Dilapidations – Section 18 (1) / Diminution Valuation

A claim for dilapidations is capped by Section 18 (1) of the Landlord and Tenant Act 1927 insofar that damages for breach of repair cannot exceed the amount by which the value of the premises is diminished by virtue of such breach. Express covenants to redecorate, comply with statute and reinstate are not covered by Section 18 (1) and these are dealt with by way of Common Law principles of loss/damages. It is therefore normal to refer to a “Diminution Valuation” which includes both the above aspects. It is usual for the Court to Direct that a formal Diminution Valuation be carried out by a suitably qualified Expert if that has not already been undertaken as stipulated by the Dilapidation Pre-Action Protocol.

The Protocol requires that a Diminution Valuation be carried out if:

• The Landlord has carried out only part of the work
• The Landlord has not carried out the work but intends to do so
• The Landlord does not intend to carry out the work (exceptions apply)

A Tenant may decide to rely upon a defence based upon a Diminution Valuation but must state their case for doing so.

The Diminution Valuation would take into account the likely future use of the building and the future actions of the Landlord in respect of redevelopment, refurbishment or other variation in the use of the building. If no alteration in use is likely then the works must be considered in detail to establish if the failure to carry them out causes any diminution and secondly whether the works have been “superseded” by a market requirement for improvements to the property for which the Tenant is not responsible (super cession).

The Diminution Valuation will usually be based upon the approach adopted in Shortlands Investments Ltd -v- Cargill Plc 1995 where the cost of repairs (as adjusted by the above) forms the basis of the valuation. In fact in most cases the cost of repairs, adjusted as necessary on the above principles, is taken into account in the valuation. The obvious exception being where the building is worth more as a development site whether in repair or not.

In simplistic terms therefore the lease is a contract, breach of the contract is compensated by damages (not specific performance) and damages are “the reimbursement of a loss suffered”. The final words are the absolute definition of the purpose of a Diminution Valuation – to establish the actual loss suffered by the Landlord.

We carry out Diminution Valuations on all the basis indicated above and also where a property has subsequently been sold, including analysis of the sale figure where appropriate.