Section 18 Valuation: Diminution in Value and the Claim Cap

Section 18 of the Landlord and Tenant Act 1927

Section 18(1) has two parts, usually called limbs. Both protect tenants against claims bigger than the landlord's real loss.

The cap only reaches repair. RICS guidance is clear that section 18(1) does not apply to decoration, removal and reinstatement. Those obligations are assessed under different rules.

So split the landlord's schedule into its categories before you argue the cap. The Dilapidations Protocol already asks the landlord to list repair, reinstatement and redecoration separately.

Diminution in value explained

Diminution in value means the fall in the value of the landlord's reversion. That is its interest in the building once your lease ends.

A valuer prepares two valuations of the same property on the same date:

1. In compliance. The building as it would be if you had kept every covenant.
2. Out of compliance. The building as it actually is, with your breaches.

The difference is the diminution. RICS guidance says market value is the starting point, generally taken to mean open market value. The valuer works out who would buy or rent the building in each state.

When the landlord will redevelop

The landlord's plans for the building often decide the claim. If it will strip the floor to shell, the repairs you skipped may be worth very little to it.

The second limb goes further. Some premises will be pulled down, or altered so your repairs become valueless, at or shortly after the lease ends. Then no damages are due for those repairs.

RICS calls a related idea supersession. A landlord should only claim for what it lost. Where its own works sweep away an item, there is usually no loss on that item.

The Protocol builds this in. The landlord's quantified demand should leave out items its plans will supersede. The tenant's response should flag any it missed, with the evidence.

Ask early about the landlord's plans. Look for planning applications, marketing particulars and refurbishment tenders. They are often the best evidence you will find.

Supersession: when the landlord's plans cancel the claim

Supersession is the idea that some schedule items are overtaken by what the landlord does next. If those works would sweep the item away anyway, the landlord has lost nothing on it.

RICS guidance says there is no universally accepted test for supersession. It sets out the situations where it most often arises:

1. Demolition or structural alteration. The landlord should not claim for repairs to parts it will pull down. This overlaps with the second limb of section 18.
2. Grander works. The landlord carries out wider or more expensive works than the lease required. The claim may then be superseded, or limited to the basic works.
3. Market demands. If the market would require the grander works anyway, such as an upgrade to meet energy rules, the landlord may struggle to show a loss.

The Protocol asks the tenant to state supersession in its response, with the evidence and the items it affects.

Cost of works versus diminution

RICS guidance says damages after the lease ends are typically the lower of two figures. One is the reasonable cost of the works; the other is the diminution in value. That makes both figures matter.

A landlord who has done the works will lead with its invoices. A landlord who has not will usually need a diminution valuation. The Protocol says that before issuing proceedings it should provide one, prepared by a valuer, unless that would be unreasonable.

The tenant's side needs both figures too:

1. A real cost of works. A builder's line-by-line price for what the lease actually requires.
2. A view on diminution. From a valuer, where the landlord's plans or the market suggest a small fall in value.

Our own RICS-qualified quantity surveyor prices the first figure from current builders' rates. Because our own crews do the work, it is a price we will build for. We do not value the reversion: that is a valuer's job.

Using the cap in negotiation

Most claims settle without a trial. The section 18 cap is a negotiating tool long before it is a legal argument.

Use it in this order:

1. Split the schedule. Separate repair from decoration and reinstatement, because the cap only reaches repair.
2. Price the repair items. Get a real cost of works for each line.
3. Test the landlord's plans. Evidence of refurbishment, re-letting as shell or redevelopment can cut the repair claim sharply.
4. Take valuation advice. Where the fall in value looks small, a valuer's view strengthens your hand.
5. Make a reasoned offer. Base it on the lower of the two measures, item by item.

The Scott schedule is where this happens, line by line. One team, one point of contact: we price the works, negotiate with your landlord's surveyor and, if it costs less, do the works ourselves.

What this means at your lease end

Section 18 does not make a dilapidations claim go away. It keeps it honest. A landlord can still recover its real loss on repair, and the reinstatement and decoration items sit outside the cap.

Three things keep the bill down for most tenants:

• a schedule of condition from the start of the lease;
• reinstatement and decoration done before you leave, where the lease clearly requires them;
• a priced, evidence-backed response to every line the landlord claims.

If you are leaving early, the cap also shapes a surrender premium or a break. Our guide to surrender of a commercial lease covers how the dilapidations fit into that deal. Want the works priced before you negotiate? Get your claim reviewed.