Valuation Requirement
Application of the statutory cap theoretically requires two valuations to arrive at the Diminution Valuation as the quantification of loss. These valuations are:
A
The value of the landlord’s interest on the assumption the Property is in its covenanted state (condition) on that date (Valuation A – Assuming Compliance);
B
The value of the landlord’s interest in its actual state (condition) on the Valuation Date (Valuation B – In Actual Condition).
The distinction between the two lies in the Diminution in Value. However, these valuations can only be made independent of one another if the chartered surveyor has access to comparable evidence from the open market for similar properties in each unique state.
Calculating commercial property valuations is straightforward for the covenanted condition, Valuation A, as we can use evidence from similar properties let on full repairing and insuring (FRi) leases.
However, it is near impossible in practice to calculate the actual (dilapidated) value at lease expiry. This would require evidence from transactions involving physically similar properties with precisely the same breaches as to repair, decoration and reinstatement.
With no direct comparisons in the Actual Condition, valuers tend instead to deduct the cost of Remedial Works (plus consequential losses) from Valuation A in order to arrive at Valuation B.
Valuation B can differ significantly if the landlord’s valuer deducts the entirety of his building surveyor’s costs, without any scrutiny as to which may not be relevant to lettability/value.
Moreover, each valuer will be using their chartered building surveyor’s costs, which will vary to some degree.
Credible Valuations
In considering the likely impact of the breaches on property value, it is first necessary to assess the expected type of hypothetical purchaser of the property at the lease end date and how the bid of this party would be affected, if at all, by the disrepair to the premises.
A chartered building surveyor is required to provide a remedy and price for any disrepair he finds within the property. However, in making commercial property valuations, the valuer applies experience to ‘filter’ out claimed items that are unlikely to ‘survive’ to affect the property’s freehold value.
The first is commonly termed ‘supersession’. This is the term used to describe a situation where they need for certain work is made redundant by the ‘probable occurrence of another’. Examples might include repairs to dated toilets which require modernisation or repairs to storerooms above a shop which would have greater value if made residential.
The second ‘filter’ requires the valuer to apply actual open market transacting experience to objectively judge which costs are, and which are not, likely to be ‘value-effective’, in reference to the standards of condition and presentation that the local market demonstrates is required and expected of similar properties.
For most second-hand commercial properties, one reaches a point in objectively targeted expenditure beyond which one can keep on spending, but no more will be added to or recovered in value. In other words, the law of diminishing returns invariably applies.
The valuer applies local transactional evidence, along with experience in agency (transacting) generally, to provide informed commercial property valuations, rather than blindly assuming that all costed items ‘survive’ to impact value.
Summary
In England, Wales, and the Isle of Man, statutory regulations limit damages for dilapidations to the lower of the Cost of the Remedial Works or the impact on the property's value. This cap is often significantly less than expected.
In Scotland, similar principles are applied to a relatively limited extent under common law. For bespoke specialist advice tailored to your specific needs, contact us today.
So you can only, therefore, be confident that you have either secured the lowest possible outcome as a tenant or defended the highest as a landlord if you engage the advice of both a Chartered Building Surveyor (Cost of Works) and a Chartered Valuation Surveyor (property’s value). At Dilapsolutions, we uniquely and automatically provide both – two for the price of one!
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