The globalisation of property disputes

Written by Phillip Oldcorn ?

The globalisation of property disputes?

Two recently reported property litigation cases pose the question of whether our increasingly global investment and professional service-led world is leading to the “export” of otherwise domestic risks to other regions.?As skills and experience travel, do they present new risks for investors and banks??Or is the media simply highlighting problems that have consistently impacted international real estate deals?

I will always be eternally grateful to the insurance industry for a 30-year career that has exposed me to different international legal systems. As an English, common law lawyer, I was initially daunted by European Napoleonic civil law systems, because they seemed so far removed from the English legal system that I knew.??

However, what quickly struck me as we applied our real estate insurance products to France, Italy, Spain, Germany and Central Eastern Europe was “plus ca change, plus c’est meme chose!”?The more things change, the more they stay the same.?So it has puzzled me why there seems to be a lack of litigation in Europe, Australia and other places involving issues that have been troublesome in the UK for some time.??

Italian Rights of Light litigation

I wasn’t surprised then to read about the recent litigation concerning Piazza Aspromonte in Milan. This was my first experience of an international “Rights of Light” dispute. UK professionals are probably very familiar with the issue, but for the benefit of readers from other regions, the legal basis of the claim is a simple breach of an easement or servitude.?The right, gained either over long term use or via a right created in past transactions, to have light and/or air to your property.?

I was fortunate to be exposed to this risk in 1990, since before the mid-2000s outbreak of this type of insured risk, I had only seen one similar issue. This was an “oversailing” issue concerning a crane in Preston, near Manchester, in 1991.?My boss was a sharp cookie, his client was upset that the guy next door had started development without any consultation and not in a considerate way. The client asked us whether there was anything he could do and my boss spotted that his crane was oversailing his building, thereby infringing his airspace, and breaching his easement/servitude rights. Due to this breach, he was awarded a substantial amount of damages to compensate…

It wasn’t until the mid-2000s that Rights of Light disputes came back on my radar, this time in Central London via a request for insurance. That deal involved the planned development of a very large building.?The potential infringement of his neighbour’s Rights of Light was insured, (including a hefty excess to be borne by the insured). The expected litigation did subsequently transpire.

?It wasn’t until 2010 and the Heaney case that things really kicked off in the UK, HKRUK II (CHC) Limited v- Heaney [2010] PLS CS 238.?This put the Rights of Light risk firmly on the checklist of every real estate professional. Now ten years later in UK property transactions, a Rights of Light assessment is as standard as a review of the title to the land and money laundering checks when on-boarding clients.?

Rightly or wrongly, my insurance businesses did not join in the stampede to insure the possible infringement of light and air. I found the whole risk assessment process to be very odd at first.?Sussing out whether there are any affected neighbours and how much their damages might be, can, at best, be described as a rough science. Damages can be high and the risk that the development might be permanently stopped could obviously be catastrophic for the investor.?So we didn’t dabble and only started offering Rights of Light insurance after we hired the expert Jess Ollerhead in 2018 to lead that business for us - visit Jessica Ollerhead profile.

?Why hasn’t Rights of Light litigation become a regular issue internationally??

?So, here is a great example of what I was saying earlier. The Piazza Aspromonte in Milan does disguise itself as a breach of building permit case but is, at heart, a Rights of Light/Air case and the risk should be assessed (we call it underwritten) as such.?A dispute was triggered by residents of several neighbouring streets who complained that the new building infringed their rights to light and air to their properties, which upon investigation was significantly in excess of that permitted by the city of Milan.

?Photos copyrights:?Urbanfile La Voce Delle Citta article “Milano | Loreto – “Hidden Garden” è un cortile, oppure no?”

And as in London and most other major cities, central and buildable space in Milan is like gold dust, so of course developers will seek to maximise the footprint and height of their buildings.?As governments ramp up their environmental policies and focus more on “brownfield, not greenfield” development, the need to reuse and intensify existing development will only grow, as will this hazard.?

But a note of caution to those who haven’t worked with this issue in London over the last 15 years.??

