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The Uninvited Guest: Forcing a Seat at the Table

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Summary: A head tenant looking to strike a deal with a developer for a release of rights of light should consider its lease terms carefully before doing so to check whether the freeholder’s consent to the release will be required. This is a matter that should also concern a developer. Whether the freeholder’s consent is required will depend on the particular circumstances and lease wording.

Introduction

You’re a developer formulating your strategy to deal with rights of light.  One of the impacted properties identified by your rights of light surveyor suffers an injury which is described in the report as “injunctable”.  You instruct your lawyer to identify the owner of the impacted property so you can negotiate a release.  Your lawyer tells you that the property is held under a 125 year long-lease vested in a headtenant with a remote freeholder. 

You might be forgiven for thinking that you only need to negotiate with the headtenant on the basis that the freeholder’s interest is so remote that they would be unlikely to secure an injunction.  Being prudent or if your bank insists, you might procure insurance to cover the residual risk of the freeholder’s position. 

However, following the recent decision of Mr Justice Morgan in the High Court in the case of Metropolitan Housing Trust Limited v RMC FH Co Ltd, that strategy may need to be reconsidered. 

The judge held that given the wording of the head lease, the head tenant could not release its rights of light without the remote freeholder’s consent.  

The lease wording in question was not particularly unusual, but was a clause in fairly regular form, what lawyers often call a “no encroachments/easements covenant”.  It stated that the headtenant would not give permission for any new window or other encroachment to be made nor permit any easement to be acquired upon or against the demised premises. 

Encroachment

The judge held that:

  • a right of light acquired after the grant of the lease by prescription formed part of the “demised premises”; and
  • allowing a development to go ahead which would interfere with the rights of light enjoyed by the demised premises would constitute an “encroachment”.  The court rejected the head tenant’s argument that an encroachment had to constitute some physical trespass or physical interference with the demised premises.  

On that basis a head tenant’s lawyer must now consider the detailed wording of the lease to check whether the freeholder’s consent to the release of rights of light would be required. 

Is this only a concern for the head tenant or should the developer be concerned too?  If a head tenant releases its rights of light in circumstances where that constitutes a breach of lease covenant, isn’t the only recourse for the landlord to sue the head tenant for breach of the lease, possibly seeking to forfeit?  If the head tenant’s lawyers do not spot the issue, then can the developer simply focus on securing its release as quickly as possible and progressing its development? 

This case establishes that an interference with light constitutes an “encroachment” within the meaning of a “no encroachment” clause. Can a developer now argue that it was not aware that releasing rights without freeholder’s consent was a breach of lease terms.  And therefore if a developer procures a release of rights of light in circumstances where that is indeed a breach of lease covenant (of course this will depend on the particular wording), could the freeholder accuse the developer of inducing a breach of contract ? If successful could the freeholder ask a court to “unravel” the deed of release and effectively reverse it ?

Whether a freeholder would succeed in doing so would depend on whether it could have obtained an injunction to prevent the loss of light in the first place; and that in turn will depend on its motivation for seeking the injunction – is it genuinely concerned with loss of light or is this a tactical play to extract its share of the release fee? 

For these reasons, the issue of whether the freeholder’s consent is required to the tenant’s release is of equal concern to the developer as it is to the tenant. 

Easement

That’s not all.  The court also went on to consider the implications arising from the fact that the newly opened windows in the newly developed building would acquire prescriptive rights of light after twenty years.   Such rights would of course amount to an easement over the demised premises, which would directly breach the lease covenant not to allow an easement to be acquired.  The judge held that that could also be a potential breach, although one solution to that particular problem might be to draft a release in favour of the developer in a more limited way so that it includes a consent under section 3 of the Prescription Act  1832, allowing the new windows to enjoy light over the demised premises by permission; that would prevent the new windows acquiring rights of light (an easement) over time. 

Conclusion

The judgment shows that tenants and developers alike must carefully consider the terms of the lease to check whether the freeholder’s consent to a release may be required and need to think carefully whether to invite the freeholder to the table to take part in the negotiations.  Careful thought will also need to be given to the wording of the deed of release in order to see whether that can be structured to avoid a breach of lease covenants where possible. 

The decision, while clear in terms, adds more practical uncertainty and delay to what is already a complex and lengthy process for a developer looking to swiftly progress a development against the challenge of a volatile market.

If you have any queries or concerns about this case or rights of light issues generally, please email me – Rashpal.Soomal@blplaw.com.

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