EE Ltd & Anor v Affinity Water Ltd (ELECTRONIC COMMUNICATIONS CODE - NEW AGREEMENT OR MODIFICATION - water tower - consideration and compensation)

Factual and Procedural Background

This decision concerns the financial terms of a new agreement under the Electronic Communications Code (Schedule 3A to the Communications Act 2003) relating to a site owned by the Respondent at a reservoir in The City. The Claimants occupy the site following the expiry of a previous lease granted in 1998 to a predecessor of the Claimants. The lease was contracted out of the security of tenure provisions and expired after the commencement of the Code, thus classified as a 'subsisting agreement' for transitional purposes.

The Claimants invited the Respondent to enter into a new agreement in October 2018, but a formal notice under paragraph 33 of the Code was not served until December 2019. Negotiations failed to reach consensus on financial terms, leading the Claimants to commence this reference in April 2021. By the hearing, all terms except financial consideration and compensation were agreed. The Tribunal was asked to determine these outstanding financial terms.

The site comprises a fenced compound adjacent to a water tower and reservoir, with the Claimants having equipment cabinets connected to antennae on the tower. The Respondent, a statutory water undertaker, maintains the reservoir and water tower as operational infrastructure. The Claimants have access rights to the site and water tower, subject to conditions.

Legal Issues Presented

1. What is the appropriate financial consideration payable by the Claimants to the Respondent under a new agreement imposed by the Tribunal under paragraph 34 of the Electronic Communications Code?
2. What assumptions should be made regarding the condition of the site (specifically, whether vacant possession is assumed) when determining the market value under paragraph 24 of the Code?
3. Whether professional fees incurred by the Respondent before the grant of Code rights are recoverable as compensation under paragraph 25 of the Code.

Arguments of the Parties

Claimants' Arguments

• The valuation should assume the site is already equipped with telecommunications apparatus, consistent with the reality principle and the statutory valuation hypothesis.
• The annual consideration proposed was £2,787, based on a detailed three-stage valuation approach and informed by comparable Tribunal decisions.
• Professional fees incurred in negotiating the new lease, including some related to the anticipated 5G upgrade, should be treated as a separate compensation item payable on grant rather than incorporated into the annual rent.
• The Claimants contended that future facilities management costs should not be pre-emptively assessed but addressed as compensation claims when incurred.

Respondent's Arguments

• The valuation should reflect a higher annual consideration, proposed at £6,560.84, based on the value of the site and the burdens and benefits conferred by the new lease.
• The Respondent argued for an allowance reflecting future facilities management costs, including anticipated upgrades and administrative burdens.
• The Respondent sought to recover professional fees incurred in connection with the new lease, including legal and valuation fees, as compensation under the Code.
• On the assumption of vacant possession, the Respondent agreed with the Claimants that the site should be assumed equipped, but contended for a higher valuation reflecting the site's particular characteristics.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal began by considering the statutory framework under the Electronic Communications Code, particularly the valuation provisions in paragraph 24 which require a market value assessment based on a hypothetical arm's length transaction between a willing buyer and seller. It emphasized that such a valuation involves hypothetical parties and requires assumptions that may depart from reality only if expressly or inevitably required.

On the issue of vacant possession, the Tribunal noted the parties’ consensus that the site should be assumed equipped with telecommunications apparatus. However, it questioned this assumption and suggested that the valuation hypothesis may require assuming the site is vacant, with the operator's apparatus removed, to align with the arm's length market value principle. The Tribunal acknowledged the complexity of this point but ultimately accepted the parties’ position for this case.

The Tribunal adopted the established three-stage valuation approach from Vodafone v Hanover Capital and related cases, assessing:

• Stage 1: The current or highest alternative use value of the site.
• Stage 2: Additional benefits conferred on the Claimants beyond occupation rights.
• Stage 3: Burdens or adverse effects on the Respondent arising from the agreement.

The Tribunal carefully examined evidence from both parties’ experts on various cost components related to site maintenance, security, repairs, and other factors. It found some expert valuations overly granular and detached from likely hypothetical negotiations, favoring a broader and more pragmatic approach.

Regarding future facilities management costs, the Tribunal rejected the Respondent’s reliance on a residential rooftop comparator (London & Quadrant) as inapposite, given the differing nature of a water tower site. It concluded that future costs should be addressed through compensation claims as they arise rather than pre-emptively included in rent.

After aggregating the components and applying a 10% uplift for the break clause flexibility, the Tribunal concluded that an annual rent of £3,300 fairly represented the market value of the new agreement.

On compensation for professional fees, the Tribunal interpreted paragraph 25(1) to allow recovery of reasonable legal and valuation expenses incurred before the grant of Code rights, as these are losses sustained as a result of the exercise of Code rights. It assessed the Respondent’s legal fees at £6,000 and limited valuation fees to £1,500 due to lack of evidence on the valuer’s role.

Holding and Implications

The Tribunal made an order under paragraph 34(6) of the Electronic Communications Code:

• The subsisting Code agreement is terminated with effect from a date to be agreed.
• The parties are ordered to enter into a new agreement on the previously agreed terms at an annual rent of £3,300.
• The Claimants are ordered to pay compensation totalling £7,500 in respect of the Respondent’s reasonable professional fees.

This decision resolves the financial terms of the new agreement consistent with statutory valuation principles and the parties’ evidence. It clarifies that compensation for professional fees incurred before the grant of Code rights is recoverable under the Code. The Tribunal’s reasoning reinforces the application of the three-stage valuation approach and the arm’s length hypothetical negotiation framework in Code disputes. No new precedent altering the statutory scheme was established; the ruling applies the Code’s provisions to the facts of this case.