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Why does he have the opportunity to do this?
You could raise the fence on your side.
Or you could pay for a fence on theirs. Its not likely they would agree to any cost at all as, ultimately, he is your dog.
Unless he causes damage or injury, they don't have any claim anyway but the risk is that they would lie.
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Not really. Do you mean he wants you to keep your dog on a leash in your back garden?
I suppose if he uses the opportunity to get into your neighbours' garden then he does have a complaint although it is one that many people would not have made but you don't have a right to demand that your live next door to reasonable people.
Isn't the solution just to increase the size of your own fence?
Yes, but you can't expect him to bear the cost of putting up a fence when the issue is yours. So just build your own.