Legal Briefing

Rights of light: what you need to know post-Heaney

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Real Estate | 04 May 2011

HKRUK II (CHC) Ltd v Marcus Alexander Heaney [2010] has been described by one leading rights of light surveyor as the ‘9/11’ of the rights of light world. Heaney has indeed dramatically changed the way in which owner-occupiers, developers, surveyors, insurance companies – and perhaps, more importantly, funders and prospective tenants of a proposed development – view the risks associated with potential rights of light infringements.

From the developer perspective, premiums for insuring against such risks are now likely to increase and banks will be looking to see these risks closed off before approving funding, while owner-occupiers are likely to be encouraged to undertake a detailed analysis of their rights and extract a proper premium for any release of such rights.

Heaney was due to be heard by the Court of Appeal at the end of March, but it settled at the last minute. As such, the first instance decision of Langan J in September 2010 now represents the current status of the law. So what’s it all about?

BACKGROUND

Heaney concerned commercial premises in Leeds city centre. The defendant, Marcus Heaney, owned and occupied an old bank building. The bank building was Victorian, Grade II listed and was described in rather glowing terms: it had ‘impressive stone carvings’, a ‘very striking turret’, and had been lovingly restored by the defendant over some years at a cost of about £3m. Heaney enjoyed the benefit of an easement of light. The claimant developer had purchased adjoining commercial premises, then known as Cloth Hall Court, with a view to redevelopment, at a cost of £18.75m. At the time of the purchase, the price had been reduced by £350,000 to take into account the need to deal with the potential infringement of Heaney’s rights to light.

Unusually, the claimant, HKRUK, was the servient developer, not the dominant neighbouring owner. The claimant had brought the proceedings with a view to obtaining a declaration as to its freedom from liability to the defendant, while the defendant sought an injunction and/or damages in its counterclaim.

The proposed redevelopment of Cloth Hall Court included:

  • the refurbishment of the existing accommodation up to fourth floor level;
  • the demolition and reconstruction of the fifth floor; and
  • the construction of two new additional sixth and seventh floors.

The cost of the proposed works was put at about £10m and, at this stage, a rights of light contingency was built in at £200,000.

TIMELINE

Against the construction backdrop, and as would be expected of prudent developers, protracted without prejudice discussions and negotiations took place between the parties following the initial contact with Heaney in October 2007 (within days of receiving formal advice). Those negotiations did not lead to a resolution of Heaney’s claim. However, as is apparent, neither did they lead to Heaney stepping up and issuing proceedings seeking an injunction restraining the proposed redevelopment. Rather, while threatening the issue of proceedings, the threat was not carried out, and Heaney appeared content to sit back and watch as the significant works on site progress:

  • the scaffolding and sheeting went up;
  • the roofs and plant rooms were removed;
  • the steel frame was erected;
  • the metal decks forming the floors at sixth and seventh levels were constructed; and
  • concrete for the floors was poured.

In July 2009 the works were completed and the seventh floor was let. In August 2009 the claimant developer issued its claim for a declaration. They appeared to have been motivated by the loss of the proposed tenant for the sixth floor, who was reluctant to proceed given the unresolved rights of light claim pending. The issue before the court was whether an injunction should be granted or damages awarded in lieu.

SHELFER TEST

The court’s discretion as to whether to grant an injunction is governed by the classic ‘Shelfer test’ from Shelfer v City of London Electric Lighting Company [1895]. This sets out four questions to be answered as follows:

  1. Is the injury to the claimant’s legal right small?
  2. Is it capable of being estimated in money?
  3. Can it be adequately compensated by a small money payment?
  4. Would it be oppressive to grant to an injunction?

All these questions must be answered in favour of the developer if an injunction is to be avoided. Here the judge decided to grant a mandatory injunction requiring the claimant developer to cut back the offending works and demolish the sixth and seventh floors, despite the fact that there was less than a 1% loss of light and despite cutback costs of up to £2.5m when compared with a book-value loss of light of up to £80,000. The result has surprised some commentators and developers, and the decision appears to reverse the trend of decisions in which judicial discretion to award damages in lieu of an injunction had, in relation to commercial properties at least, been more liberally exercised. That line of cases had perhaps reached a high point with the decision of Peter Smith J in Midtown Ltd v City of London Real Property Company Ltd [2005], and the ‘developer-unfriendly’ decision in Regan v Paul Properties Ltd & ors [2006] was regarded by some as being of particular application in the case of residential, rather than commercial, property.

So what factors influenced the judge in Heaney and what lessons can be drawn?

