Property update - June 2014

26 June 2014

Our real estate experts bring you the latest property law issues and provide action points to help you and your organisation.

Underground energy resources - consultation on extraction and access rights

Key points

  • Shale gas extraction requires deep drilling below land in different ownerships
  • Landowners can delay projects by refusing access agreements
  • Proposed statutory access right to be backed by community compensation payment
  • Other regulatory requirements and consents remain unaffected

Why is the government consulting on this issue?

As part of its support for energy development in the UK, the government has issued a consultation paper (Underground Drilling Access, 23 May 2014) with proposals for legislation to govern access to underground land for the purposes of extracting shale gas, oil and deep geothermal energy.

There are a series of consent processes for companies wishing to drill:

  • Department of Energy and Climate Change (DECC)/Environment Agency initial licences
  • access agreement with landowners
  • planning permission
  • environmental regulator permits
  • well plan compliance with HSE regulations
  • DECC drilling or production consents

The consultation covers the second of these - landowner access - whereby companies wishing to carry out underground drilling must first negotiate access rights with a potentially large number of individual landowners for permission to drill through their land located above the area of any drilling.

Drilling without such permission is an actionable trespass and landowners could bring a damages claim . Procedures currently exist for operators to seek court approval for access where landowners refuse to agree. However, although the courts are generally likely to grant access as being in the national interest, the amount of any compensation ordered by the courts is likely to be relatively small and the process can be uncertain and time-consuming.

The key issue identified in the consultation is that the current regime allows a single landowner to cause significant delay to a project even where the vast majority of other landowners do not object and use/enjoyment of the land will not be affected.

Fracking and drilling requirements

Although the government's proposed solution to this issue applies to both conventional and unconventional extraction of underground oil and gas (and deep geothermal energy), access rights are particularly significant for unconventional operators (which include those carrying out hydraulic fracturing, or 'fracking' as it is more commonly known), given the requirements for extensive deep horizontal drilling.

Fracking is the process of creating or enlarging underground rock fractures by injecting fluid down the well pipes at high pressure (which largely comprises water and sand mixed with small quantities of chemicals included to reduce friction), enabling the flow of shale gas from the rock.

The proposed solution

The proposed solution set out in the consultation is broadly:

  • An independent right of access for operators to drill underground below land owned by others, at depths of at least 300 metres - the exercise of such right being subject to the operator first obtaining all necessary regulator consents and only to be used for the extraction of petroleum (which includes oil and gas) or natural heat
  • A voluntary one-off payment of a standard amount (proposed to be £20,000) for each unique lateral well extending for more than 200 metres horizontally, to be paid not to individuals but to the local community; and reserve powers for the government to make regulations for statutory recovery where such payments are not made
  • A public notification system under which operators would make known the land affected and the compensation payment being made in return for exercising access

Views on these proposals are invited until 15 August 2014.

Risk factors

Public concern about the environmental impacts of fracking has been widely reported.

The consultation paper only examines the main risk factors for landowners and others living above horizontal underground drilling, namely groundwater contamination, seismic activity and subsidence. It concludes that:

  • such drilling at the depths required for shale or geothermal extraction would not negatively impact on the use of land above
  • adequate protections are provided by the planning, environmental and health and safety regulatory regimes governing such operations.

While acknowledging the possibility of other impacts (air pollution, emissions and climate change generally), the consultation considers these "extremely unlikely to occur anywhere other than at the surface point of entry"; there is no detailed assessment of these here because the proposals do not relate to the regulation of access at or near the surface.

Balancing concerns

Given the limited impact of deep-level underground drilling on landowners above and the minimal compensation likely to be paid in the event of a successful trespass claim, the government considered it better to have a meaningful amount of compensation paid for the benefit of the local community, rather than a nominal sum being paid to individual landowners.

However, this presents the challenge of ensuring the affected landowners share in the benefit of such community payment. Given the extensive area large operations could cover, this may prove problematic in practice.

The government believes the access proposals strike the appropriate balance between landowner concerns and community/national interests. Those seeking underground access rights would remain subject to the other various consent processes referred to above, ensuring continued public protection and the opportunity to raise concerns and objections, as appropriate.

