Section 18(1) and diminution in value

Worked example 2: diminution of value, with supersession

A purchaser who plans to upgrade the property to a category A specification within 9-months, which would supersede 50% of the dilapidations before seeking to actively market and let the property at a market rent of £80.00 per sq. ft. while allowing for a 6-month marketing void. It would expect to attract a new tenant of good covenant willing to commit to a 10-year lease without break option with a 12-month rent-free period.

Valuation A -  compliant state  
Ground to fifth floor (offices) 10,000 sq. ft @ £80.00 psf £800,000
Initial yield (VP): YP perp 4.75% @ Years purchase 21.05263
      Sub-total £16,842,105
Less cost of works        
Refurbishment £80 psf £800,000    
Preliminaries 10% £80,000    
Contractor's overheads and profit 9% £72,000    
Contract administration 11% £88,000    
CDM coordinator 1%   £8,000     
    £1,048,000    
VAT 20%      n/a         
  Sub-total £1,048,000    
Profit/risk to purchaser 15% £157,200    
Cost of finance (over half works period) 6%  £15,720  -£1,220,920  
Less lease transaction costs        
Letting fees 10% £80,000    
Legals/lease conveyancing Fixed   £7,500   -£87,500  
Less void costs        
Refurb works: 39 weeks [9 months]:   £600,000    
Marketing void: 26 weeks [6 months]:   £400,000    
Empty rates: 52 weeks [12 months] (allowing 3 months empty rates) -RV £400,000 x UBR £0.487:   £194,800    
Rent free: 52 weeks [12 months]:   £800,000    
Unrecoverable insurance: annual premium £15,000 - 65 weeks [15 months]:   £18,750 -£2,013,550 -£3,321,970
                                                         
      Sub-total £13,520,135
Less purchaser costs        
Legal; agents; SDLT (5.75%)        -£735,138 
      Total £12,784,998
                          
      But say £12,785,000
      Check valuation £1,279 psf

 

Valuation B - in actual condition  
Ground to fifth floor (offices) 10,000 sq. ft @ £80.00 psf £800,000
Initial yield (VP): YP perp 4.75% @ Years purchase  21.05263 
      Sub-total £17,842,105
Less cost of works        
Refurbishment £80 psf £800,000    
Dilapidations £25 psf  £250,000     
Sub-total   £1,050,000    
Less supersession 50%  £125,000     
Sub-total   £925,000    
Preliminaries 10% £80,000    
Contractor's overheads and profits 1% £8,000    
Contract administration 11% £88,000    
CDM coordinator 1%   £8,000      
    £1,173,000    
VAT 20%      n/a         
  Sub-total £1,173,000    
Profit/risk to purchaser 15% £175,950    
Cost of finance (over half works period) 6% £26,393    
Less lease transation costs        
Letting fees 10% £80,000    
Legals/lease conveyancing Fixed   £7,500   -£87,500  
Less void costs        
Refurb works: 39 weeks [9 months]:   £600,000    
Dilaps work (undertaken during refurb)   n/a    
Marketing void: 26 weeks [6 months]:   £400,000    
Empty rates: 52 week [12 months] (allowing 3 months empty rates) - RV £400,000 x UBR £0.487:   £194,800    
Rent free: 52 weeks [12 months]:   £800,000    
Unrecoverable insurance: annual premium £15,000 - 65 weeks [15 months]:   £18,750    
                                                          
      Sub-total £13,365,713
Less purchaser costs        
Legal; agents; SDLT (5.75%)        -£726,743 
      Total £12,638,970
                            
      But say £12,539,000
      Check valuation £1,264 psf

The highest valuation in both a compliant state and actual condition is that from the bid of hypothetical purchaser (2). The difference between these 2 valuations of £12,785,000 and £12,639,000 is £146,000, which forms a cap on the common law claim of £700,000.

There may of course be a third hypothetical purchaser, who plans to convert the property to residential under the permitted development rights on which a more comprehensive appraisal would be required.