Rights of light Insurance could, following recent rulings, offer developers a viable alternative to negotiation in disputes. By Robert Cooke
Key points |
? Recent decisions in rights of light cases have meant that negotiation can no longer be the main solution for resolving disputes ? Developers should consider taking out rights of light insurance where available ? The surveyor’s rights of light report is key to assessing the viability of insurance |
Negotiation has been the usual method of effecting a release from a right of light liability. However, recent developments have given cause to challenge this course of action. The decisions in Regan v Paul Properties DPF No 1 Ltd [2006] EWCA 1391; [2006] 46 EG 210 and, more recently, HXRUK II (CHC) Ltd v Heaney [2010] 44 EG 126 have shown that the courts will award mandatory injunctions if the injury to a right of light is significant. This can be disastrous for the developer, particularly if the development was built before an injunction is awarded.
Interest in insurance solutions to the developer’s dilemma has grown as a result of these decisions. In particular, HXRUK has caused quite a stir in the rights of light community. In that case, the court held that a final injunction to demolish an extension of an office development was the appropriate remedy. Previously, surveyors were relatively confident of negotiating a release, but this is no longer the case. An appeal in HXRUK is expected to be heard shortly, but until then the position remains.
What can be insured
A small number of brokers and insurers have specialist knowledge of rights of light indemnity. Approaches vary and insurers have to be flexible to meet the requirements of the developer.
The main heads of cover under the policy are: (i) damages and compensation awarded as a result of an enforcement action (ii) the costs of alteration or demolition arising from a court order (iii) diminution in market value as a result of an enforcement award and (iv) abortive costs.
Policies can be tailored to cover further liabilities, such as delay costs and increased interest payments on capital resulting from a temporary injunction.
However, not all developments will be insurable. If the affected neighbours have already been approached and are aware of their rights of light, insurers are unlikely to offer cover.
Key to assessing the viability of offering cover is the surveyor’s rights of light report. The content of reports may vary, but the RICS’s Rights of light guidance note 2010 seeks to establish a more structured approach. Insurers will want to know which properties could suffer injury, whether any objections to the planned development have specifically referred to rights of light and the likely compensation costs. The surveyor should include in his report any difficulty in providing an accurate assessment of the injury to a neighbouring property arising from an inability to access the affected rooms. Insurers will then decide if the risk is insurable and, working with the broker and the surveyor, will request any additional information necessary to underwrite and assess the risk.
Insurance will benefit the developer, the owner and subsequent owners, the financial backers of the development, and the tenants or subtenants.
Once the surveyor has completed the technical calculations for potential injury, he must consider the likely basis on which compensation should be awarded and a release potentially negotiated.
Calculating compensation
Case law has determined that the compensation figure must “feel right”. If appropriate, the surveyor may choose to apply a multiplier, typically between two to five, to the base value. There is no set rule, so the surveyor has to take a view based on the circumstances.
In certain situations, it may be more appropriate to use a percentage-profit basis. In Tamares (Vincent Square) Ltd v Fairpoint (Vincent Square) Ltd [2007] EWHC 212 (Ch); [2007] 14 EG 106, an injured party was awarded a percentage of the developer’s profit (30%) on the mass of the building that caused the injury.
From an underwriter’s point of view, the status of the affected properties is crucial: are they owner-occupied, leased or part of a housing authority will the development be seen as an aesthetic improvement what is the likelihood of the neighbours having the financial wherewithal to seek an injunction if sufficient numbers are involved, would they be likely to form a co-operative to seek an injunction?
As a result of recent awards, rights of light insurance must be seen as a serious option for developers, particularly in built-up areas. As such, it would be prudent for surveyors to suggest this as a potential solution when submitting their reports.
Robert Cooke ACII is a corporate risks director at Clear Insurance Management
