Rights of light risks remain despite cover availability

In recent years, the UK government has made clear its ambitions to increase housing substantially by granting planning approval whenever possible. Brownfield sites and the like will be prime targets for development.

However, planning approval cannot override the legal easement of light, and the risk is that an injunction to protect the right to light could prevent development. While local authorities may use section 203 of the Housing and Planning Act 2016 to eliminate this risk, the time and costs of doing so can have an impact on viability.

When I started working in rights of light in the 1970s, such insurance was unknown. However, over the past two or three decades it has become more common for servient owners – those wishing to develop their land and obstruct others' light – to obtain cover where they predict a potential right-to-light injury, insuring against the possibility of action by the dominant owner – who would have that right to light, and become the claimant in a case.

As costs have come down with the numbers of policies underwritten, insurers have by and large been making healthy profits. However, two factors have caused problems for these policies.

The first relates to the attitude of the courts in terms of the insured party's behaviour. Shelfer v City of London Electric Light Co (1895) established a set of tests to determine whether or not an injunction would be appropriate.

• Is the injury small?
• Is the matter capable of being estimated in monetary terms?
• Is it one that can be adequately compensated by a small monetary payment?
• Is it a case in which it would be oppressive to the defendant to grant an injunction?

An informal addition to the Shelfer conditions requires the parties to show good conduct; in other words, not to ignore the issue. Subsequent cases, including the unreported Ottercroft Ltd v Scandia Care Ltd [2016] EWCA Civ 867 have established that the conduct of the parties should also be taken into account and that, where the servient owner or defendant has acted in bad faith, then the courts are more inclined to grant an injunction.

The second issue is that insurers' profits have more recently come under threat from ever-higher claims. This results from increasingly large developments, and cases such as Tamares (Vincent Square) Ltd v Fairpoint Properties (Vincent Square) Ltd [2006] EWHC 3589 (Ch) and HKRUK II (CHC) Ltd v Heaney [2010] EWHC 2245 (Ch), in which compensation was assessed on the basis of profit share and subsequent settlements following injunction were much higher. If the courts would award an injunction then the servient owner has to make a higher offer to avoid this or persuade the dominant owner to lift it.

These private settlements may well be lower than the figure that would be awarded by a court or through negotiation after an injunction. However, as the actual figures are unknown, insurers have to take a worst-case view based on the surveyor's recommendation for compensation.

When this type of insurance was introduced in the late 1980s, few companies offered cover. However, as the market realised the opportunities – especially in response to the number of practices offering specialist advice – the number of insurers increased. Each provided bespoke cover, with terms and conditions as well as premiums varying.

Over time more consistency of cover was achieved, although excess payments among other things still fluctuated. However, the number of headline insurers willing to cover primary-layer rights of light risk – that is before they are reinsured – has fallen to five; particularly as profits drop and policies already written have no end-stop date, meaning that the insurers must set aside sums to cover the risk in perpetuity.

However, the underwriters who recently resigned from insurer MXU are looking to start their own company, MGA. Westcor, which currently only writes excess layer, is hoping to start writing primary-layer rights of light insurance later this year, which may offer clients more choice in the future.

The current providers of primary cover are:

• MXU
• DUAL
• Zurich
• Stewart Title
• LIS; albeit only when compensation sought is less than £200,000, in straightforward cases, or where servient owner and insurer are content to wait and see whether the dominant owner approaches them.

The good conduct extension to the Shelfer conditions has meant that far more policies are now for proactive, agreed conduct, requiring the servient owner to try to reach a negotiated settlement. Where servient owners show good faith by trying to negotiate the courts are generally less likely to award an injunction, although this did not work in the case of HKRUK.

While this may appear to reduce the risk to the insurer, in some ways it actually increases it. This is because, if the servient party raises the issue with the dominant owner, the risk of court action rises since the latter will know that they have a valid claim and just how bad the impact will be.

In addition, where the owners of dominant properties haven't objected or they don't consider the level of light loss too severe, some insurers will agree a reactive agreed conduct approach or possibly wait and see.

