developers aside, it is hard to conceive of a situation in which the first limb of the test would not be met – if redevelopment is removed from the equation, perhaps all other inconveniences can be compensated by money. If access to electronic communications is to be viewed as akin to a ‘human right’, the interests of landowners may very rarely outweigh this public benefit and landowners may be better off working with operators to secure agreements mutually beneficial for themselves, the operators and the rest of us.

Getting One Step Ahead Of The Trespassers

The recent case of Vastint Leeds BV v Persons Unknown is a welcome decision for developers, who are concerned about the possibility of trespassers on large development sites.

Vastint Leeds BV’s (Claimant) development site on the site of the old Tetley Brewery and adjacent land in Leeds has suffered in the past from trespassers.  Due to the phased nature of the Claimant’s development plans, large parts of the site were and are likely to be vacant for a considerable period. Several of the buildings on the site are in an unsafe state and contain hazardous material, including asbestos. Despite having taken sensible precautions to secure the site with substantial fencing and security patrols, trespassers still managed to enter the site. Apart from travelers, nearby sites have also suffered from illegal raves and instances of fly-tipping, (the illegal dumping of waste products and materials).

Knowing of these potential  trespassers, yet without any current ones, the Claimant succeeded in obtaining an interim injunction from the court against “persons unknown” either attempting to establish occupation on the site or organizing raves, thus preventing trespassers from entering or remaining on the site without the Claimant’s consent.

When deciding whether the injunction should be made final, the Court confirmed that it is possible to obtain an order against persons unknown in three instances:

1. Where the name of a specific defendant is simply not known;

2. Where there is a specific group or class of Defendants, some of whom are unknown; and

3. Where the Defendants are defined by reference to their future act of infringement

The court looked at whether there was a strong possibility that if not restrained the persons unknown would act in breach of the Claimant’s rights. The court also considered if having acted in breach of those rights, the resulting harm would be so grave and irreparable that even the grant of an injunction at the time of the breach or an award of damages would not be an adequate remedy.

While troubled by the lack of evidence as to the specific identity of persons likely to trespass, the Court was swayed by the potential for serious harm that could occur to trespassers entering the site to whom the Claimant owed the usual limited duty of care. There was also concern about potential harm to employees/contractors/agents of the Claimant (to whom it owed a much more significant duty of care) as a result of any infringement of the Claimant’s rights.  The court also took into account the significant steps that the Claimant had taken to secure the site which had not prevented trespass in the past and which had resulted in significant loss to the Claimant.

This case will be helpful for problem sites, as having an injunction in place before any actual trespass occurs will accelerate the eviction process in terms of both civil and criminal enforcement action.  What comes out of the case is the importance for any applicant to take all practical and commercial steps possible to protect the property beforehand. Property owners should also identify specific risks both from and to specific classes of people in the area. The decision indicates that if evidence supports action the courts are willing to act.


Method in the madness: new certainty in valuation methods for viability assessments

Viability assessments for affordable housing have long been a source of frustration for developers. This difficult element of the planning phase is often the cause for delays in getting a development to the point where works can start. There is hope on the horizon in respect of one aspect at least however: a recent ruling should lead to more certainty with regards to valuation methods for viability assessments. In turn, this may reduce the time spent arguing about viability. Ground breaking it may not be, but it may speed the way to breaking ground. It must also be noted that the newly gained certainty will be offset, as the benefit of post-consent gains are most likely to be shared between the developer and the affordable housing pot.

Mr Justice Holgate, a very experienced planning judge, dismissed Parkhurst Road’s challenge to their appeal decision in Islington last year. He came down firmly in favour of factoring in local planning policy when calculating site values and requiring late-stage viability reviews to maximise affordable housing provision.  In a rare postscript, he took the opportunity to comment that it would be “opportune” for the RICS to revise their 2012 ‘Financial Viability in Planning’ guidance note, which the appellants had relied on in calculating their benchmark land value, in order to avoid a circular valuation issue.  The RICS  have responded saying that they are awaiting the review of the NPPF and will revise their viability guidance then but in the meantime will clarify the requirements for viability appraisals including making non-technical summaries.

The judgement will please the Mayor of London, who has adopted this approach himself and whose recent Housing SPG was aimed at embedding affordable housing requirements into land values. The adoption of such an approach ensures that initial appraisals on the purchase of a site factor in a 35% onsite provision.  It is thought that the next revision of the London Plan, due in 2019, will continue in this direction and the SPG may even influence the emerging NPPF changes, thereby extending this approach nationwide. The eventual logical conclusion to this will be reduced land values but it may also mean that developers will turn to non-residential schemes instead, particularly in a market where sales prices are already slipping.

Landlords, let’s be reasonable: otherwise you might pay the price

Landlords take note, on the back of a recent case, you face an increased risk that tenants will challenge costs which they are responsible for in a lease. The case in question related to tenants’ challenge of  insurance costs the Tribunal found in favour of the tenants, because the costs incurred were considered to be unreasonable.

