More heat than light?

Bryan Johnston and John McGhee QC attempt to untangle the knotty damages issues raised in rights to light cases “More important than the quest for certainty is the quest for clarity.” Rights to light and the musings of François Gautier are unlikely to have been connected before. However, the quote is pertinent to the subject of the calculation of damages in rights to light cases. There is little certainty, so we have to seek clarity based on common law principles to try and advise developers and others as to how the courts will deal with a complex set of facts that may end up before it. It is no easy task. The purpose of this article is to highlight a number of issues arising in respect of damages calculations in rights to light. Calculation of damages There are two legal bases for calculating damages arising from interference with a right to light. The first basis is diminution in value. The second basis is what is known as “release-fee” damages, arising from the Wrotham Park Estates Co v Parkside Homes Ltd [1973] 229 EG 617 line of cases. The first is straightforward – how much less is the dominant property worth as a result of the interference? However, the actual loss here may not be significant. Therefore, the second basis is an alternative method of compensating a dominant owner. This basis reflects a hypothetical negotiation between a willing dominant owner and a willing developer for the release of the right to allow development. This damages valuation process has been endorsed by the courts in the rights to light context, most notably in Carr-Saunders v Dick McNeill Associates [1986] 2 EGLR 181 and Tamares (Vincent Square) Ltd v Fairpoint Properties (Vincent Square) Ltd [2007] 1 EGLR 26. It is important to note that the release fee basis is most commonly applied when damages in lieu of injunction are being considered. In other words, the court would be minded to award an injunction, but considers damages an appropriate remedy. The court’s discretion here was emphasised by the Supreme Court in Lawrence v Coventry (t/a RDC Promotions) and others [2014] UKSC 13; [2014] 1 EGLR 147 (commonly known as Coventry v Lawrence) disapproving of the more rigid approach taken in Shelfer v City of London Electric Lighting Company [1895] 1 Ch 287. However, such damages are not the exclusive preserve of a party awarded damages in lieu of injunction. They are equally available to a party seeking a damages award only. This raises an interesting point as to the amount of the release fee where a party has not sought or would not be entitled to an injunction. Should it be the same as the fee payable to a dominant owner who can injunct a scheme, or should it be less? Logic would be that a lesser award would “feel right”, but there is no certainty on this point. Neither of the above means of damages calculation involves an enhanced book value (BV) assessment. The BV method is, however, widely used in practice and is regarded as an extremely useful tool by specialist rights to light surveyors in practically managing compensation payments to adjoining owners. It is an area where standard practice varies dramatically from the strict legal approach. There is no current judicial endorsement of the BV method, but this may well be something that the courts will have to look at in the future. Given the wide application of the BV method in practice, would the hypothetical parties not use it as a means of calculating the release fee? It is not set in stone that a release fee should be pinned to anticipated profit. Quantum of damages Questions also arise in specific scenarios as to the quantum of damages. For example, what if the claim is brought by a freeholder with a remote reversion. Applying the test set out in Tamares, does it feel right for a freeholder with a remote reversion to be awarded the same compensation as an owner-occupier neighbour, all else being equal? The interference to light is the same, but the interference with enjoyment is very different. That said, if the reversionary freeholder has specifically reserved all light to itself, why should it not be compensated as though in occupation? Otherwise, there seems little value in reserving the right. The courts, however, do see a distinction between an occupier and a reversioner. This was highlighted in Metropolitan Housing Trust Ltd v RMC FH Co Ltd [2017] EWHC 2609 (Ch); [2017] EGLR 49 where Morgan J accepted that a reversioner’s remedy was potentially different from that of an occupier. Similarly, how should the parties’ behaviour impact on the quantum of damages? If a dominant owner applies to court after development, should it be awarded the same amount as an owner applying during or just before development? Conversely, if a developer is not reasonable in dealing with its neighbours, should the damages amount increase to reflect the poor behaviour? In respect of the former, HKRUK II (CHC) Ltd v Heaney [2010] EWHC 2245 (Ch); [2010] 3 EGLR 15 suggests that such a dominant owner would negotiate less hard and thus the price would be lower. As for the latter, we can only assume similar logic would apply to increase the price, though how such behaviour would manifest itself within the hypothetical negotiation remains to be seen. Measure of damages A more existential issue concerns whether release fee damages should be available at all for interference with light. In Coventry v Lawrence (No 2) [2014] UKSC 46; [2014] 3 EGLR 71, the Supreme Court considered obiter the appropriateness of an award in damages on a more generous basis than diminution in value. Their Lordships were split on the point. Lord Clarke in principle had no objection to a reasonable price being agreed to for a licence to commit a nuisance. Lord Carnwath took a different approach. He made a distinction between interference with a specific property right and nuisance claims. He said: “In cases relating to clearly defined interference with a specific property right, it is not difficult to envisage a hypothetical negotiation to establish an appropriate ‘price’.” In respect of nuisance, however, he said that this concerned interference with enjoyment of land “where the injury is less specific, and the appropriate price much less easy to assess, particularly in a case where the nuisance affects a large number of people”. Lord Carnwath (who was an eminent planning barrister) felt that the release fee basis was “a radical departure from the normal basis regarded by Parliament as fair and appropriate in relation to injurious affection arising from activities carried out under statutory authority”. Injurious affection based damages are very familiar within the planning world. They are more akin to diminution in value than release fee damages. Injurious affection plays a role in rights to light where compensation is to be paid following any resolution arising from section 203 of the Housing and Planning Act 2016. Lord Carnwath’s approach would significantly limit the amount a claimant could be paid in damages arising from an unlawful interference with their right to light. Such approach does provide certainty. However, the counter-argument is that there is a risk that such an approach would licence a developer to ride roughshod over neighbouring owners in