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Risk. Reinsurance. Human Resources.

IntroductionWelcome back to Property Eye, the Aon Real Estate newsletter. We’ve been on a diet and now come as a svelte bulletin. In this edition we look at the funding agreement, give an introduction to the Insurance Act and have a Q&A with Tim Roberts of British Land.

In this Issue1 Introduction

1 The Insurance Act

1 UK Terrorism Changes

2 Funding Agreements – Top Tips

3 Rights to Light – Has the Law Changed?

5 60 Seconds with Tim Roberts, Head of Offices & Residential, British Land

Property Eye October 2015

The Insurance ActThe Insurance Act received royal assent on 12 February and will come into force in August 2016. Some have described this as the most significant change to English insurance contract law in over 100 years.

The Act will certainly leave policyholders in a far better position than under the current law. The key changes affect the duty of disclosure when arranging a policy and the rules surrounding which policy

terms can be relied upon by insurers to void a policy. The Act is hugely significant as it changes the legal framework for insurers, policyholders and brokers. If you would like further information please contact your account team or email realestate@aon.co.uk.

UK Terrorism ChangesPool Re have announced changes to the Terrorism rates affecting UK renewals from October 2015. These include;

• Pricing: There will be ‘minor changes’ to rates to make sure that the amount of money that Pool Re generates is fair and transparent and is as risk-reflective as it can be. There will be discounted rates for SME’s, but changes to the way in which certain clauses are costed (particularly affecting the business interruption or loss of rent exposure).

• Deductibles: Pool Re will offer a premium discount for deductibles once the deductible gets to a point ‘where it has an effect on terrorism loss’.

• Risk management: To reward measures such as the government’s ‘crowded places’ initiative with up to 2.5% rate reduction at property level.

Property Eye | Aon Risk Solutions | October 2015 2

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The security components a lender is looking to obtain include a charge over the property itself and also a charge over the insurances that protect that property. The insurance section of the funding agreement has the following main elements:

•Descriptionoftheinsurancesthatshouldbeinplace

•Paymentofinsuranceproceeds

•Provisionforthelender’sinteresttobenotedonthepolicies

•Borrower’sobligationsinrespectofthoseinsurances

The market tends to use the LMA (‘Loan Market Association’) form for these types of agreement and whilst this has recently gone through some updates, in our experience there remain some pitfalls for you to look out for.

Pitfall Suggestions

RequisiteRatingDefinition • Allowforthefactthatnotallinsurerswillberatedbyalllistedagencies.Use‘or’insteadof‘and’• Recognisethelevelofinsurerratings(S&PA-orequivalentisgoodinsurancesecurity)• Avoidaskingformultipleratings

Requests for First Loss Payee Status:• Underthepublicliability(PL)insurancepolicy• Withnominimumpaymentlimit

• AvoidincludinganyPLrequirement–beneficiariesofPLinsurancearethirdparties• Donotoverrideexistingcontractualobligationstolessees• Agreeanacceptableleveltodealwithlowvalueclaims,experienceindicates£50,000-100,000

is not unreasonable• Definingalloftheaboveas,‘excludedinsuranceproceeds’,willsavehoursofdraftingdiscussions

Not giving enough time:• Forinsurerstoagreetotheallocationofrights

under policies• Forinsurer’sandbroker’slegalteamstohaveenough

time to approve wordings

• Getbrokersinvolvedasearlyaspossible(speakingtothelawyersifnecessary)andprovideafullcopyofthefirstdraftfacultyagreement

• Ensuretheinvestmentteamsarespeakingtotheinsuranceteams–brokershaveadutytokeepallinformationconfidential

Lender’s requests for full value cover for all perils are not always achievable, economic or appropriate for every market. In particular for natural disasters in areas where these are common

• Fornaturalcatastrophescarveoutthefullvaluerequirementforexposedterritories• Understandwhatlimitsareavailableatreasonabletermsandmoreimportantly,understandwhat

the true impact of a loss would be• Ensuretheagreementincludesthewords‘whereavailableatreasonableeconomicterms’

The insurance market can change. Cover that your lending agreement requires today may not be available tomorrow

Ensuretheagreementprovidessomeflexibility

Action resulting from insurers downgrading e.g. sovereign downgrade

Allowflexibilitytomaintainanexistinginsurer

An agreement may contain requirements for future insurance (e.g. a guarantee that cover will be renewed on the same terms)