Controversy around the potential environmental impact of fracking is likely to continue but the consultation makes it clear that the government is committed to the development of UK shale gas and oil and geothermal energy, that it believes that this can be done safely and responsibly and that the regulatory system needs to operate in a way which will not disincentivise the required investment in these nascent industries.

Key contact: Lee McBride, partner

Development - a developer is held not to be liable for the escape of concrete into a public sewer during construction works

Key points

  • A developer was not negligent in failing to search the archives of a local museum in order to discover the potential existence of an old drain under the site
  • Development of a site in an urban area will usually be a reasonable use of the land
  • Where harm caused to adjoining land is not reasonably foreseeable, a developer will not normally be liable in nuisance

Facts of Northumbrian Water Ltd v Sir Robert McAlpine Ltd

Northumbrian Water Ltd v Sir Robert McAlpine Ltd concerned a development in the centre of Newcastle-upon-Tyne. The defendant construction company was carrying out redevelopment works which required the sinking of a number of concrete piles to support a new building. The site had been redeveloped on a number of previous occasions and before work started ground conditions were extensively investigated.

Unfortunately, and unknown to the developer, there was an old private drain over three metres below ground. The drain was not shown on the local sewerage undertaker's plans of the area, but it did appear on a 1908 plan held in the archives of a local museum. The drain connected to a public sewer running under the adjoining public highway.

In the course of drilling one of the shafts, an open connection was created with the old drain. When concrete was poured in, it escaped from the shaft into the drain and from there into the public sewer, where it set and caused a partial blockage.

The sewerage undertaker sought to recover its loss from the developer. It made its claim on two principal legal grounds: the law of negligence and the law of nuisance.

Negligence

It was accepted that the developer was under a duty to take reasonable care to avoid causing damage to the sewerage undertaker's property. The sewerage company argued that the developer had breached this duty because it had failed to take proper measures to investigate the site, by not searching the local museum archives.

The Court of Appeal agreed with the High Court that the developer had not been negligent. Although there was a recognised risk that, when pouring concrete into a shaft, some might escape into voids in the sub-soil, there was no reason to think that it might migrate beyond the borders of the site - much less into a sewer under the adjoining road.

The existence of the sewer would only have been discovered after a search of several hours at the museum and, given that the site had been extensively redeveloped in the past, the developer had no reason to think that any earlier drains would have survived.

Nuisance

Nuisance involves an interference by one occupier of land with the use or enjoyment of the land, or of rights and interests in land, of another. Liability in nuisance has traditionally been regarded as strict, in the sense that it does not depend on proof of negligence. On that basis, the fact that a defendant has taken all reasonable care would not, of itself, exonerate it from liability in nuisance.

However, if the defendant's use of its land is reasonable, it will not be liable in nuisance. In this case the use to which the land was being put was the construction of a new building. The court thought that such redevelopment of land in an urban setting was normal and reasonable, unless it involved unusual methods of working - which this development did not.

Liability in nuisance further depends on the harm suffered by the neighbouring landowner being something which was reasonably foreseeable. As noted above, the court held that the developer had no reason to think that the concrete would migrate. It therefore ruled that, since the loss suffered by the sewerage company was not reasonably foreseeable, the developer was not liable in nuisance.

Things to consider

Adjoining landowners will be taken impliedly to consent to a degree of inconvenience arising from the ordinary use of neighbouring properties. The court's conclusion that redevelopment in an urban setting is a reasonable use of land for these purposes reflects the realities of modern life and is extremely helpful to developers.

Where it is apparent that works are interfering with a neighbour's use of their land, or are causing actual physical damage, the developer may (depending on the circumstances) still be liable. Where however, as here, the loss could not be foreseen, the position is different.

There are exceptions to the rules of nuisance which were not pleaded in this case so specialist advice should always be sought.

