Rooftop Rents and the Impact of the Digital Economy Bill 2017

The Digital Economy Act 2017 (the “Act”), which received Royal Assent on 27 April this year, has made headlines owing to several controversial provisions around data sharing and collection. However, also packaged within this new legislation is a topic which has garnered comparatively sparse commentary: the reformed Electronic Communications Code (the “Code”). The Code regulates the legal relationship between landowners/occupiers of land and telecommunications operators who seek rights to locate electronic communications apparatus on land. At the moment, we are not sure when the Code will come into force. It may be in force by the end of 2017, or in March 2018.

Many hotel owners / operators generate additional income from allowing telecommunication operators to place installations on hotel rooftops in space that is otherwise not incoming generating. It is not uncommon to see multiple masts on hotel rooftops, each one leased to a different operator and each one generating income. For as long as the roof top is not needed, this can be a good source of income.

The Act is about to change things, and not necessarily in the hotel owners/operators interests. Rents under new agreements are going to go down, and notice periods to terminate rights of occupation increase. There will be no increase in premiums for sharing with other operators or for upgrading equipment. It is too early to tell whether the changes to the Code will create a detrimental imbalance in the relationship between landowner/occupier and operator. One thing is clear, the economic benefits of having telecommunications on your rooftop are about to change.

We summarise below some of the biggest changes to be aware of.

Reforms: Valuation

One of the most fundamental changes to the Code is the altered methodology for valuation. It is here that the Government identifies scope for incentivising investment in the UK’s telecommunications infrastructure. Currently, most operators pay a market rent negotiated between the parties. Going forward, the Government wishes to clarify its view that landowners should not be entitled to a share of the economic value created by the services an operator offers. Instead, the consideration is to be valued on a “no scheme” basis. No value will be attached to sharing rights and other benefits. This means that where you had previously enjoyed enhanced payments from multiple operators, an operator will be able to share with multiple operators and only pay once.

The new approach to calculation looks to reflect the underlying value of land on the basis of compulsory purchase principles. In this sense, it brings valuation in line with the system used for domestic utilities and providers of other essential services. The land value is to be assessed according to its value to the site provider (i.e. the landowner or occupier) as opposed to the operator.

Reforms: Site Sharing

In a big change from the current Code, the Government has decided to confer automatic rights to upgrade and share apparatus. It will now be possible for operators to upgrade their equipment and share their sites without the permission of a landowner. This applies to all new agreements entered into once the new Code comes into force. The intention is to allow operators to make the best use of sites across their portfolio, without additional cost considerations.

However, this is a drastic change for landowners who have previously been able to restrict sharing arrangements and upgrades, whilst negotiating at arm’s length with the operators for such rights. Whilst landowners will be given new powers to require details of who is on the land and what equipment, it will be a new concept for many landowners who will find they cannot restrict occupation. As the Code will enshrine assignment rights, there will no longer be the opportunity for landlords to negotiate new terms and rent increases in the event of equipment and lease assignment.

Terminating Code rights

In another major change, removing operators from rooftops will become more protracted. Currently the termination mechanism under the existing Code is such that the operator, on receipt of a notice, has 28 days in which to serve a counter-notice. Under the new Code, however, the time periods for termination are to be significantly extended. The reformed provisions require site providers to serve a notice specifying the date at which the agreement is to cease, being no less than 18 months from the date of notice. In tandem, the period allowed for the serving of a counter-notice is to be extended to three months. These altered termination provisions are clearly far more burdensome. Therefore, if hotel operators/owners have development plans that involve the roof longer lead in times will be required to ensure operators can be moved.

Comment

There can be little doubt that the previous Code was in need of reform: the nature and role of digital communications has changed radically since its introduction. The Act seeks to make it easier for operators to roll out electronic communications apparatus and infrastructure, allowing for improved coverage, improved capability and improved capacity.

On the face of it, this weighting in favour of operators ought to be welcome news to commercial providers. However, it could also be considered unfortunate that the Government has not taken the opportunity to strike a different balance between operators and landowners. Since 1984 operators and landowners have found ways of working together. Operators are now sophisticated, well advised corporates. Deals are reached. The new valuation scheme, combined with an inability to contract out of the Code and the lengthy termination rights, seems likely to place landowners in a weaker position than that in which they had found themselves under the previous Code.

The new provisions will apply to all new agreements reached after the coming into force of the Code. Some of the new provisions will apply to existing agreements e.g. the termination provisions. If you need advice on the current position on any mast agreements you have and the impact of the new Code on your business, please do not hesitate to contact the writer.