Section 18 and the Diminution Cap: What a Landlord Can Really Recover

by | Mar 14, 2003 | Dilapidations

In March 2003, with the quarter day approaching, many commercial leases were coming to an end. Landlords were preparing schedules of dilapidations and tenants were receiving them. A schedule can run to many pages and a large sum. But what matters is not the total at the bottom of the schedule. It is what the landlord can actually recover, and on that question one short provision of the law carries great weight.

What section 18 says

Section 18(1) of the Landlord and Tenant Act 1927 has two limbs.

  • The first limb caps damages for breach of a repairing covenant at the amount by which the value of the landlord’s interest has been reduced by the disrepair. This is known as the diminution in value.
  • The second limb says no damages are recoverable for failing to put or leave premises in repair at the end of the lease if the landlord intends to demolish the building, or to make structural alterations that would make the repairs valueless, shortly after the term ends.

What this means in practice

The cost of the repairs is often a good guide to the loss, but it is not always the answer. If a landlord plans to refurbish the building completely, relet it on terms that do not depend on the repairs, or sell it to someone who will redevelop it, the true loss may be much lower than the cost of the works on the schedule. In some cases it may be very little.

For tenants, this means a claim should be tested against what the landlord is really going to do with the building. For landlords, it means a claim should be realistic and supported by evidence of both cost and loss.

Practical points

  1. Landlords should decide their plans for the building before preparing the claim.
  2. Schedules should be clear, priced fairly and limited to genuine breaches of the lease.
  3. Tenants should ask what the landlord intends to do once the lease ends.
  4. Both sides should consider early whether a valuation of the diminution will be needed.
  5. Many claims are best settled by negotiation, with surveyors on both sides working to narrow the issues.

Our advice

Take advice early, ideally a year or more before the lease ends. That leaves time to carry out works, agree a settlement or plan the case properly.

See our Dilapidations service, and how we later handled a £357,000 dilapidations claim for offices in east London.