Terminal Dilapidations Defence & Section 18 Diminution Valuation: Retail Property
Our RICS building and expert witness surveyors were able to demonstrate a diminution value at 1% of the landlord’s original claim.
Brief: To defend dilapidations claims and negotiate with the landlord.
Property: Town centre shop.
Instructed by: Outgoing tenant.
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The Property
- The property comprised a ground floor shop, escape area and rear yard.
- The building appeared to have been constructed circa 1960 and was out of character with the surrounding buildings, which had traditional stone walls.
- The shop was set in a parade of retail premises that were vacant at the time of the inspection.
The Landlord's Claim and our Scott Schedule
- Our client came to us when they were served a terminal schedule of dilapidations for their rented retail premises.
- The landlord’s claim for the works amounted to over £75,000, with additional costs for professional fees bringing the total to over £100,000.
- The landlord’s surveyor had identified 125 breaches of the lease terms. These ranged from damaged tiles and a requirement to redecorate where finishes had been damaged, to demands to replace and reseal windows and to hack off wall tiles and replace them with new ones.
- One of our dilapidations surveyors visited the property to assess the claims.
- Our surveyors are all RICS qualified, and have detailed knowledge of the Dilapidations Protocol legislation, in addition to following the RICS Standard ‘Dilapidations in England and Wales’.
- While there were some points of agreement, such as the need to redecorate, test and ensure light fittings are working and replacing damaged flooring and plasterboard, we disagreed with many of the estimated costs put forward.
- Our surveyor found that the costings have been provided on a solely item-by-item basis, resulting in inflated costs. A large proportion of the works were reliant on unskilled labour, with only several key areas requiring a more specialist contractors. Assuming the unskilled labour could all be done by one main contractor meant that the costs estimates could be substantially reduced.
- Overall, our estimates for the costs of repairs required came to £55,000 lower than the landlord’s estimates, a 73% reduction.
Section 18 Diminution Valuation
- The Landlord disputed the Scott Schedule, and so our client instructed us to provide expert evidence on the diminution in value for the premises for the purposes of Section 18 of the Landlord and Tenant Act 1927, and whether the damages claimed/claimable for the cost of the works etc by the clients are as much as, more than, or less than the diminution in value figure.
- The valuations were provided in accordance with the guidance provided by the RICS Valuation – Professional Standards 2014 Edition where they do conflict with the well-established principles of Section 18 of the Landlord and Tenant Act 1927.
- One of our chartered general practice surveyors visited the property to enable them to assess the rental values and the diminution of value.
- First, they assessed the overall condition of the property.
- They found that the property had been left decorated and available to trade.
- Assessing rental value
- The retail part was measured in accordance with the latest code of measuring practice and where applicable the RICS Property Measurement, 2nd Edition.
- The retail area was zoned according to the parts that are most and least valuable as part of a retail business. Other areas included the courtyard and first-floor accommodation; these were valued using comparables to find a rate per square metre.
- Assessing diminution.
- Section 18 (1) of the 1927 Act relates to breaches of repair. The first part of the section states: ‘Damages for breach of a covenant or agreement to keep or put premises in repair during the currency of lease, or to leave or put premises in repair at the termination of the lease, whether such covenant or agreement is express or implied, and whether general or specific shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of such covenant or agreement aforesaid’.
- This section provides the cap whereby the damages for breach of repair cannot exceed the diminution of the landlord’s reversionary interest.
- When valuing a property, the valuer takes into account how a buyer would attend a property, and, after making an allowance for disrepair, put forward an offer. The valuer also considers the value of the property in good order, because on occasions the dilapidations can be assessed at higher figure that the property is worth, bringing in the purpose of Section 18.
- The valuation uses comparable properties to identify the value of the property in its current dilapidated form; this is then deducted from the value as if well maintained and decorated.
- Valuations take a range of factors into account, including the market, the Red Book and hypothetical interest.
- In assessing the diminution in value under Section 18(1) of the ‘Act’ there is a requirement to provide two valuations.
- The first valuation was an assessment of diminution in value assuming the hypothetical purchaser would carry out the totality of the repairs and decorations.
- The valuation allowed 12 months for marketing after completion of the works to the retail area to secure a letting.
- In repair, costs of rates, insurance and marketing for 12 months are deducted.
- Out of repair, assuming the works take 2 months, loss of rates would be increased by 2 months, alongside an allowance for reinstatement and decoration.
- The diminution in value in this case came to £12,200
- The second valuation was an assessment of diminution in value assuming the hypothetical purchaser would decide that an ingoing tenant would carry out the totality of the repairs and decorations.
- The landlord would incur the additional legal and surveyor fees associated with monitoring the works.
- The value out of repair is therefore the gross value, minus the cost of marketing and the surveyor fees.
- The diminution in value in this case came to £877.50; around 1% of the Landlord’s original claim.
Read more about our landlord and tenant dilapidations services here.
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