Diminution Valuations – A Second Set of Eyes

Dilapidations negotiations are led by building surveyors, whether preparing the Claim for landlords or defending against claims for tenants. Rightly so, as these are claims for damages for failure to do works to repair, redecorate & reinstate alterations, and it is the expertise of building surveyors to identify these and price their remedy.

There is also the vital role of the Valuer as a distinct discipline of chartered surveyor, primarily (but not only) in terms of the “Section 18/Diminution in Value” (DV) element. As a reminder, this caps dilapidations damages to the lower of the negotiated cost of works figure or the impact on the Property’s open market value (essentially capping all three heads of repairs, redecorations and reinstatement).

The Dilapidations Protocol dictates (at its 9.3 & 9.4) that landlords must provide a DV if not (yet) doing most to all of the claimed works. This is a protection because not only is the effect of dilapidations on a property’s value usually far less than the cost of works, but landlords who are not progressing works are commonly thinking about doing different works to repurpose/modernise once they have the dilapidations settled.

It still never fails to amaze us how many tenants settle a dilapidations claim without putting their landlord to providing a diminution valuation!

From a landlord’s perspective, whilst the preference would usually be to avoid this hurdle, a strong and persuasive DV is essential to counter an opportunistic one from a tenant.

For tenants, whether or not a landlord provides a DV and/or does most to all of the claimed works, the Protocol (at its 9.5) restates their longstanding right to provide their own DV. These almost always enable far lower settlements than a building surveyor alone will be able to achieve (as the Valuer has the expertise to achieve the usually lower value-impact). Yet again, so many tenants settle without obtaining a DV. Perhaps the false economy of saving the extra fee or failure of their building surveyor to explain and recommend.

However, for tenants especially, the role of the valuer goes further. It is a second set of eyes. For example, a common issue we find is that of erroneously claimed reinstatement (of tenant’s alterations). This element often makes up the lion’s share of a claim, especially for offices. Yet often, consideration of whether or not the claimed reinstatement is valid is not thorough enough. Whilst it may be probable – even a fact – that the tenant (or a predecessor) carried out the offending alterations, it does not mean that, at law, they’re obliged to reinstate.

Crucially, the starting point is what was physically demised (leased). So often, at lease renewal, what exists at that time [including any alterations carried out under previous lease(s)] becomes part of the new demise unless the landlord’s solicitors clearly state, for example, in the “Yield Up” and/or Alterations Clauses that at the end of the new lease, the tenant must reinstate any alterations made during this and any previous leases.

Even referenced back to previous leases, unless the landlord (with whom the burden of proof sits) can produce Licenses To Alter or other clear evidence that what are claimed to be alterations were carried out by the tenant and that there is a clear contractual obligation to reinstate them, then there is no such obligation to do so. It is amazing how much the valuer at this second, or “review” stage, can filter out as more likely demised than a tenant’s improvement to reinstate.

Factoring this element in with the specialist valuer’s DV impact, the “saving” relative to settling via a building surveyor alone on a pure cost of works basis is significant.

For more information and advice in relation to diminution valuations and dilapidations claims, please email paul@dilapsolutions.com.