Digital Economy Act 2017 - the new Electronic Communications Code - two years on

The Digital Economy Act came into effect on 28th December 2017, and with it, came the new Electronic Communications Code. The new Code has been eagerly anticipated: the old Code was famously described in a case in 2010 by Mr Justice Lewison (as he then was) as “one of the least coherent and thought-through pieces of legislation on the statute book”. Given the Government’s drive to provide high-quality networks to the entire country and with businesses becoming more and more reliant on superfast broadband, what has changed for Operators and landowners and how have the new rules been working in practice?

More power to the Operator

Under the new Code, Operators now have an automatic right to assign Code agreements and, subject to certain conditions, to share or upgrade equipment with other Operators. The landowner can insist that the outgoing Operator guarantees the performance of the incoming Operator, but sharing or upgrading is permitted without the need for landowner’s consent so long as it only causes minimal adverse visual impact and does not impose any additional burden on the landowner (meaning no additional adverse effect on the landowner’s enjoyment of the land and no additional loss, damage or expense). Landowners will no longer be able to charge extra for new or additional Operator users, or (generally) for new equipment. Although Code agreements can be terminated if the landowner wants to redevelop, at least 18 months’ notice is required. A well-advised landowner therefore, should be careful to ensure that it retains sufficient ‘lift and shift’ rights in the Code agreement as there is nothing in the new Code akin to paragraph 20 of the old Code to provide for this.

Another issue for the landowner to consider is that these greater sharing and assignment rights could cause difficulty in identifying the actual Operator at any one time. To mitigate against this, we are beginning to see express notice provisions in Code agreements compelling Operators to inform the landowner on any such dealing.

Less income for the landowner

Due to the revised assessment for rents under new Code agreements, income streams for landowners have decreased. While still supposed to represent market value, the calculation is now to exclude any value attributable to the proposed network use, or attributable to the enhanced rights to share use or upgrade equipment, and to assume there are other sites the Operator could use. This means that the rent reflects the value of other possible uses to which the site – typically, only a small area e.g. an empty portion of a roof - could be put.

The 2018 case of EE Ltd v Islington Borough Council [2019] UKUT 53 (LC) has already demonstrated this drop in rental values; the Council, as landowner, had initially sought annual payments of £13,250, but the tribunal set the consideration as just £1,000 pa.
Because of this, and as the new Code does not have retrospective effect, landowners with Operators already on their land under old Code agreements would be advised to keep those agreements in place (and renew them where possible) as they are likely to command higher rents than those granted under the new Code.

Clarity on the Landlord and Tenant Act 1954

One of the main problems with the old Code was that it did not exclude the security of tenure provisions of the Landlord and Tenant Act 1954 (which gives business tenants the right to renew their leases). As a result, Operators could be doubly-protected (where an agreement could be regarded as a lease) which meant landowners trying to end a Code agreement were left with a messy and burdensome process. In light of this, landowners would seek to exclude the 1954 Act in the usual way for property leases.

Under the new Code however, the 1954 Act no longer applies to Code agreements, where the primary purpose of the agreement is to give the Operator rights under the Code. If an agreement is deemed to be a property lease and not a Code agreement (i.e. the main purpose was not the grant of Code rights), then the 1954 Act security of tenure rights would govern the document rather than the Code’s termination rights. This welcome change ensures that the relevant document will only be governed by one of the regimes on termination.

Disputes are on the up

Historically, Operators had been reluctant to exercise their Code rights to compel landowners to grant a Code agreement. This was in part due to the potential of reputational harm, but also because of the costs and timeframes often involved. However, with fewer commercial incentives for landowners to agree to a new Code agreement as well as landowners with existing Code agreements seeking to renew them under the old Code arrangement, we have started to see more disputes.

The new Code makes it easier for Operators to argue that the Court should give an order imposing Code rights on a landowner. In contemplating its decision, the Court is required to weigh up the public interest against the landowner’s rights, and it is deemed to be in the public interest to have a choice of high quality services. This goes beyond its obligations under the old Code, which provided that a person must not be unreasonably denied access to a service. It remains to be seen whether the interpretation of this new test will include a right to upgrade to full fibre broadband, though given the generosity of some decisions to date, we would not rule this out.

The Code also contains a more efficient and streamlined dispute resolution procedure in the event that landowners refuse consent, and contains similar grounds for refusal to grant a new Code agreement or to terminate an existing one as contained in the 1954 Act. We would expect that any disputes would be construed in the light of existing 1954 Act case law. Indeed the case of EE Ltd and Hutchison 3G UK Ltd v Sir James HE Chichester & Ors [2019] UKUT 164 (LC) appears to confirm this in that it applied the S Franses v Cavendish Hotel principles (that case emphasised that if a landlord tries to defeat a tenant’s claim to a new lease on the ground that the landlord intends to redevelop the premises, that intention is tested objectively (i.e. will it really do the work?) and held that the intention is insufficient where it is established that the landlord would not actually carry out the work if the tenant left voluntarily).

Our assessment of the changes

• Given the lower revenues available and greater uncertainty in recovering their land, we would expect to see more refusals by landowners to Operators seeking to obtain a Code agreement.
• As a result, we have already started to see more use of the Court procedure to compel landowners to grant Code agreements and more litigation as a result.
• Greater confidence for Operators to roll-out new Code agreements resulting in an uplift in the volume of Code agreements being entered into.
• Government pressure on Operators to deliver faster and more reliable broadband services.