Lease rights and the Digital Economy Act
A note for property lawyers on the consequences of the Digital Economy Act 2017 and
the new Electronic Communications Code for the assignation of telecommunications leases
CALUM STEWART, LEGAL ASSISTANT, SCOTTISH LAW COMMISSION
Scottish property lawyers may at first sight think that the Digital Economy Act 2017 will have no impact on them. After all, it is UK legislation billed as empowering consumers and providing better connectivity, building better infrastructure fit for the digital future and protecting citizens from spam email, nuisance calls and online pornography. However, anyone involved in the drafting, revisal or examination of telecommunications leases or other conveyancing involving telecommunications needs to look at this more closely. This article focuses on the important area of assignation of leases, but conveyancers in this sector will want to study the new legislation more broadly.
The Electronic Communications Code
As part of the UK Government’s review of electronic communications, the Department of Culture Media & Sport (DCMS) conducted a review of the Electronic Communications Code, contained within sched 2 to the Telecommunications Act 1984 and amended by the Communications Act 2003. This resulted in a new Electronic Communications Code, contained within sched 1 to the 2017 Act, which received Royal Assent on 27 April this year. It will come into force on a day appointed by the Secretary of State, although latest information would suggest October 2017.
Prior to the review there was agreement that the old Code needed modernisation. Corporate structures of telecommunications companies have evolved, and there is an increasing need for better connectivity. The new Code is therefore intended to better regulate the relationship between landowners and electronic communications operators. It is based on a report of the Law Commission for England & Wales (Law Com no 336, 2013), with which the Scottish Law Commission provided assistance, although the report did not contain draft legislation.
Assignation of Code rights under the new Code
The new Code seeks to expand electronic communication infrastructure throughout the UK by facilitating assignation of Code rights by one operator to another. There are nine defined “Code rights” under the new Code, including the rights to install, to keep and maintain electronic communications apparatus on, under or over the land, and to carry out works on the land. “Code operators” are defined in para 2 of the new Code and are effectively appointed by Ofcom.
The new Code, like its predecessor, regulates telecommunications leases: that is, a lease between a telecommunications provider and a landowner. Usually, the landowner will rent out land in order for a telecommunications mast to be erected and maintained. The new Code will restrict the ability of landowners to prevent an assignation of such leases by the tenant Code operator to another Code operator.
In its report, the Law Commission for England & Wales highlighted a concern of stakeholders that the inability to assign Code rights without first having to seek the permission of the landowner was both time-consuming and costly. Frequently, permission would only be given for monetary consideration. The policy for the new Code is based on the premise that landowners should not be able to profit unduly from the communications system, and that the unfettered right to assign to another Code operator should be of no consequence to the landowner, as Code operators will be regulated by Ofcom.
In the new Code, the provision on preventing agreements limiting assignation of Code rights is found in para 16. Subparagraph (1) states that any agreement attempting to limit the possibility of assignation by one Code operator to another, or indeed attempting to attach conditions which must be satisfied before assignation is permitted, such as the payment of money, is prohibited. Therefore, if the operator gives notice to the landowner that it is assigning its Code rights to another operator, the landowner will not be able to prevent the assignation. After the effective date of the assignation (which will include intimation), liability under the lease will pass from the operator assignor to the operator assignee.
However, there is a degree of protection afforded to landowners. This is in the form of a carve-out, provided in para 16(2), which states that any limitation on assignation is authorised if it is part of a “guarantee agreement”. This is described in para 16(7) as: “an agreement, in connection with the assignment of an agreement under Part 2 of this Code, under which the assignor guarantees to any extent the performance by the assignee of the obligations that become binding on the assignee”.
Landowners and tenants south of the border will be familiar with the practice of entering into authorised guarantee agreements (AGAs). These were introduced by s 16 of the Landlord and Tenant (Covenants) Act 1995 and were intended to provide security for landlords in England & Wales by requiring the outgoing tenant to guarantee the liabilities of the incoming tenant. Such agreements were never introduced in Scotland, where the concept of joint and several liability of the outgoing and incoming tenants has been resisted.
Although Scotland does not have equivalent legislation relating to AGAs, provisions in leases making assignation conditional on the provision of a guarantee do exist. A guarantee agreement may occur where, for example, the outgoing tenant is a multinational company of substance and the incoming tenant is another company within the same group which has no substance and no trading record. The landlord may, if it is entitled in terms of the lease, require the outgoing tenant to guarantee the obligations of the incoming tenant under the lease.
Paragraph 16(2) seeks to address this situation by allowing for a carve-out for guarantee agreements in Scotland which come under the definition in para 16(7), as quoted above. This may mean that any guarantee agreements must be unequivocal in their terms, in order to meet this and for landowners to benefit from the limited protection the carve-out affords.
It remains to be seen whether solicitors will wish to consider adjusting the current drafting of alienation clauses in relation to telecommunications leases. Those clauses with the ability to insist on a guarantor may now look more attractive.
LEGAL ASSISTANT, SCOTTISH