The Digital Economy Bill – supporting the UK through turbulent times

As the 5G dawn breaks on the horizon, key stakeholders must act quickly and decisively to ensure they are in a position to emerge successful from the rollout. MNOs, towercos, fibre owners, local authorities and service providers must work together to ensure the foundations are laid for this digital revolution. However, a coordinated and incisive approach on a national level is critical, and governments must act now to ensure the benefits of 5G rollout are felt across the digital divide. Natalie Lamb, Senior Associate at Vinson & Elkins, shares her thoughts on the UK government’s response in the form of the Digital Economy Bill.

Telecommunications is one of the most rapidly changing industries in the world.  Network operators are constantly seeking to challenge their competitors by developing ever-expanding platforms for customer engagement. To do this, they find themselves having to meet a growing customer demand for data and to provide those same customers with seamless services, all against the backdrop of a rapidly evolving digital world.

The Government is keen to demonstrate that the UK will remain at the forefront of this technological revolution.  The Digital Economy Bill (the Bill) was introduced in the Queen’s Speech in May 2016 and published a fortnight after Brexit on 6 July 2016. The Bill, which is intended to lead to the passing of a new Digital Economy Act is being championed by the Department for Culture, Media & Sport who say that it will “put in place the foundations for the digital future”, helping to make the UK “a world leader in digital provision”.

The Bill aspires to improve digital access for everyone.  It seeks to impose wide-ranging measures which are designed to pave the way for universal and super-fast, yet safe and controlled access to broadband for all.

Network operators and digital infrastructure owners, in particular, will be closely tracking the progress of the Bill through Parliament. In the measures on infrastructure and equipment roll-out contained in the Bill, cheaper and simpler infrastructure development is seen as key to universal broadband access and a truly digital society.

The Bill contains a new draft Electronic Communications Code (the Code), designed to make the rollout of digital infrastructure less expensive and less complicated.  Replacement of the current Electronic Communications Code, which has consistently been cited as overly complex and in need of an update, is being seen as a welcome change by many.

One of the key changes to the proposed Code relates to lowering the cost of installing and maintaining telecommunications equipment on private land.

Significantly, the Code’s definition of “land” specifically excludes electronic communications apparatus.  The Bill is therefore not seeking to control the lease rates in master lease agreements (MLAs) or managed services agreements (MSAs) between tower companies and their tenants. This would have had substantial consequences.  Instead, the changes are focussed on the relationship with the owner of the greenfield or rooftop land on which the digital infrastructure and equipment is located.

This is not, however, to say that the changes are irrelevant to the MLA or MSA arrangements between tower companies and their tenants.  The right under a ground lease to locate a tower and communications equipment on a piece of land is as valuable as the tower and the equipment itself because, without having the right to locate and access such tower and equipment, the tower company cannot look after the equipment and the operator cannot ensure uninterrupted services to its customers in the relevant location. In any MLA or MSA the provisions relating to ground lease extension or renewal are therefore typically a topic of great importance.

Controls in the MLA or MSA over extension of ground leases and increases in ground rent are paramount.  Tower companies will want to ensure the flexibility to negotiate competitive ground lease terms and to relocate tenants if negotiations are unsuccessful.  Network operators will want relocation and the associated interruption to their services to be an exceptional outcome only.  Network operators and tower companies therefore share an interest in seeking to protect themselves from increases to ground rents during the term of the MLA or MSA.  Traditionally, the parties to the MLA or MSA, regardless of which of them directly absorbs the ground rent cost, have found that they cannot insulate themselves entirely from the risk of the landlord increasing the ground rent. There are several examples of where this could happen.

A good example is a situation in which a network operator wishes to perform an equipment upgrade.  Other examples include where a tower portfolio is acquired, for example by a sale and leaseback transaction, or if a network operator is the subject of a takeover or decides to share its equipment with another network operator. Each of these examples opens up the possibility for the landlord to renegotiate, and in the process increase, the ground rent.

While ground rental income should always fairly compensate the landlord, the Code seeks to regulate the increase to the ground rent. Specifically, when determining ground rent, landlords will no longer be able to reference the value of the land or the economic value created by the demand for digital services by consumers to leverage a rent increase.  In other words, the profitability of the site to the network operator or the tower company will not be relevant to the rent that can be charged. Put simply, landlords will not be able to impose unreasonable rental sums for the installation of equipment on their land any more.

The real thrust of these particular measures in the Bill is that charging rent for digital infrastructure should become more like charging rent for equipment of other utilities such as water and electricity.  This will have the effect of controlling ground rents which should become cheaper in time. Operators will be able to take advantage of lower rents and, among those lobbying for the introduction of the Bill into law, it is hoped that equipment rollout will increase and customer access will correspondingly improve.

The political sensitivities around accessing harder-to-reach areas should ultimately quieten as there is likely to be an uptake in overall national digital coverage.

The Code additionally proposes to remove the consent right of landlords for equipment upgrades or network sharing.  Traditionally, landlords have been able to demand a higher ground rent as a quid pro quo for allowing network operators to upgrade or share equipment, even if the amount of space used to do so is relatively unchanged.  Anything which could dissuade the network operator from its rollout of better equipment to improve coverage is now viewed as being at odds with public policy and the need to keep pace with rapid digital progress.

In the Code, the Law Commission recommends that where equipment upgrades or sharing of equipment between operators causes minimal visual change, landlord consent ought not to be required at all.

In the event of a dispute between landowners and the operator or tower company regarding ground rent, the court will now be able to set the rent to avoid a prolonged hold up and associated lack of access to a site.

The Bill’s proposals also extend to simplifying the planning process in connection with placing digital infrastructure on land.  Historically, local planning authority consent would be required prior to constructing or installing broadband infrastructure at national parks, areas of outstanding natural beauty and conservation areas. The Communications Act 2003 removed the requirement for planning authority consent but only as a temporary measure which had been due to expire in April 2018. The Bill proposes removal of the April 2018 expiry date so that the easing of planning rules in relation to digital infrastructure will become permanent.

The infrastructure measures in the Bill, which passed its second reading on 13th September 2016, have been favorably received by network operators and tower companies. Landlords have expressed disappointment with the proposed infrastructure provisions on the basis of a perceived lack of balance.  Network operators have lobbied for the changes the Code is proposing, which are hoped to enable more economical roll-out of equipment and improved access for fixing faults. Any change in law is, however, potentially disruptive. Network operators will not want landlords’ concerns about their income stream to interfere with the maintenance of their infrastructure and equipment or the rollout of important upgrades.

There is also still some uncertainty about precisely what shape the legislation will take once it is passed. In recent weeks, a group of almost 90 cross-party MPs issued a report calling for the Government to reconsider the introduction of a “national roaming network” in order to eliminate coverage “not spots”. The report argued that mobile users in rural areas with poor coverage should, like overseas visitors to the UK, be able to switch between operators depending on which has the strongest signal.  Network operators have responded that such a move would be a “significant disincentive” to competitive network investment.  Progression of the Bill through the House of Lords, itself heavily populated by landowners, could add another interesting dynamic to the discussion.  Understandably, many remain curious as to the Bill’s eventual impact.

Finally, with Brexit on the horizon, and the UK’s potential exit from the EU’s Digital Single Market, whether the Bill goes far enough in ensuring that the UK is at the forefront of global digital transformation is uncertain. What is already a sensitive political issue may become even more newsworthy in the context of the UK’s departure from the EU in the near term.