The Dilapidations Protocol & the importance of a Diminution Valuation in dilapidations negotiations

Paragraph 9.4 of the Dilapidations Protocol (the Protocol) could not be clearer:

“…in a case where the landlord has not carried out all the works specified in the schedule…it should provide a formal diminution valuation (DV)…”

Let’s be clear. Negotiations concerning the cost of “the works specified in the schedule” is the discipline of the Building Surveyor. WHEREAS, provision and interpretation of a DV is the discipline of the Valuer.

Yet time and again, claims are settled between building surveyors, no works done, and without the Tenant Building Surveyor requiring a “formal diminution valuation” (to be distinguished from a fag-packet calculation) from the landlord (per paragraph 9.4). These settlements will almost certainly be inflated. The impact of dilapidations on the value of “the reversion” [Section 18 (1) of the LTA 1927] is almost invariably less than the lowest Cost of Works assessment. Especially, when no (or few) works as claimed have actually been done.

Any dilapidations claim settled for a tenant without engaging a specialist diminution Valuer, as well as Building Surveyor, will likely be inflated, and expose potential negligence claims. This is especially the case for settlements where the landlord has not done the claimed works, nor been required to produce a DV which is then robustly challenged.

So as a common example, it is not the tenant building surveyor’s sphere of expertise to determine whether or not what the landlord claims to be weakened terms such as reduced rent, extended rent-free period and/or a capital contribution, was really due in whole or part to the dilapidations. Rather, this is for the Valuer to advise upon, informed by comparable evidence and experience. I can assure you that, more often than not, what is claimed – whilst prima facie credible and convincing (especially if written into the reletting Heads of Terms as being “to compensate the new tenant for dilapidations” – seldom turns out to be.Similarly, the claim that reletting a property with a Schedule of Condition recording your dilapidations, in some way evidences a deferred loss; is at best improbable, because of course the new tenant will likely be caught by the fact of inexorable further decay (see my recent EG article on this).

Dilapsolutions is unique as a dilapidations consultancy, employing both Building Surveyors and Valuers. This avoids the disconnect common to other dilapidations consultancies which are characterised by employing only Building Surveyors. In particular, but not only, the traditional consultancy risks tenants settling on a pure “Cost of Works” basis, which will likely be higher than it would be with a Valuer applying the statutory DV cap. Over-settlement is especially likely in cases where the landlord has not done the claimed works, and whilst paragraph 9.4 of the Protocol requires their commissioning a DV, few landlords will do so unless pushed; and then, that DV must be examined and challenged by the tenant’s own Valuer.

If you are a commercial landlord or tenant concerned about dilapidations claims and would like to find out more, please get in touch here.