Key contact: Ashley Pigott, partner

Flood insurance for domestic property: Water Act 2014 and Flood Re

Key points

  • General availability of domestic flood insurance becoming unsustainable
  • Reinsurance scheme to provide cover for most at-risk properties
  • Current industry arrangements for continuing cover extended, pending new scheme
  • Business (and some domestic) premises excluded

Background

In June 2013, the Association of British Insurers (ABI) and the government issued a Memorandum of Understanding (MoU), setting out a joint understanding for the establishment of the ABI's proposed flood insurance fund ('Flood Re') for the provision of future cover for those households at high flood risk. This was, however, only a non-binding statement of intent as to policy development, with detailed delivery remaining to be worked through.

Considerable further work is required ahead of any new scheme becoming operational (which is not expected until summer 2015). Therefore it was agreed that ABI members would, in the interim, voluntarily continue to meet their commitments for the continuance of generally available flood insurance to most households and small businesses under the established Statement of Principles (the Statement).

The Statement includes a commitment for flood insurance to be available as a standard part of insurance where the flood risk is not "significant" (1.3% probability) and to offer flood cover in cases of significant flood risk where there are plans in place to reduce the risk below a significant level within five years (new homes built since 1 January 2009 are not covered).

Proposals for change

Alongside publication of the MoU, the government published a consultation paper seeking views on proposals to secure the continued availability of affordable flood insurance.

While confirming Flood Re as its preferred solution, the consultation also set out the other alternatives to be considered, being:

  • market facilitation (i.e. no direct government intervention)
  • direct subsidisation of insurance premiums
  • a flood insurance obligation for insurance companies

In September 2013, the government also carried out an informal consultation on draft flood insurance clauses for inclusion in the Water Bill.

Following the conclusion of the consultation processes, the government announced its intentions to legislate by the inclusion in the Water Bill of provisions empowering (but not obliging) the government to establish Flood Re and to introduce a Flood Insurance Obligation (FIO). FIO would require domestic property insurers to provide flood insurance cover for a specified number of high-risk premises. While not yet in force, these measures have now been given effect in Part 4 of the Water Act 2014, which received Royal Assent on 14 May 2014.

Flood Re

Provisions (in ss.64-69 of the Act) empower the government to establish the Flood Reinsurance Scheme ('Flood Re'). Essentially, the scheme is intended to provide insurers of household premises with access to reinsurance for identified flood risks, at rates to be set by government, with a view to promoting available and affordable household flood insurance and managing "the transition to risk-reflective pricing".

The scheme will be funded by a levy on all UK providers of residential/domestic buildings and/or contents insurance. The scheme will not be as wide-reaching as first appears: the definition of "household premises" will be set by later Regulations, and it is anticipated that there will be a number of significant exclusions (see further below).

Reserve powers

The Flood Insurance Obligation measures (in ss.70-81 of the Act) provide powers for the government to make regulations requiring insurers of household premises to provide flood insurance cover for a specified number of high-risk premises, by setting quotas to be fulfilled by insurers. The affected premises will be identified in a register of UK premises subject to greater flood risk; different levels of risk may be set out in risk bands.

Although the insurance industry was not generally supportive of this proposal, the government has decided to keep its options open by the inclusion of what are described in the explanatory notes as "reserve powers", in the form of the FIO.

The government has indicated that it remains committed to the Flood Re proposal and that the FIO is required only to cover the contingency of Flood Re proving unworkable or ineffective in delivering the policy aims.

Implementation and limitations

The substantive provisions of Part 4 of the Act are not yet in force and will require implementation by secondary legislation. Much of the detail of the scope and operation of the Flood Re and of the FIO will be set out in subsequent Regulations.

However, the explanatory notes accompanying the legislation do provide an indication of the policy drivers and broadly explain how these arrangements are intended to operate in practice. In particular, the purpose of the levy funding the Flood Re scheme is to replace the informal market cross-subsidy that currently exists between high and low-risk properties.

The 2014 Act also reflects the policy intention to phase out these arrangements over a period of years and transition to a risk-reflective priced free market for flood insurance, by providing that the relevant provisions of the Act are automatically repealed after 25 years and with further provision made for the possibility of earlier repeal of such provisions by Order.

The current Statement of Principles covers both households and small businesses. However, although what will constitute household premises under Part 4 of the 2014 Act remains to be defined in Regulations, the government made it clear in its conclusions to the consultation processes that the new arrangements would be confined to domestic premises only and were not intended to cover business premises (save for some very limited 'borderline' exceptions). It was the government's view that available and affordable flood insurance was less an issue for business than for homes and that government intervention was not called for (although the issue is to be kept under review).

