Calculating Section Eighteen Diminution in Industrial Property Reversionary Valuations
Section 18 caps industrial dilapidations at actual reversionary value loss, stopping landlords from recovering repair costs that exceed open market impact.
Statutory Cap
Meaning
The legal limit imposed by property legislation restricts the amount of damages a landlord can recover from a tenant for breach of a repair covenant. This statutory cap prevents landlords from claiming repair costs that exceed the actual reduction in the property value. It remains a key defense for tenants during dilapidations disputes.
Tenant Protection
Tenants of commercial buildings often use this legal limit to reduce the size of the dilapidations claims against them. The statutory cap ensures that if the landlord plans to demolish, redevelop or significantly alter the property after the lease ends, the tenant does not have to pay for repairs that would be undone by those works. This protection is particularly important for tenants of older buildings where repair costs can be very high.
Valuation Practice
To establish whether this limit applies, a specialist surveyor must perform a diminution in value assessment of the freehold interest. This valuation practice compares the market value of the property in its current state of disrepair against its value if the tenant had fully complied with the lease covenants. The landlord’s damages are limited to the difference between these two figures, regardless of how much the actual repairs would cost.
This step is a standard part of professional dilapidations practice, providing a clear mathematical and legal basis for finalizing the financial settlement.
Settlement Negotiation
The presence of this legal limit encourages both landlords and tenants to take a realistic approach to negotiations. Rather than insisting on the literal performance of every repair listed in the schedule, landlords must consider the economic reality of the local property market. If the property’s value is unaffected by minor defects, the landlord is more likely to accept a lower settlement figure to avoid the cost and uncertainty of a court battle.