Section 18(1) and diminution in value

Worked example 1: diminution of value, no supersession

A purchaser who plans to undertake all the dilapidations within a 6-month period before seeking to actively market and let the property in its 1990s specification at a market rent of £60.00 per sq. ft. while allowing for a 9-month marketing void. It would expect to attract a new tenant of mediocre covenant strength on a short 5-year lease term with tenant break at the end of the third year, subject to an initial 6-month rent-free period.

Valuation A - compliant state  
Ground to fifth floor (offices) 10,000 sq. ft @ £60.00 psf £600,000
Initial yield (VP): YP perp 5.25% @ Years purchase 19.04762
      Sub-total £11,427,571
Less lease transaction costs        
Letting fees 10% £60,000    
Legals/lease conveyancing Fixed   £7,500     -£67,500
Less void costs        
Marketing void: 39 weeks [9 months]:   £450,000    
Empty rates: 26 weeks [6 months] (allowing 3 months empty rates) - RV £400,000 x UBR £0.487:   £97,400    
Rent free: 26 weeks [6 months]   £300,000    
Unrecoverable insurance: annual premium   £11,250 -£858,650 -£926,150
£15,000 - 39 weeks [9 months]                                                                       
      Sub-total £10,502.421
Less purchaser costs        
Legal; agents; SDLT (5.75%)       -£554,760
      Total £9,947,661
                                
      But say  £9,648,000 
      Check valuation: £965 psf

 

Valuation B - in actual condition  
Ground to fifth floor (offices) 10,000 sq. ft @ £60.00 psf £600,000
Initial yield (VP): YP perp 5.25% @ Years purchase 19.04762
      Sub-total £11,428,571
Less cost of works        
Dilapidations £25 psf £250,000    
Preliminaries 10% £25,000    
Contractor's overheads and profit 9% £22,500    
Contract administration 11% £27,500    
CDM coordinator 1%   £2,500      
    £327,500    
VAT 20%      n/a          
  Sub-total £327,500    
Profit/risk to purchaser 15% £49,125    
Cost of finance (over half works period) 6% £4,913 -£381,538  
                         
Less lease transaction costs        
Letting fees 10% £60,000    
Legals/lease conveyancing Fixed   £7,500   -£67,500  
Less void costs        
Works void: 26 weeks [6 months]:   £300,000    
Marketing void: 39 weeks [9 months]:   £450,000    
Empty rates: 52 weeks [12 months] (allowing 3 months empty rates) - RV £400,000 x UBR £0.487:   £194,800    
Rent free: 26 weeks [6 months]:   £300,000    
Unrecoverable insurance: annual premium £15,000 - 65 weeks [15 months]:   £18,750 -£1,263,550 -£1,712,588
                                                                
      Sub-total £9,715,984
Less purchaser costs        
Legal; agents; SDLT (5.75%)        -£528,310  
      Total £9,187,674
                              
      But say  £9,188,00  
      Check valuation: £919 psf