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The Dispute Resolution team writes for Property Investor News on the interaction of the Party Wall Act and subterranean developments

“We don’t need no excavation….”

With apologies to Pink Floyd, this article will discuss the increasingly vexed issue of the construction of mega-basements in Central London and the way in which the Party Wall etc Act 1996 (the “Act”) is being used, tactically, to oppose those large-scale projects.

The first question that a would-be developer or “building owner” should consider is whether the project they have in mind involves “notifiable work” for the purposes of the Act. Unsurprisingly, notice must be served under the Act on the owner of any adjoining property (the “adjoining owner”) if the building work will interfere with a “party structure. Broadly speaking, that term means any physical structure that is shared by two buildings, or which straddles the boundary between two adjoining pieces of land.

You might think the Act does not apply to the construction of a basement. The nature of the construction work involved is very different from say, building a loft conversion, where there is an obvious risk of damage to any shared walls. However, Section 6 of the Act provides that notice must also be served on the adjoining owner no less than 14 days before the commencement of excavation work less than 6 metres from the foundations of his property. That should be close enough for most basement projects.

Needing to engage the Act is no bad thing, however. If the parties are unable to agree terms between themselves, Section 10 sets out a clear mechanism for dealing with disputes. Expert surveyors are appointed to agree the terms of a party wall award, which, amongst other things, avoids the costs that could otherwise result from the adjoining owner bringing a claim against the building owner for nuisance and/or trespass.

So far, so good. Most people would happily avoid a lengthy and expensive trial in the County Court! But the adjoining owner’s right, under Section 12 of the Act, to demand that a financial security in respect of any notifiable works can pose a real problem for the building owner. The sum demanded is often high and sometimes disproportionately so. In other words, there is the potential for Section 12 to be used by the adjoining owner as a way of trying to halt the development by making it financially unviable.

But despite the temptation, a Section 12 notice should never be ignored. If notifiable work is started while the notice remains outstanding, the adjoining owner might bring a claim breach of statutory duty and possibly even obtain an injunction order (restraining any further work from taking place until the requirements of the Act have been met). Also, if the adjoining owner were to succeed in obtaining an injunction after the work had started, that could well expose the building owner to claims for damages under the terms of the building contract.

If the amount of security cannot be agreed between the parties themselves, it will be determined by the surveyors under the Section 10 dispute procedure (either as part of the main party wall award, or as a supplementary award, depending on when the Section 12 notice was served). That much should provide some comfort to a building owner faced with what he considers to be a disproportionally high demand for security. Surveyors appointed under the terms of the Act must act impartially and agree terms that are fair to both parties. That obligation includes deciding what amount, if any, ought to be provided by the building owner as security.

Although an exaggerated figure for security should not survive a determination under Section 10, each party will still have the option of appealing the award to the County Court on the basis that the determined amount of security is too high (or too low). But court proceedings are expensive, involve considerable delay and should be avoided wherever possible. A more practical option, therefore, might be for the building owner to offer the benefit of a project-specific insurance policy (the limit of cover being at least equal to the value of the sum of security required by the adjoining owner). Having to pay a premium for additional insurance might be a bitter pill to swallow, but it is still likely to compare favourably against the cost overruns that could result from delaying the build and/or having a dispute end up in court.

There is no judicial guidance on the subject of whether the benefit of an insurance policy amounts to “security” within the meaning of Section 12, but in the leading case on the subject (Kaye v Lawrence) the adjoining owner claimed for either a security bond or project-specific insurance and the point was not taken in argument. Also, it is clear from the wording of Section 12 that the parties are free to agree an appropriate form of security between themselves. On that basis, bespoke insurance (perhaps with the adjoining owner’s interest noted on the policy) may be able to offer a workable solution in cases where the building owner is unable, or unwilling, to pay the level of security that the adjoining owner requires.