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.
Terminal Schedule of Dilapidations
Meaning
A formal document prepared by a landlord’s surveyor toward the end of a lease lists the breaches of tenant repair, decoration and reinstatement covenants. This terminal schedule of dilapidations provides the basis for negotiating the final financial settlement or the scope of repairs. It outlines the specific lease clauses that have been breached.
Lease Expiry
The preparation of this document typically occurs within the last six to twelve months of the tenancy. Serving the terminal schedule of dilapidations gives the tenant the opportunity to carry out the repairs themselves before the lease ends, which is usually cheaper than paying the landlord to do it. If the tenant chooses not to do the works, they will have to negotiate a cash settlement based on the schedule.
Negotiation Strategy
Surveyors representing both parties will review the document item by item to agree on which claims are valid and what the reasonable repair costs should be. The negotiation strategy for the tenant involves identifying items that are exaggerated, fall outside the lease obligations or are affected by the statutory cap or superseding works. Having a clear condition report from the start of the lease is invaluable during this process.
Valuation Assessment
If the tenant does not carry out the repairs, the landlord’s claim for damages must be supported by a terminal valuation. This valuation assessment determines whether the cost of the repairs listed in the schedule is higher than the actual diminution in the market value of the property caused by the disrepair. Under statutory law, the landlord’s claim is capped at the lower of these two figures, ensuring that the damages remain fair and proportionate.
This requirement prevents landlords from claiming for works that do not affect the sale or rental value of the property.