An information note: Water Bill: Part 4 - Flood Insurance: Scope of Flood Re published in March 2014 by Defra (with input from the ABI) sets out in some detail the proposed scope of Flood Re and in particular the types of premises which are intended to qualify as household premises within the scheme.

Among a number of significant exclusions from the new scheme are:

  • residential new builds or conversions after 1 January 2009;
  • properties in Council Tax Band H;
  • homes which are a registered business address;
  • public houses and post offices (including those with residential accommodation above);
  • commercially-managed blocks of flats;
  • properties rented out;
  • mixed-use properties; and
  • business premises.

While those domestic property owners falling within Flood Re may therefore take some reassurance from the new provisions, the future looks less certain for business premises, particularly those occupied by small enterprises which run on narrow margins and for whom flood insurance may increasingly become prohibitively expensive, or not available at all.

Public houses and beer ties: new statutory Code and Adjudicator

Key points

  • Reforms aim to address apparent disadvantages faced by tied tenants
  • Statutory Code to replace self-regulation
  • Enforcement and dispute resolution by new independent Adjudicator
  • Beer tie is not to be abolished

Background

A consultation exercise last year set out proposals for the public house sector, governing the relationship between large pub companies and their tenants, to address in particular issues with tie/purchasing arrangements.

After a long period of debate and uncertainty, the government has now published its response (DBIS Consultation outcome: Pub companies and tenants: government response to the consultation, 3 June 2014) and has confirmed that it intends to implement a legislative solution to what are considered to be "very real concerns about the unfairness which can arise in the relationship between pub owning companies and their tied tenants..."

Legislating for change

The government has confirmed that provision is to be made for

  • The imposition of a statutory Code of Practice, to regulate the treatment of tenants by pub companies. The Code is centred around the two core principles of fair and lawful dealing and that tied tenants should be no worse off than tie-free tenants. The Code will consist of Core and Enhanced provisions:
    • Core Code, applying to all tied tenants
      • allowing the tenant to request an open market rent review where there has been no such review for five years, in the event of significant drink price increases or another event outside the tenant's control
      • increased transparency in respect of terms offered
      • the right to refer disputes to a new independent Adjudicator
    • Enhanced Code, requiring all pub companies which have more than 500 tied pubs
      • to increase transparency through pub companies providing parallel rent assessments with tie-free arrangements
  • The establishment of an independent Adjudicator, to enforce the Code provisions:
    • with two main functions
      • arbitration of individual tenant disputes
      • investigation of possible wider Code breaches by pub companies
    • and power to impose a range of sanctions, including financial penalties and the publication of Code breaches

Funding and review

The Adjudicator will be funded by an industry levy set proportionately according to the level of tied pub ownership: the government will set the levy annually. The current estimated likely annual cost is £1.75 million equating to £90p.a. per tied public house.

The government has also signalled its intention to impose a higher levy on companies which are found to be in breach of the Code, which it is hoped will help to encourage compliance.

Both the Code and the Adjudicator will be reviewed after an initial two-year period and thereafter at three-yearly intervals.

Redressing the balance?

The response document reiterates the government's view, as originally expressed in the consultation, that there is no intention to abolish the beer tie which, when operated fairly and responsibly, is recognised as a valid business model for both large and small companies.

The government has ruled out including a mandatory right to choose a free of tie agreement in the Code because it "would have been likely to cause a high degree of uncertainty in the industry, with a likely negative impact on investment and the possibility that several pub owning companies would abandon the tied market".

The move towards statutory intervention has been driven by the government's view that the self-regulatory approach that has been in place for a number of years has not been effective to address a number of the hardships that apparently continue to be suffered by a significant number of public house tenants. The statutory code will bring to an end years of debate and will provide clarity and consistency. However, it remains to be seen the extent to which it will change the practices of the pub companies that are already working in accordance with their voluntary codes.