The former approach would specify that the servient owner can negotiate a settlement, if contacted by the dominant owner. In contrast, the latter requires the insurer to agree the course of action once contacted. But in either case what counts as too severe will rely on the individual judgement of the dominant owner and the advice of surveyors.

Furthermore, owners who become aware that they are not the only potential claimants can hold out for higher settlements, especially if they know that their agreement is the last one needed.

Ultimately, the major cost to an insurer under agreed conduct policies is either where reasonable negotiations result in a settlement above the excess, or – potentially much more expensively – where the developer has built the project and then an injunction is granted against the obstruction of light. The latter for instance was the case in HKRUK II where the injunction, if enforced, would have required the demolition of much of two storeys of the obstructing building.

For this reason, they have also rejected reports from unknown individuals or practices. Particular issues that insurers cite include trying to apply the wrong figures for rental yields, as a percentage of capital value, and setting inflated compensation budgets.

Those surveyors not recognised by the insurers have to explain to their clients why they must get a second opinion from trusted practitioners. This puts more of an onus on such recognised organisations to reflect what they know of the confidential marketplace when advising their clients.

For the short term, fewer insurers will offer full cover even after planning approval has been gained without objection, and those that do are more likely to provide cover with an agreed conduct condition. The benefit of this where settlements are reached is that the policy can have an end-stop in most situations, barring those where the dominant owner fails to respond.

In this situation there is still the possibility of a claim under lost modern grant even after a full year of obstruction. Importantly, however, the servient owner can demonstrate in this first year that they have made all reasonable approaches to their dominant counterpart, reducing the chance of an injunction being granted.

One of the main reasons for rising premiums over the past three to four years has been ambulance-chasing firms greatly increasing the volume of claims. Furthermore, during and after the pandemic, dominant owners wanted greater multiples of the book value of their property in terms of compensation or percentage of profit, whichever was the higher.

Apparently this was related to the rent rebates or breaks given during the pandemic and lockdown, which decreased property owners' income, so they attempted to make up the shortfall by trying to maximise the levels of rights-of-light compensation claims.

The main way premiums can be reduced for servient owners is through higher excess payments. This is usually a reasonable approach on larger developments with significant excess levels and premiums, but on smaller developments insurers generally feel that stated excesses and premiums are at the right level, and reducing them would result in rises that would make policies uneconomical for developers.

As mentioned above, each policy has no end date, in theory. There are provisions under the Limitation Act 1980 that may help, and claims under the Prescription Act 1832 must be made within a year of an obstruction's completion unless there is evidence that proper attempts had been made to stop the development before it became actionable. Claims under lost modern grant are not so limited, but it is implied that reasonable time limits would apply as with most tort claims.

An insurer is bound to support a reasonable client who is a dominant owner if the impact is or would be such that the property would be severely affected; but the same would not be true for the servient owner.

In the main, insurers prefer a negotiated settlement. Their primary aim is to make money from premiums and so they tend to avoid taking a case to court even though it might allow servient owners to lower their future risks.

Unfortunately, only the last made it entirely into the commission's proposals for legislation, and even that has stalled in Parliament. This could have a significant impact on the government's agenda to increase housing provision, because a right-to-light claim might well prevent a development that has obtained expedited planning approval.

A time limit for claims could easily be introduced by legislation, which could likewise mandate a deadline for engaging in discussion where a notice of proposed obstruction is served by the servient on the dominant owner.

However, the measurement and valuation issue is far more complex. As things stand, the courts have consistently stated that the question of the adequacy of daylight is for them to decide, and the amount should be judged on what feels right.

RICS was offered the chance by the Law Commission to put forward proposals for formalising the assessment of daylight as well as approved methods of valuation. The starting point will be the measurement of its adequacy, because this determines in turn how the loss is measured.

It is unfortunate that – until any legislation is passed – judges remain free to decide, having heard the evidence, whether they believe a loss is actionable before deciding whether an injunction should be granted or surveyors asked to agree appropriate compensation.