Insurance has long been an accepted means to mitigate risk, whether for your car, home, holiday or even your pet – but how about for rights of light?
Until 2010, rights of light insurance was a novel concept, intended by underwriters to provide a useful solution for property developer clients. Before the arrival of specialist policies to safeguard against a claim, the rights of light risk could be managed via several methods.
The first was via negotiation with neighbouring owners for release of their right of light, the second was consideration of the scale and position of a scheme in order to reduce risk, and the third was to purchase the neighbouring building. Alternatively, a developer could do nothing and hope that a claim never materialised.
These established risk mitigation methods, while not perfect, meant that a dispute reaching court was a rarity.
So what changed?
Judgments were made in several rights of light cases, which altered the accepted status. Tamares (Vincent Square) Ltd v Fairpoint Properties (Vincent Square) Ltd [2007] EWHC 212 (Ch); [2007] 1 EGLR 26 saw the claimant awarded damages (based on the developer’s profit on the interfering part of the development) in lieu of an injunction. This was a departure from the pre-established compensation valuation method for rights of light.
A second High Court case, HXRUK II (CHC) Ltd v Heaney [2010] EWHC 2245 (Ch); [2010] 3 EGLR 15, saw the judge uphold an individual’s right of light against a neighbouring development and order an injunction.
These cases meant developers, and their advisers, were left with a lack of clarity on what level of light loss would be considered a legal nuisance sufficient to be the basis for an injunction and what compensation levels would be appropriate in the context of the developer’s profit on a development.
It is against this background that commercial property developers sought an alternative solution to mitigate the rights of light risk – enter rights of light insurance.
The advantages of the use of insurance were quickly realised by commercial property developers, offering a means to quickly, and relatively cost-effectively, mitigate a risk that had historically been time-consuming to resolve. A settled approach to dealing with rights of light risk was restored and embraced as a way of providing financial certainty in a cautious market following the 2008 global financial crisis.
A maturing market
In recent years, we have seen an increase in insurance premiums but not so extreme as to impact scheme viability. However, the increase now being seen in excesses applied by insurers has brought the question of scheme viability back to the table.
The pool of competition for specialist insurers offering these policies has also reduced to around a handful of experienced providers. In addition, the process of securing a policy now can take many months; an undertaking once completed in a matter of weeks. If not considered early enough, this has the potential to cause development delays and affect the funding process, with financing agreements unable to proceed without cover in place.
With land prices at a historic high, developers require projects to be large-scale and at height to maintain profitability. However, the move towards valuing compensation based on a percentage of developer’s profit has led to larger amounts of compensation being required to secure the release of rights; creating a significant financial risk that underwriters must account for.
It’s perhaps inevitable that, as with any established and mature insurance market, there are surveyors and solicitors who seek to represent property owners adjacent to new developments; sometimes regardless of whether a right of light exists, or the level of impact. Often these approaches are made on a “no-win, no-fee” basis for the neighbouring owner once a planning application has been submitted or approved for a development. Insurers are aware of the costs associated with these claims, even if spurious.
The effect of these approaches can be seen in the number of claims being received from private individuals, which now comprise circa 75% of all claims being made. Insurers are also reporting that they are seeing three times more claims since 2020 than in the whole of the previous decade.
Rights of light insurance has been well utilised and, as a result, has matured over the past 14 years. Underwriters now have extensive experience in understanding the level of cost associated with successfully settling claims; not just the level of compensation, but also associated professional fees. This enhanced knowledge and understanding of the risk environment has encouraged insurers to move away from the traditional “wait-and-see” approach, afforded as standard previously, to requiring developers and their advisers to think proactively to mitigate their own risk, with insurance being used as a supportive ring-fencing mechanism.
A shift in emphasis
Developers, as a result, are showing a heightened interest in better understanding ways to reduce risk – and cost – including undertaking increased due diligence on surrounding properties to establish where rights, if any, exist; an early stage appraisal of a proposed scheme’s massing and its position on a particular a site; and open and early discussions on the options available to balance both risk and viability.
In summary, rights of light insurance is still able to unlock development; it’s now a mature market that works well. Increasingly, it is becoming the final bow on a multi-part rights of light risk mitigation strategy, taking an approach that is insurance-backed rather than insurance-led.
Tom Kibblewhite is a director of specialist chartered surveyor, Proximity
Image © Leon Seibert/Unsplash
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