Why a Section 18 Diminution Valuation is crucial in Dilapidations Claims

A recent Manchester warehouse instruction highlights how a Section 18 Diminution Valuation can critically impact dilapidations disputes.

The landlord first claimed £310,000 from the tenant, March. March instructed Whitecross Building Surveyors to negotiate, and they initially offered £157,000. Following Whitecross’s advice, March then asked one of our Radius specialists to carry out a Section 18 Valuation to help reduce the claim further.

Our valuation focused on one key legal principle:

Dilapidations damages are capped at the diminution in value, the actual drop in market value caused by any disrepair, not simply the landlord’s costed schedule.

What we found

Our market analysis found that a new purchaser would likely upgrade the unit far beyond the claimed works, including a full roof replacement and modernising fit-out.

• Full roof replacement (not patch repair), to secure an EPC A rating and a new warranty
• Stripping out and modernising all office fit-out
• Replacing with new electric roller shutter doors, upgraded electrics, and LED lighting throughout

Our Diminution Valuation was £71,300.

The result?

The final settlement was £75,000, a 76% reduction on the original claim.

The client, March, was delighted, and Mark Longley, Director - HR Operations, said:  

“Radius produced a compelling report that explained that the section 18 legal cap on dilapidations damages focuses on what a likely purchaser of the unit at lease end would do to it, rather than what the actual landlord says it intends doing, which might be understated. We can’t believe any building surveyor wouldn’t be warning clients of the false economy of not getting a diminution valuation done.”

A valuable reminder

Building surveyors are important for negotiating costs, but only a well-prepared Diminution Valuation takes into account what a buyer would really do with the building to set a legal cap on damages.

As more landlords upgrade their units to meet EPC standards, the discrepancy between claimed costs and the actual drop in value can be substantial.

Paul Raeburn, Managing Director of Radius, advises:

“With vacated warehouses in particular these days, there is a rule of thumb that almost always plays out as a truism: even if vacated in perfect compliance, the property is more or less an anachronism. As such, the open market dictates that it requires significant modernisation and upgrade works to optimise lettability/value, which landlord works will unavoidably and inevitably snuff out many of the claimed remedies. The law helpfully and crucially detaches us from what the building surveyors rely upon as the so-called “intentions” of the landlord (as these may well change later,  or not be models of perfect veracity) by directing the Valuer to instead focus on what the likely “hypothetical purchaser” at the lease end/vacation date would do. Whilst the expert valuer therefore can and should reflect (i.e. strike out) considerably more prospective supersession than the building surveyor is able to do, we countenance against ever concluding settlement without reinspecting post the full (and thus true) works programme.”

Preparing Diminution Valuations is a specialist skill for chartered valuation surveyors. If a tenant settles a dilapidations claim without advice from a Valuer on Diminution Valuation, they are likely to pay more than they should.

If you are a commercial tenant facing a dilapidations claim, email paul@radius-consulting.com for expert advice.