Earlier this year, the Supreme Court gave an important judgment on the assessment of damages in Morris-Garner and another v One Step (Support) Ltd [2018] UKSC 20; [2018] EGLR 26. The court made it clear that “negotiating damages” should be reserved for exceptional circumstances. However, it also confirmed that damages based on a hypothetical negotiation between the parties – to allow the wrongful use of property or the release of a contractual obligation or restriction – can still be awarded in circumstances where it is appropriate to measure the loss suffered by a party according to the economic value of the breached right.

The decision in One Step was a reminder that the assessment of damages for breach of property rights is not an exact science. Consequently, developers and beneficiaries of rights now find themselves with a number of questions which remain to be clarified. The purpose of this article is to look at whether – and, if so, how – negotiating damages might arise in a few common scenarios involving infringements of rights to light and breaches of restrictive covenants.

Rights to light infringements

The review in One Step of the case law on damages in tort for unlawful use of property showed the need to assess damages in a different way in such cases. The court confirmed that such damages should reflect the valuable nature of a right to control such use and the fact that the property owner may not have suffered loss of a conventional kind. For example, there may be no diminution in the value of the property.

The cause of action for nuisance to an easement of light is in tort. One Step reminds us that common law damages are based on the need to restore the claimant to the position he would have been in if he had not sustained the wrong. The “user” principle applies in such causes of action; eg where A trespasses on B’s land, A should pay mesne profits for the value of the use of B’s land.

Putting aside the conventional calculation of damages for actionable loss of light, damages in tort for breach of a right of light can be assessed at common law in relation to the value of the unlawful use which the defendant is making of the claimant’s light. That has an economic value. That value can be measured by reference to the value of the right to control the defendant’s activities; eg preventing development of the defendant’s land in such a way as to interfere with the claimant’s right of light. That right can be protected by an injunction and, if granted, the defendant cannot derive the benefit in terms of building in breach of the claimant’s right of light.

Breaches of restrictive covenants

Damages in contract serve a different remedial purpose than in tort, seeking to put the claimant in the position it would have been in if the contract had been performed.

There are many breaches of contract where a claimant does not suffer economic loss. The decision in One Step confirmed that the damages assessment in such circumstances should place a reasonable monetary value on the difference in the claimant’s situation resulting from the breached right. This is where negotiating damages come in.

Almost precisely 45 years ago, Brightman J delivered judgment in Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798; [1973] 229 EG 617. That case concerned breaches of restrictive covenants and the question was whether the proper remedy was a mandatory injunction for the demolition of the houses erected in breach of the covenants, or an award of damages in lieu. Brightman J decided that the latter was the proper remedy and his approach to the assessment of those damages has been taken as the modern starting point for considering when and how negotiating damages should be awarded for breach of covenant and, if so, how they should be assessed.

Now the Supreme Court in One Step has commented on Wrotham Park and the subsequent line of authority, how should advisers approach quantifying damages?

General guidance in covenant and rights to light claims

In cases where the injury is to a claimant’s property rights, whether founded in contract or in tort, the judgments in One Step make it clear that the defendant cannot take something for nothing. So that is the starting point in terms of guidance.

It may be that the difference between the two causes of action becomes blurred. In both covenant cases and rights of light cases, the failure to observe the right can lead to the defendant making unlawful use of the burdened land which can be translated into the economic value of the claimant’s right to prevent that. As already noted, that right can be protected by an injunction which prevents the defendant deriving the benefit in terms of building, etc, in breach of the right.

But what should be the approach to damages where an injunction is refused? This is not an uncommon situation where property rights will be, or have been, infringed.

Where an injunction is refused

Damages will invariably be sought where the court has declined to grant an injunction. The decision in One Step confirms that one method for valuing the right which is not being specifically enforced by an injunction is to assess the amount which the claimant might reasonably have demanded for the relaxation of the obligation in question. However, it emphasised that this is not the only approach and it is for the court to judge the appropriate method to use.

What unites the approach to damages – whether for breach of covenant or of an easement – is the jurisdiction of the court to award damages in lieu of an injunction under section 50 of the Senior Courts Act 1981. The judgment of Lord Reed in One Step considers how the law relating to such damages has developed. What emerges is the definition of the category of damages which we must now describe as “negotiating damages”. The task for a judge when awarding damages under section 50 is therefore to consider the economic value, or monetary substitute, for what is lost by the refusal of an injunction.

In cases where there has been (or will be) a breach of a property right (whether in contract, tort, or trespass) the value of that right ought to be capable of estimation by the value to the claimant of the right he was seeking to protect or preserve. One Step contains a clear warning that, in cases of economic loss, it is for the judge to determine that loss on the available evidence, which may require taking into account the amount of a hypothetical release fee. But such a fee may not be the only way of measuring the value of the claim. At the end of the day, the award must be compensatory.

It is now clear that, for the purposes of negotiation, it is permissible to take as a measure of damages the economic value of the right which is, or will be, broken. That value is what is lost to the claimant by the refusal of an injunction. That value can be the benefit gained by the defendant as a result of the wrongful use of his property. Whether the claim is for breach of a right of light, or is for breach of a restrictive covenant, the compensation and the sum to be agreed to be paid to the claimant should be based on the net value of that benefit. If an injunction were to be granted, the defendant could not make the net profit, or enjoy the net gain, from the development undertaken in breach of the claimant’s rights.

What next?

One Step does not offer claimants the certainty of any fixed percentage share of profit available in circumstances where property rights are infringed and negotiating damages are suitable. Trial judges retain a strong element of discretion over deciding the availability of release fee damages and how to calculate them. However, the suggestion in Amec Developments Ltd v Jury’s Hotel Management (UK) Ltd [2001] 1 EGLR 81 that the hypothetical deal “has to feel right” is likely to remain a strong guide for the courts in future cases where negotiating damages are awarded.

Developers – and their neighbours – will need to bear this in mind when they negotiate. There is no automatic Stokes-style (Stokes v Cambridge Corp [1962] 13 P&CR 77) one-third as the fraction to be applied to the net profit, or gain. It seems obvious that a party’s expectations in any negotiation should be governed by the likely approach of the court when assessing damages, so far as it is possible to judge that. However, our experience is that the amounts put forward in these types of negotiations often fail to reflect this “reality check”.