Removeanycrystalballgazing,butensurethattheborrowerhasanobligationtonotifytheinsurerofanymaterialchanges

Non-disclosure by lenders – if the lender wants to be an insured party then they have a general duty to disclose material facts

Thereisnomarketagreementasyet.Insurerstakedifferentstancesovermodifyingtheprincipleofnon-disclosureforlenders.TheInsuranceActshouldbringgreaterclarity

Broker letters of undertaking Aretheyworthit?Getfirstpartyrightsontheinsurancecoverandevidenceofthesame

Payment of premiums before cover incepts Includeprovisionforpaymentwithinagreedcreditterms

Insurer notices of assignment – assignment being presented as a fait accompli

Insurerswillalwayshavetogettheirownlegalteamtoagreeorwillnegotiateamendmentstoterms.Thesolutionistopre-agreetheassigmentwordingwithyourinsurer

Funding Agreements – Top TipsThe insurance section of a funding agreement may be tiny, but it can delay the entire deal. It is worth spending some time at the outset to get it right and avoid frustrating negotiation further down the line.

Property Eye | Aon Risk Solutions | October 2015 3

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Rights to Light – Has the Law Changed?

With much of the recent commentary on the case of Coventry v Lawrence and the Law Commission recommendations, you may be forgiven for thinking it has. However, whilst Coventry – Lawrence did mark a slight shift in emphasis in how the courts will interpret the existing caselaw, the Law Commission recommendations are currently only that; recommendations. If they are eventually implemented, they will certainly alter the way Rights toLightsituationsarehandled.AlisonMurrin,SeniorProfessionalDevelopmentLawyeratAshurst LLP explains how.

The Law Commission Recommendations

Introduction

The Law Commission issued its consultation for the reform of rights to light in Spring 2013 and onDecember42014itpublisheditsreportanddraftbill.TheCommissionisseekingtoputtheSupreme Court decision in Coventry v Lawrence on a statutory footing. If the legislature has the time, rights to light will never be the same again.

Coventry v Lawrence did nothing to change the fact that an injunction is the primary remedy for an interference with a right to light and the courts will always have a wide discretion when deciding whether to award an injunction. However the case did change the way the courts decide the question of whether to award damages in lieu of an injunction. The Supreme Court rejected the rigid application of the ‘working rule’ set out in Shelfer v City of London Electric Light Company [1895] 1 Ch 287 in favour of a more flexible and balanced approach.

Injunction v damages

The Law Commission has endorsed this by recommending a statutory test which has, at its heart, the concept of proportionality. By applying this new test the courts would not be permitted to grant an injunction where this would be disproportionate, taking into account such issues as the conduct of the parties, the public benefit of the development, the delay of the claimant in enforcing its rights, the loss of amenity (taking into account the extent to which artificial light is relied on) and the impact of an injunction on the developer. This concept of proportionality will involve the court in carrying out a balancing exercise, weighing up a number of factors. This will not necessarily be easy, but at least it does allow the Court to be more flexible and take into account the public benefit aspect of the grant of planning permission for the development. However, If the judgement in Coventry v Lawrence is anything to go by it is likely that it will be very difficult to persuade the courts that anything other than an injunction is appropriate where the actionable infringement of a right to light relates to a residential property and the claimant wishes to preserve their light.

Interestingly the Law Commission has decided not to replicate that element of the Shelfer test which requires the court to consider whether or not it would be ‘oppressive’ in all the circumstances to award an injunction. Instead the statutory test considers the ‘impact’ of an injunction on the developer. Of course, it will be down to the courts to rule on the interpretation of these words.

Article by:Alison Murrin SeniorProfessionalDevelopmentLawyer,AshurstLLP +44(0)2078593123 alison.murrin@ashurst.com

Insurance Commentary by:Mark Swallow TechnicalDirector,LegalIndemnities,Aon +44(0)20270863168 mark.swallow@aon.co.uk

PropertyEye|AonRiskSolutions|October2015 4

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Measure of damages

The Law Commission makes no recommendation for a change in the measure of damages awarded in lieu of an injunction. This is an extremely complex area of the law and may be a missed opportunity to change the basis on which damages are calculated and move away from profit related damages which developers argue are not a fair assessment of the sum to be paid for the release of the right to light. However, as the Law Commission points out, a reduction in the level of damages may actually have the unexpected knock-on effect of increasing the number of injunctions awarded.

