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Sending the right signals

18 September 06

Solicitors acting for clients leasing their land for telecommunication masts need to be aware of industry practices adopted by the major operators

by Ian Thornton-Kemsley

Many solicitors will find themselves involved in leases for telecommunication installations.

The majority of telecommunication agreements arise in situations where there has been an approach by specialist agents for the tenant. The landlord frequently has very little knowledge of the market and is often not professionally represented in the ensuing negotiations, which are based on standard heads of terms prepared by the tenant. It is the practice for some operators to have these signed by the landlord, and a moot point whether such agreements are legally binding.

Unusually in the property market, the lease is then usually produced by the tenant. The landlord’s solicitor is often the first professional to be involved on the landlord’s side. It is therefore particularly important that they have an understanding of this specialist market and the practical issues that arise.

Like agricultural leases, telecommunication agreements are governed by other statutes, in this case the Electronic Communications Code (Telecommunications Act 1984, schedule 2 as amended). Indeed it may not be necessary for a formal lease to have been agreed for the protection of the code to be afforded to an operator.

Code powers

It is important that solicitors understand and advise their client of the code powers available to all telecommunications operators under the Communications Act 2003.

Paragraph 2 of the code states that the agreement of the occupier has to be obtained in writing to execute any works on land for telecommunications purposes, to keep apparatus installed and to enter the land to inspect the same. The agreement can only be exercised in accordance with the terms in which it is conferred. It is particularly important, therefore, that any agreement adequately sets out the rights and obligations of the parties to avoid prejudicing either and to regulate the future conduct of the relationship.

It is important to consider this provision in relation to early access agreements or to telecommunication wayleaves such as with BT. Heads of terms signed by the parties may constitute a written agreement.

Paragraph 5 contains compulsory powers to acquire rights over land. It is frequently threatened by operators but rarely followed through. The operator must give notice of the need for such rights and, after 28 days, may apply to the county court or in Scotland the sheriff, for an order to dispense with the need for landowners’ consent. The court must grant an order where it is satisfied that the effect of the order can be properly compensated for by money and that the loss to the grantor is outweighed by the benefit to others. Paragraph 7 deals with the financial terms. This provides that there must be:

  • consideration in respect of the giving of the wayleave as would have been fair and reasonable if the rights had been given willingly; and
  • compensation for any loss or damage suffered by the grantor (including injurious affection). (It is this element that usually means that any professional fees incurred can be recouped from the operator.)The word “consideration” is a fundamental departure from previous compulsory purchase legislation, which has tended to be on the basis of compensation (i.e profits or losses foregone). It is related to, although not necessarily the same as, market value.

The most important provision is para 21 of the code, which restricts the landowner’s ability to require removal of any telecommunications equipment installed on his property. This is particularly pertinent where landowners may be prejudiced by the continued existence of the equipment after the agreed term (e.g. where there is prospect of redevelopment).

A code system operator can serve a counter notice within 28 days of any notice to remove (such as a notice to quit) and, in such circumstances, the landowner can only effect removal with the consent of the court. The usual ground for counter notice is that the operator is seeking to negotiate a new agreement. In practice once that notice is served, operators tend to sit back, leaving the onus of removal on the landlord.

In development situations the service of such counter notices can hold up sites by anything up to two years and can involve considerable costs to the landowner. Provisions in the code regarding compensation may protect the landowner’s interest in circumstances such as the future development of the property, but only if the operator is successful in an application under para 5 of the code.

Where apparatus has been abandoned or is not likely to be used again, the operator is obliged to remove telecommunications apparatus under para 22 of the code. The potential costs of decommissioning sites should not be underestimated and many operators seek to reduce their liability in this respect by agreement.

Typical terms

The lease terms are frequently drafted in favour of the tenant and often based on English styles.

Rent review pattern

Operators tend to seek five-year review patterns. Strutt & Parker’s Telecommunications Survey suggests that 70% of sites are however reviewed three-yearly, with only 19% five-yearly.

Rent review mechanism

Operators tend to seek reviews in line with the RPI. Radio mast rentals have, however, outstripped the RPI by a significant factor in recent years as illustrated in the graph below.

As operators get closer to achieving full coverage, the demand for new sites is likely to fall. Probably for this reason, most agent-represented deals are based on the higher of open market rent or RPI and are usually upwards only.

It pays to consider the wording of the review provision carefully. In several leases the review provision as drafted implied that the site was to be valued fully equipped – a potential windfall for the landowner and embarrassing for the drafting solicitor who had lifted text from a normal commercial rent review clause without appreciating the practical implications. There have also been problems with poorly drafted RPI provisions.

Dispute resolution

Rent review disputes are often referred to arbitration rather than an expert.

The telecommunications industry remains extremely polarised and it is extremely difficult to find a truly independent expert. Most surveyors in the industry represent mast operators. Arbitration should therefore be the preferred dispute resolution process.