In London, we became convinced that things were getting out of hand, when a convenience store owner approached one of our London developer customers who was building two towers in the same neighbourhood.?The shop owner pointed out that the sun would continue to rise at one end of his street and set at the other, so he was pretty sure that one of the towers owed him some cash!?Of course his damages were negligible and in fact his shop would be much better off for the new custom that the developer was bringing to the neighbourhood, but what do you do… It was chequebook o’clock, obviously.??

And there’s the big problem with this type of risk.?You don’t have to be a legally trained professional to see that the lights are about to go out. And if the light is going down for you, it will be for your neighbours, introducing contagion risk to your project.

?So international investors would be wise to consider in advance possible remedies that injured neighbours may have.?Is it money damages and/or an injunction? And might there be local compulsory purchase processes available if the municipality considers the development is important enough??

Has the seller got the legal capacity to sell?

?Another recent Italian case featured the media group RCS and Blackstone.?This case arose when RCS, the original seller to Blackstone, argued that Blackstone could not subsequently sell the building to someone else, because they didn’t have the capacity to sell.?They claimed that the original transaction (the sale by RCS to Blackstone) should be reversed and the building returned to RCS. Their argument was that the original sale price between RCS and Blackstone was too low, given RCS’ financial difficulties at the time.?

?At its heart, the question in this case is “has the seller got the legal capacity to sell”??

More commonly, we are worried about fraudulent sellers who don’t have the right to sell, invalid board meetings or powers of attorney used by directors, failure to hold board meetings in the right jurisdiction for the constitution of the company, and so on.?

This highlights another common reason for international real estate litigation.?Historic, sometimes identifiable, but often unidentifiable risks that, without a time machine, you cannot go back and fix now. ?These are historical problems. They have either happened, or didn’t happen, or they did happen, but in a discombobulated way.

One common area of latent historic risk surrounds the local government process of granting permits for renewable energy projects, such as solar farms and wind turbines. For many years now, we have been asked to insure solar and wind farms all over the world.?Usually, where due diligence has shown that something is not quite right.?Contrary to the assumption, these situations are not limited to new development sites, where developers are nervous about objections from neighbours.?

These scenarios are certainly problematic, but more commonly, we are asked to look at an existing site, which has been successfully producing energy for a number of years, where the due diligence has spotted serious issues with the way that the permits were originally granted by the local government.?There are a few common themes; the wrong type of permit was applied for or granted, conditions attached to the permit have not been complied with or it’s too difficult to confirm this, and sometimes a suspicion that government staff or elected officials have taken money to grant the permit in the first place.

?Another common international risk we are asked to look at, is whether there is a possibility of a challenge to a seller because they do not have the right to sell land that was originally acquired as part of a public tender processes.?Legal due diligence?often shows that the tender processes were potentially flawed and the subsequent transfer voidable.?We have seen this in many countries, but particularly in Central & Eastern Europe, where these are often very old sell-offs, usually from the early 1990s or before. Did the government follow the right procedure? Often those procedures were still being developed and legislated for. Did everyone have a fair go at tendering? Was one party favoured above others? Was the tender properly advertised according to law? The evidence just isn’t always there, to enable investors and their advisors and funders to be certain.?

It is of course impossible for anyone to know for sure what exactly happened, only to make a best guess based on the available information and the history of ownership since the original tender acquisition occurred.?

Who’s to blame? (and a sense of pride)

The globalisation of the real estate industry has been a wonderful thing.?When I walk around Warsaw, Bucharest, Manchester, London and many other cities, I take some pride in observing the transformation that has occurred since I started operating in these places 20 years ago, knowing that the real estate industry, which we help, has brought these improvements about.???

It seems clear to me that property risk and consequent litigation has certainly been globalised.

?I don’t know if this has actually always been the case and now we just have better news reporting and accessibility via social media, etc.?Or whether, and this is my hunch, that global investors learn from their experiences in one country and understandably apply those lessons to the next region in which they are active, along with their global legal and other professional advisors.??

If the latter is the case, then I would argue that newly globalised risk is a price worth paying for the inward investment that countries desperately need, to continue the development of their environment.