unlawfully interfering with their rights. Injurious affection works well in the public sphere in compensating for a lawful interference, but the risk in the private sphere is that private developers will maximise their gain at the expense of those with rights over the development site. Coventry concerned noise nuisance. Interference with a right to light is a nuisance. However, a right to light is itself an easement, and thus a proprietary right. Looking at Lord Carnwath’s analysis, it is not immediately evident whether a right to light falls within the interference with a property right box or the interference with enjoyment of land box. A right to light shares elements of both, though Lord Carnwath’s comments above concerning interference with enjoyment of land ring true for practitioners having to deal with rights to light claims. Lord Neuberger considered that damages could be assessed by reference to the benefit derived by the tortfeasor not suffering an injunction. However, he also saw force in the Carnwath approach. While obiter, the differences of opinion in the Supreme Court are fundamental. It opens up the potential for a complete re-evaluation of the applicability of release fee damages if the right case presents itself. This opportunity could come quickly. The non-rights to light case of One Step (Support) Ltd v Morris-Garner [2016] EWCA Civ 180 has already been heard by the Supreme Court – the central issue being the circumstances in which it is permissible to award damages measured as a percentage of a defendant’s profits arising from a breach. The Court of Appeal had taken a two limbed approach: 1) would the claimant have very real problems in establishing financial loss; and 2) are release fee damages a just response. It remains to be seen if this will be approved and judgment is eagerly awaited. Date of assessment of damages This is a key issue as it will impact on the release price. In Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2006] EWCA Civ 430; [2006] 2 EGLR 29, Neuberger LJ (as he was then) held the hypothetical negotiation occurred at the date of breach. Applying this to rights to light, the date of breach is the date of interference – ie when the development is well advanced and passes a point where an interference with the light occurs. In such circumstances, the adjoining owner is in a very strong position to demand a more favourable price. Indeed, arguably, such a situation could be said to be exploiting a ransom position. However, the point of Wrotham Park damages is to avoid being a ransom; instead they are the outcome of a fair negotiation by willing parties. It is difficult to square this where the valuation date is so loaded in favour of the dominant owner. In the real world, a developer would very likely seek to buy out the dominant owners prior to development starting – this may even be a conditional requirement from certain stakeholders. That being so, the date of the hypothetical negotiation more likely should be prior to development taking place. Indeed, hearing argument on both sides, this was the position taken by Judge Langan QC in Heaney. He held that in dealing with a hypothetical situation, the court should: 1) plant its feet in the real world; and 2) assume that both parties would act reasonably. Based on this, he concluded negotiations would have resulted in agreement prior to the developer risking money on a scheme it may be ordered to pull down. Arguably the negotiation should take place before the building contract is completed. This avoids the adjoining owner having leverage knowing that the developer is committed and cannot risk delay under the contract. Given the impact of the variability of the valuation date, further judicial commentary on this would be welcome. No profit It is possible that an interfering scheme either is not developed for profit or does not realise a profit. If the former, Moss J in Tamares suggested that, in absence of evidence of profit, the court might do its best by awarding a suitable multiple of the damages for loss of amenity. That is clear. What is less clear is where a scheme anticipated to be profitable fails to realise profit. In such circumstances, the parties must account for risk in the negotiation. This risk should act as a cap on an excessive percentage of profit being payable to the dominant owner. Too high a percentage is too much risk. Too much risk and no reasonable developer would continue with the scheme. Appropriate percentage Case law suggests a range of profit percentages, from circa 5% to 50%, making it difficult to advise parties as to what the appropriate percentage is. Recent rights to light case law suggests that 30% of profit arising from the offending part of the scheme may be appropriate. But this may be too high. Pre-development, the developer is carrying significant risk, and handing over more than 30% of relevant profits may well be hard to swallow. In rights to light terms, a fairer percentage may well be lower. Therefore, while the factual outcome in Tamares provides one tangible outcome to crystallise advice on, parties should be wary as to 30% being the default portion of profit on the offending part of the scheme. On large schemes, applying this would seem to give a disproportionate benefit to the dominant owner. Multiple adjoining owners Applying the hypothetical negotiation is relatively straightforward when dealing with one dominant owner. The situation is significantly complicated when dealing with multiple dominant owners, each entitled to require the proposed scheme to be cut back in order to respect their rights to light. There is limited authority on how this situation should be dealt with. There are two basic scenarios. First, where the cut backs to which two adjoining owners are entitled intersect and, secondly, where they do not. With the latter, the likely lost profit arising from each cut back should be used to calculate the release fee damages to which each is entitled. With the former, there can only be one pot of lost profit arising from the offending part of the scheme. This will need to be allocated among the dominant owners. The easiest way to do this would be an equal split for the common intersections. However, is that the fairest? What about the remote reversioner or the owner who is more gravely interfered with than its neighbour? The aim is to try to achieve a solution which “feels right”, but how to apply it in practice is not easy and is a potential source of significant argument. Further illumination required Release fee damages provide a mechanism to compensate a party for the loss of a beneficial right, as opposed to compensating them for the actual loss in value arising. It is very much an art rather than a science. The basis is controversial and there are differing views on its applicability, even within the highest court in the land. There are also key questions that need addressing, in terms of both valuation and the structure of the negotiation. Unfortunately pending further determination, there is not much clarity and even less certainty. Bryan Johnston is a partner and head of real estate litigation at Dentons UK and Middle East LLP and John McGhee QC is a barrister at Maitland Chambers Pic credit: WestEnd61/REX/Shutterstock