Rights of light insurance: property development
30 October 2017
Fraser Pratt explains how rights of light insurance can help everyone involved in property development
Although rights of light issues are still frustrating development, widespread misconceptions of the role of insurance could be exacerbating the situation.
Regan v Paul Properties  EWHC CIV 1391 reignited interest in using rights of light insurance, but at that stage insurance was an all-or-nothing option. The availability of cover depended on planning permission being granted, there being no objections on the grounds of light during the planning process and no communication about the issue from neighbouring properties during the development. The policy also restricted the insured party’s dealings with general matters of neighbourly conduct. Its primary objective was to indemnify the insured against the cost of an injunction, but typically covered:
- legal and professional costs;
- settlement with an injured party;
- damages, compensation and expenses awarded against the insured party;
- costs of altering, demolishing or reinstating the property as required by a court order or settlement;
- reduction in the property’s market value due to its redesign to respect a third party’s rights of light;
- any sum paid with the prior written consent of the insurer to free the property from rights of light issues; and
- any sums that the insured was contracted to pay that have been made abortive due to a court order – for example, on-site costs such as plant hire.
Rights of light issues still frustrate development, but widespread misconceptions of the role of insurance could be exacerbating the situation
A lightbulb moment?
Following Regan, case law shaped the way rights of light risks were viewed by lawyers and surveyors and changed the attitude of insurance underwriters. Tamares (Vincent Square) v Fairpoint Properties (Vincent Square)  EWHC 828 (Ch) indicated that a percentage of development profits could be used to calculate appropriate compensation. With HKRUK II (CHC) v Heaney  EWHC 2245 (Ch) came the previously inconceivable scenario that a completed building would be subject to a mandatory injunction as a remedy for an infringement of rights of light.
Although case law was leaning more towards the injured party rather than restricting cover, insurers began including additional consequential losses to satisfy property developers, funders and their prospective tenants regarding rights of light claims. These covers incorporated:
- delay costs, if the development had to stop following an interim injunction;
- loss of rent cover if a tenant under a leasehold agreement could not occupy the property and could lawfully withhold rent;
- loss of trading profits where a commercial tenant could not occupy the property from the contracted date, resulting in loss of income; and
- relocation costs if a tenant under a leasehold agreement could not occupy the property.
The most significant change came with the judgment in Coventry v Lawrence  UKSC 13. It was the first time that judges seemed to apply common sense when considering rights of light case law. The judges stated that, in future, courts should be more willing to consider damages as a remedy, taking into account such factors as the public interest and defendant’s conduct. Referring to Shelfer v City of London Electric Lighting Co  1 Ch 287, which has been informing rights of light judgments for 120 years, they suggested that this may no longer be appropriate to modern-day cities, where land and its development potential are at a premium.
The judgment in Coventry v Lawrence was the first time that judges seemed to apply common sense when considering rights of light case law
The ruling changed the way rights of light underwriters viewed risk; insurers now recognised that good conduct should be encouraged. They realised that if a claim goes to court and a policy has restricted the developer’s behaviour, this would not be regarded favourably. Therefore, insurers needed to allow the developer to negotiate with those involved in properties that were suffering actionable rights of light infringements. This prompted the creation of agreed conduct or agreed negotiation strategies (ANS).
ANS permit an insured party to negotiate in line with interpretation of Coventry and the traditional advice from a rights of light surveyor. This allows both the insured and their professional advisers to manage such risk through a combination of strategy, self-insured deductibles and insurance.
It is assumed that the insured and their advisers have concluded this will minimise the risk of an injunction and accept that appropriate compensation will need to be paid to some neighbouring owners. This part of the risk is, effectively, self-insured by way of a deductible – an excess that the insured will have to pay until the policy begins to contribute.
The insurance is principally used to reassure parties such as funders, joint venture partners and target tenants that the chosen strategy is underwritten, accepting that the potential of an injunction is also insured against, though more remote. In turn, assurance provided by a rights of light policy addresses the reality that the chosen strategy will take more time to implement than is available before construction is scheduled to commence. It thus allows construction to start on time, even though all settlements with neighbours may not have been concluded.
Another benefit of an ANS is that it no longer necessarily matters whether contact with an injured party has been made before approaching insurers. If a detailed explanation of what has occurred to date and copy correspondence can be provided, insurers will consider a solution. The ultimate value of this option is when the negotiation process becomes delayed and funding or agreements for lease could be affected. Alternatively, it could just be a case of not being able to engage the benefiting party – that is, contact has been made but no formal conclusion reached, and therefore an insurance policy can be used to cap the potential financial loss should this party come forward again.
Rights of light strategy is often a matter of risk. Engaging a specialist insurance broker will ensure that the developers and their advisers are asked the right questions, such as the following.
- What stage of planning or development have you reached?
- What is your interest in the site?
- Are you buying or packaging it for sale?
- Are you building to sell or to retain?
- What advice has been received from your rights of light surveyor?
Such questions can inform the type of cover and costs; for instance, if the site is being sold, a large excess may keep the premium low for the seller but is unlikely to be attractive to a buyer.
Premiums for rights of light insurance should offer value against the proposed compensation budgets set by the surveyor, as this is how the developer traditionally measures their financial risk. However, as the context for rights of light has shifted, so have surveyor’s budgets, which means that underwriters are now digging deeper into the raw data – EFZ analysis and contour plans – and taking their own views rather than relying solely on the suggested budgets in the report. Therefore, providing 'rule of thumb' premium guidance is very difficult, without at least having access to the rights of light report commissioned for the development.
Rights of light insurance will never be the magic bullet that allows all development to be completed without risk. However, a better understanding of the options and where to obtain the best advice will ensure that policies work to complement the development strategy, managing risk, saving time and ultimately, money.
Fraser Pratt is Head of Department, Legal Indemnities and Rights of Light, at PIB Insurance Brokers