knowledge | 27 October 2022 |
Security for costs - the price of limited liability?
A recent security for costs judgment will be of particular interest to developers availing of very low capital special purpose vehicles (“SPVs”) to hold properties. It also provides food for thought on the importance of managing the risk of right to light claims as part of site acquisition and development.
In James Street Hotel Ltd v Mullins Investment Ltd,1 the plaintiff company had commenced proceedings against various defendants for damages of €4 million in connection with the purchase by it of a site for a hotel (“site”). The plaintiff was a “shelf company” with no assets, having financed the purchase through borrowings and finance from its parent company.
The defendants’ estimated costs of defending the action were €3 million and it was accepted that if the plaintiff lost the case, it would be unable to meet a costs order against it. Consequently, the defendants sought security for these costs to protect their position in what would otherwise be a “lose/lose” situation for them. For its part, the plaintiff claimed that it was unjust to require it to provide this level of security and claimed that special circumstances meant it should not be required to do so.
Test for security for costs
The initial onus is on a defendant who seeks security for costs to establish that:
- it has a prima facie defence to the plaintiff’s claim, and
- the plaintiff will not be able to pay the defendant’s costs if the defendant successfully defends the action.
If these two facts are established, then security will be ordered, unless the plaintiff resisting the application can show that special circumstances exist for the court to exercise its discretion not to make the order.
There were eleven defendants in total in this case, made up of the entities and persons involved in the sale of the site to the plaintiff and including two firms of solicitors. As the plaintiff admitted not having sufficient assets to meet an award of costs against it and it was accepted that certain defendants had a prima facie defence, the main issue for the court was whether the remaining defendants could also reach this standard. Having looked into the dispute at a high level to consider the merits of the defence, Twomey J held that they could.
The dispute itself centred around a right to light asserted by a neighbour to the site. Alleging an interference with that right, the neighbour had first objected to the application for planning permission to develop a hotel on the site and then unsuccessfully appealed the grant of planning permission in respect of the proposed hotel. It then brought judicial review proceedings to challenge the grant on the basis that An Bord Pleanála had failed to take account of the alleged easement of light. The judicial review proceedings were discontinued before the plaintiff purchased the site. Shortly after the plaintiff purchased the site, the neighbour then sought an injunction against the plaintiff to prevent it from building the hotel. Ultimately, those proceedings settled and the plaintiff then sold the site at a loss. This loss formed part of the plaintiff’s claim for damages against the defendants.
The plaintiff’s key complaint against the defendants was that the existence of the neighbour’s judicial review proceedings had not been disclosed in replies to the standard requisitions on title that had been raised as part of the conveyancing process. The plaintiff argued that had this information been disclosed, it would not have proceeded with the sale.
The defendants argued that the judicial review proceedings were not a private law claim for a property right against the owner of the site. Instead, they were a public law claim that a State body should have taken account of the diminution of the light arising from the building of the proposed hotel in granting the planning permission. The defendants argued that the judicial review proceedings were therefore not an “adverse claim” against the property and so fell outside of the requisitions raised.
They also claimed an absence of causation as the plaintiff was, or should have been, aware of any alleged “adverse claim” over the site as it examined the relevant planning file and received specialist professional advice prior to the purchase of the site, including from a rights of light specialist. After taking all of these steps, it still went ahead with the purchase.
Decision of the court
Analysing all of these factors, the court ultimately concluded that the relevant defendants had made out a prima facie defence that it would have made no difference to the plaintiff’s purchase of the site, if any of the defendants had notified the plaintiff of the claim made in the judicial review proceedings. This prima facie defence could extend to all defendants.
The court then considered whether any “special circumstances” existed not to grant the order. Here, the plaintiff sought to rely on Valebrook Developments2 to argue that it should not be ordered to provide security for costs in favour of all defendants as it was highly probable that the plaintiff would be successful against at least one of the defendants.
However, Twomey J concluded that given his decision that (at least) the prima facie defence identified was available to all defendants, he could not say that it was highly likely that at least one of the defendants would not have a defence to the action. This was a key condition for Valebrook to apply.
He ordered security for costs with quantum to be determined later, along with a decision on whether security should be staggered to take account of the fact that mediation was likely in the case.
There are a number of takeaways in this judgment, including for solicitors. However, with buildings getting taller and density in urban areas growing, fundamentally this case underlines the importance to developers of having a strategy to minimise and manage the almost inevitable increase in the risk of right to light claims. Developers might also expect that the flexibility offered by structuring development companies as SPVs does not bring with it a completely free hand in vindicating rights in respect of development opportunities.
Also contributed by Stephen Connolly
- James Street Hotel Ltd v Mullins Investment Ltd  IEHC 549.
- Valebrook Developments Ltd (in Receivership) v Keelgrove Properties Ltd  IEHC 173.
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.