It is a salutary point that of the 21 arbitrations in recent years of which I am aware, all have been won by the landlord with substantial awards of costs. At arbitration, unlike most expert determinations, it is possible to recoup the expenses of the action.

Assignation

There is likely to be some consolidation in the future between operators, and bankruptcies in the industry have focused attention on the tenant’s covenant.

Where the landlord is represented, assignation is normally prohibited outside the company group. Most operators however insist on a right to assign subject to landlord’s consent (such consent not to be unreasonably withheld or delayed). This may mean that a landlord is unable to obtain a premium for the granting of consent (Landlord and Tenant Act 1927, s 9 (E&W); for Scotland note Renfrew District Council v AB Leisure (Renfrew), 1988 SLT 635). With payments being made to landlords in respect of consent to assign in the order of £3,000-5,000 per mast, this is a valuable right.

Equipment restrictions

Often leases are drafted restricting either the number of antennae or the height of the mast. Some older leases restrict frequencies either directly or indirectly by the use of terms such as VHF (very high frequency). Unrestricted leases attract higher rents than restricted leases, but there is often value to the landlord in controlling the height and scale of a potential eyesore by this method.

In drafting height restrictions it is worth remembering that antennae or lightning rods are often installed above the mast and it is often easier to specify a maximum height of the installation.

Even specifying the number of antennae may give rise to difficulties! Sector antennae actually comprise a number of separate small antennae. Does a restriction of, say, three antennae mean three antennae or three sets of antennae?

Reinstatement

Many standard leases issued by telecommunication operators appear to water down the effect of para 22 of the code. There have been at least two well publicised insolvencies in the industry which have left landlords of sites without any income and owning redundant radio masts incurring rates. Masts may cost several thousand pounds to remove. Operators however resist reinstatement bonds and have been successful in so doing.

There is no evidence that the main telecommunication companies have made any provision for the removal of their networks despite the licence obligation. This could yet be a smoking gun in the industry.

Site sharing

Almost unique to the sector, there is considerable value in subletting or site sharing – the industry term whereby third parties install and operate their antennae and/or dishes on existing masts. It is a grey area of the law as to whether these agreements amount to a licence or lease (cf Brador Properties v British Telecommunications plc 1992 SC 12), although they are treated by predominantly English-based operators as licences.

The potential income to the mast operator from site sharing can be considerable and drafting such clauses gives rise to a number of tricky issues for the unwary.

The easiest approach is an absolute prohibition on subletting or site sharing in either the whole or part of the property or any of the rights granted.

It is fairly standard for telecommunications leases to comprise a base rent and for the landlord also to receive a stated percentage of any site sharing income taking place.

Consideration should be given as to whether the payaway is net of deductions, such as management charges etc, or gross. Leases which provide for a percentage payaway less deductions are open to abuse by mast operators. Telecommunication operators and some government organisations appear to charge lower rates between themselves, perhaps because of reciprocal agreements, than third party operators. Operators may offer discounts in respect of bulk (number of sites and/or the amount of equipment on one site). There are situations where rent free periods are granted or site share rental is reduced because of other considerations (such as capital contributions to mast replacement). Some mast operators have been recharging any payaway to a landlord back to the site sharer and treating this as a legitimate deduction!

There are also concerns about the transparency of site share agreements. Attempts to establish what income the landlord is entitled to have met with refusal to produce agreements on grounds of commercial confidentiality.

Other methods are being used such as fixed sums reviewable at the same time as the base rent, or direct covenants between sharer and head landlord.

Strange though it may seem, most site sharing agreements are concluded between operators without the sharer examining the terms of the head lease at all. This has given rise to a number of cases where site sharing has led to an apparent breach of lease. Many operators fail to appreciate that site sharing can only take place subject to the existing lease terms. A restriction on height or number of antennae or an extension to the subjects of lease may require renegotiation.

As planning authorities become more concerned about the proliferation of radio masts across the country, they are likely to insist that new operators seek space on existing masts (though any decision must be based on the merit of the particular case). There is also an absolute obligation on operators to site share, without test of reasonableness, in terms of SI 2553/2003 under the Communications Act 2003. Thus the landlord has considerable leverage in site share negotiations.

Street works

Increasingly telecommunication apparatus is being laid within the public highway under powers granted to licensed operators in the New Roads and Street Works Act 1991. Local authorities currently are not able to seek consideration from operators for the installation of equipment in the highway and this therefore has considerable attraction for operators.

However careful consideration should be given to the extent of the highway in each instance. In many situations the verge may not be owned by the authority. After installation a radio mast (unlike the situation for underground cables etc) is not maintained by the authority and arguably may no longer form part of the maintainable highway.

Ian Thornton-Kemsley is a consultant for Strutt and Parker, and the author of the Scottish Rural Property and Business Association advisory paper on radio masts and the specialist chapter on the valuation of such sites in "Valuation: Special Properties and Purposes" (Estates Gazette, ISBN 0 7282 0418 5).