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First Decision on the interaction between the code and the 1954 Act in lease renewals

The County Court (sitting in the Upper Tribunal) has delivered judgment in Vodafone Limited v Hanover Capital Limited [2020] EWMisc 13(CC), dealing with (a) term length and (b) (most importantly) how rents of renewal electronic communications site tenancies under the Landlord and Tenant Act 1954 fall to be valued on renewal under section 34. It is the first known decision on these important issues following the Upper Tribunal’s decision in Ashloch that a renewal of such a subsisting agreement must be via the 1954 Act lease renewal process and not pursuant to Part 5 of the Code.

Stephen Jourdan QC and Oliver Radley-Gardner appeared for the Claimant operator, and Kester Lees and Fern Schofield appeared for the Defendant landlord.

Facts and Procedure

The case concerned the renewal of a business tenancy granted in 2008 of a mast site at Bredbury, in Manchester. That lease was a subsisting agreement under Schedule 2 to the Digital Economy Act 2017. It fell to be renewed under Part 2 of the 1954 Act. The unopposed proceedings were commenced in the County Court at Manchester. Given the importance of the case, the Upper Tribunal agreed to hear the matter, and sat with the assistance of an assessor-valuer.

The Rent Issue

The question for the Court was how to operate the hypothetical transaction under section 34 of the 1954 Act in light of the Code. In particular, what regard is to be had to the parties’ awareness of the tenant’s possible rights under Part 4 of the Code to secure a code agreement absent consent? It was common ground that the parties to the hypothetical negotiation would have regard to the Code. The rival valuation positions were determined by the evidence to which the Court should have regard: (a) solely transactions which were carried out consensually on a ‘New Code’ valuation basis (by reference to paragraphs 24 and 25) (as contended for by Vodafone) or (b) transactions which took into account the value to operator (including transactions negotiated before, but in the shadow of, the New Code) (as argued by the landlord).  

The Court answered that question as follows:

1. Section 34 requires a counter-factual assumption to be made, namely that the subject site has been advertised and marketed. In the real world, mast sites are not dealt with in this way. They are sought out by individual operators to fill a network need.
2. The existence of the Code, and the willing tenant’s potential rights under it, are to be taken into account in that hypothetical negotiation.
3. In respect of the treatment of ‘New Code’ comparables:
   1. professional costs ought to be annualised and would be included in the comparable.
   2. payments referable to inducements fell to be disregarded due to the willing landlord hypothesis.
4. A strict ‘New Code’ approach would have produced a value of £2,250 per annum in this case.
5. However, the section 34 hypothetical transaction concerned the one lease on offer to the market and, therefore, where there was evidence of sharing (here by EE and H3G), the Court took the view that the result of the competitive bidding process in the hypothetical world would result in a higher payment.
6. The Court utilised the market evidence of transactions based upon Old Code valuations (without a ‘no network’ assumption) to reflect the value-to-operator/tenant aspect of the hypothetical transaction. Accordingly, a rent of £5,750 was determined, including a 5% adjustment for the absence of a rent review clause.
7. However, the Court noted that “the same might not be true for sites which satisfy the needs of only one operator and which would not be of interest to competitors. In such cases the Code’s no-network assumption may cause the parties to agree a rent reflecting only the value of the site to the owner and the other consideration which [Vodafone] identified”.

The Term and Break Issue

The Operator contended for a three year term and a six month rolling break clause. The landlord argued for a ten year term with a five year break clause.

The Court determined that in order to strike the appropriate balance between the operator’s commercial needs and the landlord’s interest the appropriate term length was ten years with a six month rolling break, exercisable after five years. The court noted that a minimum certain term length of five years was common practice in the industry.

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