The law dictates that the quantification of damages paid to a landlord for dilapidations will be capped at the true loss. This is the impact (if any) of the tenant’s breached repairing covenants on the freehold value of the property, which is often less than the cost of carrying out all the claimed works.
The skills and experience of chartered valuation surveyors (Valuers) are required to accurately determine whether or not the statutory cap applies. Our personnel have the experience and knowledge necessary to ensure you that you receive a fair and accurate outcome when a lease comes to an end.
Application of the statutory cap theoretically requires two valuations to arrive at the Diminution Valuation as the quantification of loss. These valuations are:
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);
The value of the landlord’s interest in its actual state (condition) on the Valuation Date (Valuation B – In Actual Condition).
The difference between the two should, in theory, be the Diminution in Value. However, these two valuations can only be made independent of one another, if the valuer has access to open market comparable evidence of similar properties in each distinct 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.
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 which 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 the 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-affective’, 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.
Ensuring that the loss in damages for dilapidations is capped at the lowest cost possible can save you significant sums over claims settled purely on a “cost of works” basis negotiated between chartered building surveyors only. Whether and to what extent this statutory cap applies is the specialism of the chartered valuation surveyor (valuer)
Making sure that you employ the specialities of the necessary chartered valuation surveyor (valuer), then, is a very worthwhile investment. Our experienced and knowledgeable personnel will guarantee you secure a fair outcome throughout end-of-lease negotiations.