LESSONS TO BE LEARNT

  • Heaney appears to go back to the overriding principle that a wrongdoer, such as an infringing developer, will not be entitled to effectively sanction their wrong by purchasing the rights of an adjoining neighbour with the payment of damages. The courts are not to be regarded as a tribunal for legalising wrongful acts.
  • Delay on the part of a dominant neighbour will not be fatal to a claim for an injunction. Heaney had delayed considerably without taking any formal action: indeed it was the developer who had taken the bull by the horns and instigated proceedings. Historically, such delay in seeking and pursuing an interim injunction might have been considered to be prejudicial – possibly even fatal – to a claim for a final injunction; the previous settled thinking had been that if a defendant delayed, it may have waived its right to an injunction and may well be left to a remedy in damages. No longer is that the case.
  • The courts can be expected to be harsh in their assessment of what constitutes a ‘small’ injury or money payment, or ‘oppression’ within the meaning of the Shelfer test. So here an injunction was granted in the face of the following figures, which historically may have led to a conclusion of a ‘small’ injury and ‘oppression’ by the grant of an injunction:
    • the cost of cutting back the building so as to demolish the sixth and seventh floors to avoid the infringement was put at between £1.1m and £2.5m;
    • the traditional ‘book value’ assessment of loss of light was put at something between £20,000 and £80,000;
    • the value of the bank building was £4m; and
    • the loss of light measured in equivalent first zone by reference to floor areas was less than 1%, in fact 0.75%.
  • Presenting the court with a fait accompli – completed works and even, as here, a tenant in occupation of the newly constructed space – will not count as ‘oppression’ and avoid the grant of an injunction. This is to be contrasted with the approach of the court in Wrotham Park Estate Company Ltd v Parkside Homes Ltd [1974], where the court refused to order the demolition of private houses built in breach of a restrictive covenant as to do so would involve an ‘unpardonable waste of much-needed houses’. Perhaps houses are more valuable than commercial space.
  • The quality of the building where light is being infringed and the nature of the space affected will be key. What appears to have swayed the judge in Heaney is the fact that the old bank building could be regarded as of special architectural interest and that the principal loss of light was to a main boardroom that was allegedly the ‘jewel in the crown’ of the bank building.
  • The judge regarded the infringement as ‘deliberate’ and ‘done for profit’. This will, of course, be the case in almost all commercial developments where rights of light are being infringed.
  • A dominant owner is now far more likely to insist on a release payment based on a share of the developers’ profit after an assessment of the extent to which the scheme would have to be cut back to avoid the infringement, rather than on the traditional lower ‘book value’ loss-of-light basis.
  • Owners or occupiers should be vigilant in monitoring adjoining properties and be aware of any prospective redevelopment proposals. Early involvement on the part of both surveyors and lawyers is essential. Neighbouring owners with rights of light acquired by prescription are often unaware of their rights and of the possibility of securing a significant payment for them.
  • Developers, again, should undertake careful consideration. Delay cannot now be relied on as being a mitigating factor against the grant of an injunction. Future tenants and occupiers of the development will now want to be reassured that any rights of light have been dealt with at an early stage, and, increasingly, funders and banks are requiring reassurance on this point before committing funds. Are there any tactical measures that can be deployed to avoid acquisition of rights of light in the first place? Consider the following:
    • Are any adjoining properties between 15-20 years old and therefore about to acquire prescriptive rights from the required 20 years’ use? If so, ‘light obstruction notices’ ought to be served under the Rights of Light Act 1959 to prevent such acquisition, and thereby block any potential claims for an injunction and/or damages.
    • A careful legal review as to the extent of any rights of light needs to be carried out. There are various reasons why adjoining owners may not enjoy rights of light despite their buildings being in place for more than 20 years. For example: if either of the sites have been in mutual ownership during the past 20 years; if one or other of the properties has ever been held by a Crown interest; or if there are any agreements in place regulating the enjoyment of the rights.
    • Are there any rights of light releases in place between the neighbouring dominant owner and any third-party properties? These may be relevant to any analysis of the extent to which rights are enjoyed and the measure of damages.
    • Are the neighbouring dominant properties tenanted? An early review of the legal ownership structure and the extent to which any leases are in place (and if they are, the extent to which any tenants under such leases enjoy rights of light) is advisable to inform strategy and tactics, and to determine how many parties need to be negotiated with.
    • In significant redevelopments, consider whether there is scope for the involvement of the local authority and the use of their compulsory purchase powers under s237 of the Town and Country Planning Act 1990.

The economic upturn and the rise in redevelopments in already crowded city centres is bound to mean that the issue of the extent to which private rights of light may be infringed by a developer without fear of an injunction, and the measure of damages payable for such an infringement, are likely to remain top of the agenda over the next few years. Given the significant budgetary constraints now suggested by the current state of the law post-Heaney, cases may reach the Court of Appeal sooner rather than later.