Primary legislation will be required to establish the Code and the Adjudicator; in line with the government's stated intention to legislate at the earliest opportunity, these measures were included in the proposals for the Small Business, Enterprise and Employment Bill as announced in the Queen's Speech on 4 June 2014.

Key contact: Emma Pioli, partner

Infrastructure Bill aims to bolster infrastructure investment

Key points

  • Bill contains a mixed bag of measures
  • Various planning changes aim to facilitate development
  • Highways Agency is to become new strategic corporate body
  • Land Registry to assume responsibility for Local Land Charges registration

The Infrastructure Bill was introduced into Parliament on 5 June 2014 and includes provisions for the following:

Highways

The Highways Agency to become a long-term funded government owned company

  • An arms-length strategic highways company (SHA) will assume the functions and have the powers and duties currently undertaken by the Highways Agency
  • SHAs may be appointed for defined areas within England (but the initial intention is to appoint one company for the whole of England)
  • SHAs must have a Road Investment Strategy with a statement of objectives and financial resourcing

Nationally Significant Infrastructure Projects

  • Quicker and simplified processes for making changes to Development Consent Orders (DCOs) for Nationally Significant Infrastructure Projects (NSIPs) - the implementation of minor improvements to the NSIP regime through procedural changes to examination of projects and consideration of applications for changing/revoking DCOs

Planning conditions

  • Deemed discharge of certain planning conditions, where the local planning authority fails to notify its decision within a prescribed time

Development restrictions

  • Future purchasers of former Homes and Communities Agency, Greater London Authority and mayoral development corporation land to be free to develop, unaffected by certain third party rights, interests and restrictions which are overridden by powers conferred on those bodies

Species control

  • New powers to require landowners to act, or permit others to take action, to mitigate the adverse impact of invasive non-native species

Local Land Charges (LLC)

The transfer to the Land Registry of LLC registration and search functions

  • Land Registry empowered to take over responsibility for the LLC Register and LLC searches
  • Establishment, ultimately, of a single electronic LLC Register kept and maintained by the Land Registry, in place of the individual registers presently administered by local authorities
  • Land Registry to determine when each authority is ready to transfer its data; transfer triggered by the Land Registry giving written notice to the authority in question

In addition, the Bill provides for extended information and service powers for the Land Registry, to provide a wider range of information and other services, including possible corporate formation, acquisition or investment.

Points to note

A 2013 government review came to the conclusion that the NSIPs regime operated well and was not in need of any major change. The measures in the Bill make minor improvements only and are included here because implementation will require revising the primary legislation governing NSIPs (the Planning Act 2008).

Secondary legislation will supply more detail in relation to the deemed discharge of planning conditions proposals.

The transfer of Local Land Charges administration to the Land Registry may be a further pointer towards what some consider to be the government's ultimate intention for privatisation of the Land Registry. In the meantime, there are practical concerns as to the lack of adequate staff resources and the potential inefficiencies of splitting responsibility for LLC searches from the CON29 enquiry process, given that the latter will remain with individual local authorities.

Another topical matter not referred to, but which did feature briefly in the Queen's Speech, is the proposed streamlining of the underground access regime for development of gas and oil shale and geothermal energy and hydraulic fracturing. There are no provisions for this included in the Bill as published, since introduction of legislation is subject to consultation. That process is currently ongoing, with responses invited until 15 August 2014 (see DECC Consultation - Underground Drilling Access, May 2014).

Planning update

Assessment of weight to be attached to conflicting material interests

The High Court has considered a statutory challenge in which the claimant alleged that the Welsh Ministers had failed to take account of a material interest and had misunderstood the statutory test relating to the special weight to be attached to harm to listed buildings.

In World Society for the Protection of Animals v Welsh Ministers and others, the court considered the decision by the Ministers to grant planning permission for an extension to a dairy farm to house 1000 dairy cows for nine months of the year. The farm was near Grade I and II listed buildings.

An inspector appointed by the Ministers on a call-in found that the injury to the setting of the heritage assets should be attributed special weight and that the harm would be significant, thereby carrying even greater weight. The proposed development would be unacceptably harmful to the listed buildings and that harm was not outweighed by the projected economic benefits the development would bring. The Ministers declined to follow the inspector's recommendation on the basis that the economic benefits outweighed the social and environmental objections.

