Section 18(1) and diminution in value

Section 18(1) of the 1927 Act is set out in 2 sections, known as limbs 1 and 2, which both need to be considered in undertaking the necessary valuations. The specific wording of each limb is detailed below:

Limb 1

'Damages for a breach of a covenant or agreement to keep or put premises in repair ... shall in no case exceed the amount (if any) by which the value of the reversion ... in the premises is diminished owing to the breach of such covenant or agreement ...'

Limb 2

'... and in particular no damage shall be recovered ... if it is shown that the premises ... would at or shortly after the termination of the tenancy have been or be pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant or agreement.'

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Application of limb 1

Limb 1 of section 18(1) imports the concept of fairness and equity to a tenant’s dilapidations liability, providing that, whatever the amount of the common law claim, a landlord cannot recover more than its financial loss owing to the breaches of covenant to repair.

The application of section 18(1) assesses the amount by which a hypothetical purchaser would discount its bid for the building reflecting its actual condition and any improvement or upgrading works the purchaser might carry out that would otherwise negate the effect on market value (and the bid) of some of the wants of repair owing to the tenant’s breaches.

Section 18(1) accordingly envisages 2 valuations, namely:

• Valuation A (compliant state)

A valuation reflecting the bid of a hypothetical purchaser for the landlord’s reversionary interest, being the interest at the lease expiry date, assuming the building was in a compliant state, being the condition that the outgoing tenant should have delivered back the property; and

• Valuation B (in actual condition)

A similar valuation but taking the building in its actual condition, being the condition it was found at the lease expiry date.

The difference between the 2 valuations is the diminution in value of the asset.

Application of limb 2

The effect of limb 2 is to reduce the landlord’s claim in damages in circumstances where the landlord has a fixed and settled intention at the lease expiry date to demolish or substantially alter the building, or component parts of the building at or shortly after the expiry date, and the intended works of demolition or alteration would render the cost of the repairs valueless.

The meaning of ‘structural alterations’ in limb 2 is not absolutely clear. However, it is generally thought the courts will give a wider meaning to ‘structural alteration’ in the context of limb 2 and this will not necessarily have to entail alterations that would impinge of the structural integrity of the building.