Section 18(1) and diminution in value

Car Giant Ltd & Anor v London Borough of Hammersmith and Fulham [2017] EWHC 197 (TCC)

The case concerned a dilapidations claim relating to 35 secondary 1980s light industrial units in Willesden. The defendant held a 25-year lease on FRI terms. At the expiry date of 20 February 2011, 18 units were occupied by subtenants and the remaining units were vacant. The agreed extent and cost of dilapidations was £402,887. The claimant undertook agreed works of dilapidations of £183,897. It was agreed that remaining works of £218,990 were not undertaken. The claimant sought £402,887 contending no diminution cap. The defendant sought £110,000 forming a diminution cap. The judgment was at £166,000, plus fees for preparation of the schedule of £13,125, plus interest. Costs were acknowledged to be largely in favour of the defendant, who had made a Part 36 offer at £250,000.

Highlights

The judgment held the following:

• The total agreed cost and extent of works form the building blocks of diminution valuations and this is the figure to be taken.
• The agreed cost of works carried out represents diminution in value of the reversion.
• In respect of works not carried out, the burden of proof of diminution in value rests on the claimant.
• The claimant is required to demonstrate that works not undertaken would still be carried out, were major defects or were serious or substantial.
• Justifiable reasons for not undertaking work could include a lack of finance, disturbance to tenants, a rolling programme of works, holding back expenditure until the claim is resolved. In all cases, it must be supportable with evidence.
• If the works that are not carried out represented either one-off expenditure or decorations and were either minor or unimportant, say where market rents were still achieved, then no loss can be suffered.
• The claimant’s actions and inactions after the valuation date throw light on the value of the reversion at the valuation date.
• The cost of preparing schedules are to be treated as a head of loss and fall outside of the diminution cap because it is cancelled out within the valuations.
• Finance cost of 6% appeared to be calculated over half the period of the works but could be offset or reduced by rent receipts under new leases and holding over leases.
• There was an ability to recover dilapidations from sub-tenancies on leases holding over but with allowance of 50% representing the risk of recovery. No recovery was allowed from former subtenants who entered into reversionary leases.
• A speculative investor allowing for medium term development opportunity is considered doubtful as ‘the timescale is wholly uncertain’.
• It is unusual to require tenants holding over to bear cost of remedying pre-existing defects through a service charge.
• Evidence is required to support any claim for professional fees.
• Interest on the award may be calculated from a date later than the valuation date where evidence is presented demonstrating that the claimant is not out of pocket and had spent the money over a number of months and years.