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Terminal dilapidations: Valuing the reversion

16 June 2010

Damages for breach of a tenant’s obligation to repair a property cannot exceed the amount (if any) by which the value of the landlord’s reversionary interest is diminished by the breach.

This is the rule set out in section 18(1) Landlord and Tenant Act 1927.

In Van Dal Footwear Ltd v Ryman Ltd (2009) the Court of Appeal has confirmed the correct basis for valuing the landlord’s reversion under s 18(1). This provides welcome clarification, particularly in circumstances where there have been negotiations for a new lease.

Ryman was the tenant of a building under a 1995 lease. At the end of its lease it failed to protect itself by issuing a claim for lease renewal, but remained in occupation until July 2007. During that time it made two offers for a new lease that were rejected by the landlord. Ryman vacated and left the property in disrepair.

At trial the court found the repair costs were about £135,000, but the diminution in value was only £118,000. The court accepted evidence that Ryman would have renewed offers for a new lease to any purchaser of the reversion. Those offers would have been attractive, as Ryman was a blue chip covenant and this would prevent any rental void.

If this were the case, a purchaser would have been prepared to pay more for the property in its actual condition and, accordingly, the damages awarded were reduced to £48,500. The landlord appealed against this reduction in damages.

The Court of Appeal confirmed that the rule in section 18(1) requires a calculation of two simultaneous sales of the reversion, one in repair and the other in disrepair, as at July 2007. It was to be valued with vacant possession, without regard to the old lease or any other lease.

Since there was no agreement for lease in July 2007 or any offer capable of acceptance when Ryman vacated, this was not relevant to a valuation of the reversion. A special purchaser did not exist and none should be invented. The landlord was entitled to the full diminution in value of £118,000.

What does this mean?

Estimated repair costs are only an indication of the diminution in value of the reversion. If they exceed the diminution in value, the actual damages recoverable will be capped under s 18(1). This cap will not, however, apply to decorative or reinstatement items. The valuation date is when the property is vacated.

For the purposes of a section 18(1) valuation, the old lease and any new lease are ignored. However, if there is an agreement for lease already in place this may reduce the landlord’s damages. A tenant may be able to show that a special purchaser of the reversion exists such that the diminution in value is small or even nil. For example, where the premises are ripe for redevelopment.

What should you do?

If a landlord is not carrying out the repairs, it must obtain a section 18(1) valuation prior to the issue of a claim.

If a tenant makes an offer for a new lease immediately prior to vacating and that offer is not rejected, it could reduce the damages recoverable by the landlord. A landlord should promptly reject any unsuitable offer for a new lease made by the outgoing tenant.

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Aisha Abdallah

Associate
T: 03700 86 8481
I: +44 (0)1908 48 8481
E: aisha.abdallah@shoosmiths.co.uk