Fourteen years ago, Marcus Heaney bought the Yorkshire Penny Bank building in Leeds. Four years later, HXRUK received planning permission to add floors to an adjacent building.
During 2008, HXRUK notified Heaney of its proposed works, admitting that they would cause an actionable interference to the light received by his building. HXRUK started its development while negotiations continued.
Construction completed in 2009. HXRUK issued proceedings seeking an order that Heaney was not entitled to an injunction against its works because a small payment would be adequate compensation. The court disagreed and granted an injunction requiring the demolition of finished parts of HXRUK’s property (HXRUK II (CHC) Ltd v Heaney [2010] EWHC 2245 (Ch); [2010] 3 EGLR 15). This sent developers a scary message.
Inspiration for dilapidations insurance
On 13 April 2011, a seminar entitled “No light at the end of the tunnel?” discussed the case and how it would affect rights of light insurance. Rights of light insurance enables developers to proceed knowing the limit of their schemes’ exposure to that sort of claim. One presenter – Bill Gloyn, then of JLT and the past president of the City Property Association – predicted a greater interest in arranging cover following Heaney. He was correct and rights of light insurance has been a great success.
The key to deciding whether insurance is a solution is a specialist survey, assessing the injury to neighbours. Insurers consider these reports and decide whether the risk is insurable. The process continues to be led by the insured’s specialist surveyor, who assists the developer in negotiating compensation awards with its neighbours, with the insurers only stepping in to deal with extreme scenarios.
I was in the audience on 13 April and found the approach of lawyers and surveyors working with insurers to address developers’ concerns following Heaney impressively practical.
Development of dilapidations insurance
More than four years passed before I was posed a related interesting question. I met with a representative of one of the leading brokers in the rights of light insurance market on 24 September 2015. I A judge has rejected a claim that CBRE negligently overvalued a Reading development site at £17.5m in 2007 that was later sold for only £3.75m following the financial crisis. was asked if there was another area of property law in need of a similar product.
I raised the following scenario: a lease of commercial premises has expired. It contains outstanding repair and reinstatement obligations. However, the tenant does not expect a claim by its former landlord regarding those breaches because a sub-tenant has remained in the premises without works being done or any rent reduction. The tenant is advised that no claim is anticipated but, potentially, the landlord could raise one and has either six or, if the lease was by deed, 12 years to commence proceedings.
The tenant made a provision in its accounts for this liability and cannot get the certainty needed to release it. The tenant is advised that it could apply to court for a declaration that the landlord has no claim but this would incur costs and may encourage an argument that might not otherwise have been pursued. The tenant could offer the landlord a small amount to settle but this may lead it to seek a larger payout, assuming it does not want to keep open the option of running a future substantial claim.
I said it would be helpful if this risk could be replaced by a premium for insurance allowing the tenant to release its accounts provision and walk away from its former premises. The insurers would have the comfort of the tenant’s surveyors’ and lawyers’ advice in the same way in which they do regarding rights of light advice. The experts would not be warranting a result any more than the rights of light experts and the risk would not simply be passed on to the experts’ insurers.
The brokers liked the idea, which we discussed at subsequent meetings. I tested the concept with surveyors who confirmed it would potentially be of interest. Once we involved underwriters it became apparent that there was interest in insuring risks before lease-end and where there were expected to be significant claims.
Nature of dilapidations insurance
Now, more than two years since I met with brokers, a policy has been developed providing tenants with coverage against the cost of terminal dilapidations expenditure between an identified excess and an agreed coverage level. This should cover the total damages claimed, or expected to be, plus both sides’ professional fees and other expenses, on a worst- case basis.
To date, each policy has been bespoke. Tenants take the cover in their own names. Cover is potentially available before or after lease-end, even after landlords have commenced proceedings.
No upfront costs are anticipated to investigate the availability of insurance where tenants have a professionally produced dilapidations assessment. Policies are potentially available for any value. Ideally the tenant can supply a surveyor’s report. More substantial risks may also need written legal opinions on strategy and options. Cover can be arranged in days once the assessment, opinion and copy lease documentation has been supplied. This will be used to determine what excess the tenant will be expected to meet before an insurance claim can be made, calculated so as to give the tenant an interest in minimising its dilapidations liability.
Premiums are based on a percentage of the level of the coverage. This could be 5% or less if no claim is being pursued but might be 10-15% where there are ongoing proceedings.
Tenants can work with their existing advisers to implement their strategy, having converted their risk into a known level of exposure. The producers of the original assessment would run the defence, with additional advisers only getting involved if disputes take an unexpected turn.
As in rights of light insurance, the key to deciding whether insurance is a solution is a specialist survey, assessing the tenant’s liability. Insurers consider these reports and decide whether the risk is insurable. The process continues to be led by the insured’s specialist surveyor, who assists the tenant in negotiating any claim with its landlord, with the insurers only stepping in to deal with extreme scenarios.
Nick Mace, professional risks director of rights of light insurance broker Clear Insurance Management, expects the nature of enquiries to shape the policy’s development, commenting: “Dilapidations insurance is at an early stage, with only a few policies written, but I expect it to evolve as the concept is applied to resolve different situations.”
Scenarios: Applying the concept to three recent situations
■ An office tenant carried out works before lease-end. The landlord disputed their effectiveness and claimed £500,000. The tenant’s surveyor estimated their liability at around £50,000 and an offer to settle was made at £100,000. After several years of dispute, the landlord was awarded £58,000 on appeal and had to pay both sides’ costs at £300,000. Although proved right, the then client took a high risk by defending the claim and has said: “If this insurance had been available in 2011 I would have grabbed it.”
■ A lease of a 10,000 sq ft office was assessed at £200,000 mid-term. Approaching lease-end, the landlord claimed £300,000. It would now be possible for the tenant to have insured following the assessment based on an excess/deductible of, say, £250,000.
■ Portfolios of property at different stages of tenure could be holistically managed under a single policy. For example, a retailer had 200 stores and wanted to sell its business. The purchasers needed to assess the dilapidations exposure by reviewing information provided by the retailer and inspecting 10% of its stores. Ultimately, no sale was achieved due in part to the inability of the purchaser to limit its risk and the retailer collapsed into liquidation. Now it would be possible to insure an above-average exposure on a rolling basis.
If works are completed and negotiations have run their course, but the former landlord will not provide the former tenant with confirmation that its repair obligations have been discharged, insurance could be provided against the re-animation of the former landlord’s claim at some point during the liability period.
One can envisage scenarios in which disputes might be fought harder because of insurance, such as those in which tenants may have been inclined to accept an early high settlement offer to avoid the risk of litigating in an unfamiliar area.
Simon Hartley is a partner at RadcliffesLeBrasseur
