Section 18(1) and diminution in value

Valuation A (compliant state)

In arriving at the first valuation ‘in a compliant state’, investigations are required to help understand the type of hypothetical purchaser most likely to successfully acquire the building and their likely plans.

The building will be worth different amounts to the various bidders in the market place and it is usual to prepare different valuations for each possible bidder to determine the highest of those worths, which ultimately reflects the value of the premises. It may be that the highest bidder would be from a purchaser seeking to let the space at a market rent on full repairing terms or perhaps one seeking to upgrade the space in return for an improved rent and in the expectation of attracting a better covenant on  longer lease terms. In most cases, there is an obvious outcome so that these valuations can be limited to 1 or 2 alternatives.

Valuation B (in actual condition)

Turning to the second valuation ‘in actual condition’, the relevant question is by how much less would someone pay for the property in that condition? Finding comparable evidence in the same state of repair is highly unlikely unless the building was sold in its actual condition at or close to the valuation date and so the type and plans of the hypothetical purchaser become important considerations.

In valuing the building in actual condition, the hypothetical purchaser has additional considerations to that of buying a building in a compliant state, namely what to do with the dilapidations.

It may be that the successful bidder is one who plans to undertake all the dilapidations before seeking to let the building. Alternatively, it may be a purchaser who plans to let the property in its actual condition without incurring the cost of the repairs, but at a lower level of rent on diluted repairing obligations for a shorter term. The intentions having regard to the type of hypothetical purchaser leads to different assessments of worth in the market and again, it is the highest of these works that determine value.

The actions (or non-actions) of the landlord may provide helpful evidence of the likely plans of the hypothetical purchaser of the property in its actual condition, particularly as the landlord is in the market, unless it can be demonstrated that the landlord acted either unreasonably or perhaps having regard to its own personal interests. In any event, any evidence of an intention to pull down or reconstruct the whole or part would be taken into account under limb 2.