Where leases require insurance costs to be ‘reasonably incurred’ or even just ‘reasonable’, landlords should:

  1. ‘shop around’ and be selective when renewing insurance policies. The premium charged must be reasonable and competitive in the market, but this does not mean that the cheapest insurance cover available is the only option. Other factors (such as the terms of the lease, the liabilities to be insured, the terms of the policy, credit rating of the insurer etc.) will all be relevant;
  2. be prepared to supply evidence to tenants to demonstrate that the landlord acted rationally when incurring the cost and that it is a reasonable charge in the circumstances; and
  3. when using block policies, consider whether tenants are adversely affected by the block insurance.

Whilst the recent case related to insurance premiums for a residential block, it would seem arguable that the same principle could also apply to commercial leases where  a service charge cost or insurance premium has to be ‘reasonably incurred’. It would therefore be prudent for commercial landlords to take the steps above when the costs themselves have to be ‘reasonably incurred’ or  ‘reasonable’.

Consent to Assign – taking the good with the bad.

The case of No.1 West India Quay (Residential) Ltd v East Tower Apartments Ltd surprised the legal profession in 2016 when the court held that one bad reason for refusing consent to assign a lease effectively trumped two other good reasons, making the landlord’s refusal unreasonable.

This decision provides some welcome pragmatism for landlords, residential and commercial alike, but care still needs to be taken when considering possible reasons for refusing consent, to ensure the decision is reasonable.

Best practice for refusing consent

  • Always make sure the reasons for refusing consent are related to the landlord and tenant relationship and the subject matter of the lease
  • It will be reasonable to refuse consent or impose conditions if otherwise the proposed assignee would have an adverse effect on the landlord’s rights and interest in the property or in its estate as a whole
  • Ensure any refusal is notified to the tenant in a reasonable time, giving the reasons for the refusal. This will be a matter of a few weeks, but will differ depending on the facts of the case and may depend upon how quickly the landlord is provided with all relevant information to allow him to evaluate the application properly
  • If there is insufficient information about the assignee either the application for consent to assign should be refused promptly or requests for financial and other information must be made speedily.

The Case
In the case, the tenant, East Tower, sought consent from its landlord, West India, to assign its interest in three apartments. West India withheld its consent to two of these applications on grounds that it had not received undertakings for its legal fees or for the cost of carrying out inspections of the apartments and it had not received a bank reference to enable it to assess the assignee’s covenant strength. The High Court held that the legal fees requested were excessive for a residential application and that this one bad reason overruled the two good reasons, thereby making West India’s refusal unreasonable overall.

The Court of Appeal disagreed and held that if the good reasons were independent of the bad reason then the bad reason should not “infect” the good. The vital question is whether the decision to refuse is reasonable not whether all the reasons were reasonable.

In this case the reasons were independent of each other and two of them were reasonable. The landlord would have refused consent on the reasonable grounds in any event. As a result the Court held that the decision to withhold consent was reasonable.


Attack of the Triffids: Knotweed nuisance cranks up a notch

Investor, developer, indeed landowner in any capacity – recent rulings mean Japanese Knotweed is now more of a nuisance (and a costly one) than ever. With over 6000 UK locations identified as containing the weed, you best be clear on how to handle this inconvenient invader or you face ending up in a bind.

What’s Changed?

The decisions in the two cases are a particular concern for landowners because:

  1. neighbouring landowners no longer need to demonstrate that the weed has caused physical damage to their property in order for a successful nuisance claim to be made; and
  2. the damages recoverable by the neighbouring owner can extend to diminution in value of their land and loss of amenity – which could amount to quite substantial sums of money.

What Should I Do?

If you are acquiring new land

  • Require the Seller/Landlord to confirm whether there have been any historic or ongoing Japanese Knotweed issues on the land and if so to provide details and copies of any guarantees or warranties which should be transferable to you and any lender.
  • Carry out your own site survey to satisfy yourself that there is no Japanese Knotweed on site. This will be very important for overgrown bare land.  It may be all you can do if the Seller tells you to rely on your own survey in answer to the question above.

If you have Japanese Knotweed on your land

  • Take immediate expert advice on how to eradicate the Japanese Knotweed – this must only be done by suitably qualified specialists. Make sure any action taken is backed by a guarantee or warranty which is transferable to successors and any future lenders
  • During the period whilst the Japanese Knotweed is being eliminated (which can take up to 3 years), take expert advice on how to minimise the risk of it spreading

GDPR: Three Months to Go

Changes to the privacy laws in the European Union reach beyond Europe. Any company regardless of location can fall under the new guidelines issued under GDPR. Reed Smith’s IP, Tech & Data Group hosted a webinar on February 22 that discussed key priorities and strategies for compliance during the final three months remaining before the Global Data Protection Regulation (GDPR) comes into force on May 25, 2018.

We believe these changes will affect many real estate clients worldwide, so we’d like to share our colleagues perspective on the GDPR.

The webinar, hosted by the authors of this blog post, can be seen on demand by registering on this page.