If you have settled a claim recently were you made aware of the implications of a Section 18 valuation? For many, dilapidations simply mean repairs and the cost of doing the works. For a tenant, this is particularly important as it can limit your liability to a figure which, in some cases, can be significantly less than the cost of works. Please read an update from Vickery Holman on Section 18 as well as the impact of COVID on dilapidations and valuations.
DILAPIDATIONS – DID YOU SETTLE AT THE RIGHT FIGURE?
What is Section 18? It is a statutory provision which enables valuations to be prepared to assess the loss in value to the landlord’s interest in the property because of the repairs not being undertaken by the tenant. Two valuations are involved. The first is the value assuming the tenant had complied with his repairing obligations under the lease. It is important here to remember, it is the condition in which the lease required the tenant to hand back the property, not an assumption the whole property is in good condition. The second, is the value in the actual condition of the property at the end of the lease.
The difference between the two valuations is called the diminution in value. If the diminution is less than the cost to the landlord of doing the works, the landlord can only recover the lower figure.
The implications of a Section 18 diminution in value valuation
If, as a tenant, you have settled a case in recent years and were not advised by your surveyor or solicitor to have a Section 18 valuation, then you may have grounds for action against them.
Your building surveyor must still negotiate the best position for you on the legitimate elements of the Schedule of Dilapidations. Then your valuer, working closely with your building surveyor, can undertake the Section 18 valuations.
Section 18 relates only to repairs. Decoration and reinstatement of alterations are frequently included in the Schedule but, technically fall as a separate claim. It is however generally accepted that assessing the loss to the landlord of these items is on the same basis as the approach under Section 18. They tend therefore to be considered under one set of valuations.
The valuer must consider whether there are items in the Schedule which do not impact on the property value. Pre COVID-19, assessing market value was a relatively straightforward process in identifying the issues and market sentiment. Today, we have uncertainty on values due to the pandemic. It is too soon to see the impact on market values but for any leases ending in 2020 or 2021 (possibly also in 2022), this will be of greater relevance to Section 18 valuations. There may well be property sectors where, even if the tenant had maintained the property correctly, the landlord would have a material problem in re-letting or selling or can do so only by offering concessionary terms. If so, it may be argued that part, or possibly the whole of the defects included in the Schedule of Dilapidations, even if remedied, would not enhance the value of the landlord’s interest. That will reduce the diminution in value under Section 18 valuations, to the benefit of the tenant. It will also increase the obligation on landlords to consider the Section 18 position at an early stage rather than pursue an unfounded claim for dilapidations.
So now is a time, more than ever, for the parties to ensure Section 18 valuations do feature in their consideration of the dilapidations liability. Our Valuation team are based around the South West and can help you. Our Building Surveyors are experienced with dilapidations so please contact us for further advice.
The Two Limbs of Section 18
Section 18 of the Landlord and Tenant Act 1927 is a cornerstone of the legal framework governing dilapidations claims at the end of a commercial lease. This section is structured around two distinct “limbs,” each serving to protect tenants from excessive claims while ensuring landlords are fairly compensated for genuine losses resulting from disrepair.
The first limb of Section 18 addresses the maximum amount a landlord can claim for breach of a repairing covenant. It states that the landlord’s claim for damages cannot exceed the actual reduction in the value of the property—known as the diminution in value—caused by the tenant’s failure to keep the premises properly maintained. This means that even if the cost of repair works is substantial, the landlord is only entitled to recover the lower amount between the cost of repairs and the actual loss in property value. This statutory cap ensures that tenants are not held liable for more than the true impact of disrepair on the landlord’s interest in the property.
The second limb of Section 18 further limits the landlord’s ability to claim damages by considering the landlord’s intentions for the property after the lease ends. If the landlord plans to demolish or significantly alter the building, and these works would render the repairs unnecessary, the tenant’s liability for those repairs may be reduced or even eliminated. This limb prevents landlords from claiming compensation for repairs that would have no bearing on the property’s future use or value, ensuring a balanced approach to dilapidations disputes.
Together, these two limbs of Section 18 play a vital role in resolving disputes between landlords and tenants. They require careful assessment by a chartered surveyor or building surveyor to determine the actual loss and the landlord’s intentions, helping both parties reach a fair agreement and avoid excessive or unfounded claims. Understanding how these provisions operate is essential for anyone involved in commercial property leases, as they directly influence the outcome of dilapidations negotiations and litigation.