The claimant animal welfare organisation challenged the grant of permission. The court dismissed the application on the basis that the Ministers' approach was clear. They had accepted the inspector's analysis but disagreed with the weight to be attached to the harm identified. The Ministers were entitled to reach the conclusion they had.

Noise assessment

While planning may be seen as something of a "Dark Art" among property practitioners, noise assessments may be regarded by some as the real estate equivalent of alchemy. A recent case gives a useful aide memoire of the language of noise measurements.

In Lord Mayor & Citizens of the City of Westminster v Secretary of State for Communities and Local Government (1) and Sainsburys Supermarkets Ltd (2) the local authority applied to quash a decision of the Secretary of State's inspector to grant permission for use of premises as a supermarket.

The ground floor of the building had permission for A1 non-food retail sales, with residential flats on the upper floors. The authority initially refused permission for supermarket use on the basis that deliveries would unacceptably impact the residential amenity of the flats.

The inspector took account of the parties' evidence as to noise and their different noise calculations. This included:

  • the ambient noise averaged over one hour (known as LAeq.1Hr)
  • the maximum noise experienced in an hour (known as LAmax.1Hr)
  • how many loud noise events occurred with the non-food use
  • how many loud noise events would be created by deliveries

The inspector concluded that the effect of the deliveries would not be unacceptable on the basis that there was a moderate level of noise of limited duration. The authority submitted that the inspector had introduced a new process of noise assessment, had misinterpreted the noise policy statement for England (NPSE) and the World Health Organisation (WHO) noise table (see further below) and had misunderstood Sainsbury's delivery and servicing plan.

The court rejected the submissions. The inspector had taken a properly balanced approach to the evidence before him. He had to decide whether the ambient noise level should be averaged over a longer period and if so how.

Sainsburys suggested that the LAeq figure should be averaged over a 12 hour day but the inspector pointed out that calculation would fail to recognise that some hours were noticeably quieter than others. The authority proposed to average all the quietest hours.

The inspector rejected both aggregations and proceeded on the basis of LAeq.1Hr for existing noise and LAeg.1Hr for an hour containing deliveries, whilst also considering LAmax. The court found his judgement entirely sound.

The two noise documents mentioned above measure different things. The WHO table measures the impact of a change in noise levels, and the NPSE measures absolute levels not changes in levels.

Environmental Impact Assessment - negative screening opinion

When a planning authority receives an application for development falling within Schedule 2 to the Environmental Impact Assessment Regulations (2011), it must adopt a "screening opinion". That is a statement of opinion as to whether the development will have a significant impact on the environment due to nature, size or location. The object is to determine whether an environmental impact assessment is required for the development.

In adopting an opinion, the authority may take into account mitigating factors provided they are specific, available and would be realistically effective. It cannot identify environmental effects but can state that they would be considered at a later date when additional information would be available (R (on the application of Lebus) v South Cambridgeshire District Council).

In R (on the application of Plant) v Pembrokeshire County Council the claimant sought to quash the grant of planning permission for two wind turbines following a negative screening opinion.

The claimant alleged that the screening opinion had identified potential environmental impacts using a screening checklist but had failed to consider their significance under the regulations. The opinion stated that they would be considered in a "landscape and visual impact assessment (LVIA)" later in the course of the application. That was contrary to the Lebus principle.

The court rejected that claim. The checklist was not the screening opinion; the planning officer had sufficient information available to screen the proposed development and to conclude that there was unlikely to be a significant impact on the environment. The LVIA was a tool to be used in the determination of the planning application, not the screening opinion.

Service of a claim under section 288 (statutory challenge to planning decisions)

Where an application is made to the court to challenge a decision of the Secretary of State on a planning appeal, a strict time limit applies. The claim must be filed within six weeks of the decision. The court has no discretion to extend that period.

The court practice direction requires that the service of the claim form on the other parties should also take place within the six week period, but the court has wide case management powers to allow for service outside that period. This should be borne in mind when negotiating the review period for the purposes of conditional contracts and option agreements.

Key contact: Jan Hebblethwaite, associate in the Planning team


NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.