With BREXIT on the horizon and with no certainty as to what impact it may have upon the economy or property markets; both landlords and tenants need to ensure they’re not going to be surprised with any significant costs whilst there are such high levels of uncertainty in the market.
This is something to particularly bear in mind when dealing with terminal dilapidation claims, which can frequently be an area of dispute between Landlords and Tenants of commercial property, which can result in sizeable costs being incurred. Unfortunately, the role that s.18 of the Landlord & Tenant Act 1927 can play in mitigating such cost is often overlooked or misunderstood.
James Carruthers, Associate, explains what the s.18 of the Landlord & Tenant Act 1927 is and why it is detrimental to dilapidation work.
What is a dilapidation?
When looking at it simply, the term ‘dilapidations’ refers to a claim generated by a landlord relating to repairs that must be made to their property (breach of a covenant relating to the physical condition of a given property) at the end of a tenancy; whether in respect of repairs, decoration, reinstatement or replacement.
What is ‘The Dilapidation Schedule’?
It is actually a professional schedule of procedures that must take place in order to establish standards of conduct and content relating to dilapidations claims to help provide a uniform procedure for dealing with such cases as well as to try and prevent the incidence of exaggerated claims being made.
Under the provisions of the protocol, advisers for both Landlords and Tenants should each have a good understanding for the principles of calculating loss in accordance with repairing covenants, stemming from common law; specifically, s.18 of the Landlord & Tenant Act 1927.
What is the s.18?
The wording of s.18(1) of the Landlord & Tenant Act 1927 is set out below:-
“Damages for a breach of a covenant or agreement to keep or put premises in repair during the currency of a lease, or to leave or put premises in repair at the termination of a lease, whether such covenant or agreement is expressed 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 as aforesaid; and in particular no damage shall be recovered for a breach of any such covenant or agreement to leave or put premises in repair at the termination of a lease, if it is shown that the premises, in whatever state of repair they might be, would at or shortly after the termination of the tenancy have been or be pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant or agreement”.
What are the implications of s.18?
S.18 of the Act sets out two main limbs, both of which must each be addressed in any dilapidation valuation work.
The first limb assumes a hypothetical sale of reversionary interest (sale of freehold or leasehold) in a given property at the end of a tenancy (even if the actual landlord would never have sold, or the premises are unsaleable because of the market at the time or even because of the nature of the reversionary interest).
The overriding question is, what difference does the actual disrepair falling within the covenant makes to the value of that reversionary interest.
For example, let’s take a property that is valued at the end of a tenancy at £50,000, however, it has been identified that repairs must be made in order to restore the property to its original state. Those repairs are going to cost £100,000. However, the Valuer identifies that if the repairs are carried out, the property will only be valued at £100,000. In accordance with s.18, the measures of damage would only be £50,000 rather than the full estimated repair cost.
If the impact on value is less than the cost of the repairs, then it is only this lesser sum, and not the full cost of repair that the Landlord can recover in their dilapidations claim.
And the second limb?
The second limb places greater focus on Landlord’s intentions at lease term date. The landlord is prevented from recovering damages for any disrepair which will be superseded by demolition or structural alterations that are intended to be made.
To take an extreme example; if the Landlord was planning to demolish a warehouse to make way for a new housing development at the end of a tenancy, it would be determined that any repair works carried out by the Tenant would be rendered obsolete.
It seems entirely reasonable that damages cannot be recovered for any such works that would be rendered useless by the Landlord’s intended use of the property upon recovering possession.
Clearly in reality circumstances will be more nuanced, as in certain events some repair works may still withstand any proposed redevelopment works. Yet it remains of key importance that Valuers and other advisers have a focus whether any of the required repairs set out in a Schedule of Dilapidations are likely to be superseded.
What does this mean for you?
Any valuation exercise carried out in respect of terminal dilapidations claim will typically be linked to the first limb of the s.18(1) definition.
The issue is often an objective one and does not depend on the works the landlord actually performs, but relates to the work that a hypothetical purchaser would factor into its bid for the reversion.
A frequent mistake made by advisers in carrying out valuations in accordance with s.18 of the 1927 Act is in erroneous assumptions that all items within a Schedule of Dilapidations constitute repairs (as opposed to decoration or reinstatement) and that they will have a material effect upon value; with the result being that the whole repair cost is incorrectly included within the calculation. Whereas in fact s.18 valuations are as much an art as a science and should not simply be treated with a formulaic valuation approach.
It is therefore of great importance that advisers are familiar with the principles of s.18 in order that appropriate advice is given. At George F White we are able to offer highly skilled staff in both the realms of Building Consultancy and Valuation, who have knowledge and experience of dealing with terminal dilapidations claims and the associated s.18 valuation advice, to provide our clients with in-depth tailored advice to help achieve their objectives.