This has not been completely kicked into touch, the Law Commission suggests that the Government keeps a watching brief on this particular aspect and reform may follow at a later date.

Prescription

The Law Commission has also made a U-turn and is no longer recommending the abolition of prescriptive rights. This was a step too far for many respondents to the consultation and would have put rights to light on a different footing to other easements. Instead the Law Commission have suggested a simplification of the scheme which enables the acquisition of a prescriptive right to light to be interrupted, and brought to an end, without physically obstructing the light.

Other recommendations

Other key recommendations include:

• Astatutorynoticeprocedurewhichwouldenablealandownertorequire their neighbours to tell them within a specified time if they intend to seek an injunction to protect their right to light, or to lose that remedy

• Amendmentofthelawgoverningwhereanunusedrighttolightis treated as abandoned

• ApowerfortheLandsChamberoftheUpperTribunaltodischarge or modify obsolete or unused rights to light

Conclusion

The Law Commission describe their recommendations for the reform of the law of rights to light as an undramatic but significant change in the law designed to update it and to maintain an appropriate balance between development in the public interest and the protection of the amenity of our homes and workplaces. However if these recommendations become law we will surely see a real shift in how rights to light disputes are handled and resolved.

However, these recommendations will not take effect in full unless and until the Government responds to, and gives effect to, the recommendations in the 2011 Report, Making Land Work which deals with the general reform of the law relating to easements and covenants.

TherecentCountyCourtdecisionofScott v Aimiuwu(unreported)indicatesthatthe

CourtswillapplytheSupremeCourt’sreasoninginCoventry v Lawrence in rights to

lightcases.IntheScottcasedamageswereawardedinlieuofaninjunctionandthe

damageswerecalculatedonacompensatorybasisratherthanbyreferencetoashare

ofdeveloper’sprofit.Howevereachcasewillturnonitsownfactsandheretheinjury

affectedsecondaryratherthanprimaryaccommodation.Itisausefuldecisionfor

developersinrelationtotheassessmentofdamagespoint,buttheCourtsmaystillbe

persuadedtoawardprofitrelateddamagesinothercircumstances.

Insurance Commentary

It could be argued that Coventry v Lawrence and the Law Commission Report have both served to remind all parties facing rights to light situations that when you injure a third party’s rights, the remedy is an injunction and only if compensation can be justified would an injunction be avoided. It is easy to forget when looking at a rights of light report, that when a material injury is listed as ‘non-injunctible’ that is the surveyor’s opinion rather than fact and the legal starting point is the precise opposite.

Insurers are grateful that the courts have moved towards a more flexible interpretation of the Shelfer requirements for compensation to replace injunction. However, there has not yet been any knock-on effect on the availability of cover nor on premiums. Coventry v Lawrence was not a rights of light case and some commentators have said that for significant injuries to residential properties, the case may actually make an injunction more likely. The Law Commission Report, as Alison points out, is still some way off being law.

The Scott case, whilst perhaps indicating a trend within the judicial system, cannot yet be relied upon when underwriting and so insurers continue to adopt a cautious approach.

The risk from rights of light injuries remains very real and insurance will continue to be a valuable tool for developers and funders when faced with such issues.

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Risk. Reinsurance. Human Resources.

60 Seconds with Tim Roberts, Head of Offices & Residential, British Land1. How would you describe yourself in

three words?

a) Determinedb) Open c) Downtoearth

2. What is your most amusing or embarrassing moment in property?

Being stuck on a roof on a building in Theobalds Road, when the fire door shut in the early 90’s when mobile phones didn’t work properly and having to shout down to people on the pavement below!

3. British Land are very committed to occupier satisfaction surveys. Is there a key learning that you are willing to share?

Simply that there is not a good business in the world that doesn’t put its customer needs first.

4. What is your passion outside work?

Apart from my family it is, in order, skiing, golf and tennis.

5. Is the buoyant demand for Central London and prime regional assets creating a vacuum, where property will take longer to recover elsewhere?

There is clearly a lot of demand for London and prime regional assets, and this has pushed up prices. I don’t see the lack of demand for other regional assets as a vacuum. As market prices adjust, and adequately reflect the outlook for performance, then investor demand for non-prime regional assets will return. With the hope of sustained economic growth we could be on the verge of this already.

6. Have you a favourite gadget you now can’t live without?

iPad Mini as using the Ubersense app I can record and analyse my golf and tennis swings.