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Assessment of Damages

Assessment of Damages


Assessment of Damages

If the tenant decides not to rectify any breaches of repairing obligations prior to the expiry of the lease, the landlord is entitled to submit a claim for financial compensation. This is usually based on the cost of undertaking the outstanding remedial works, but may be more fairly represented by the reduction in the value of the reversionary interest (see below).

In addition to the cost of the remedial works, a claim may well include:-

1. The cost of preparing the schedule of dilapidations and the cost of negotiating the claim.

2. Loss of rent and service charge during the period the remedial works are underway.

3. Cost of rates whilst building is unoccupied and undergoing remedial works.

4. Cost of additional insurance whilst vacant.

5. Loss of interest, if applicable, on the cost of carrying out necessary works.

This is usually presented in a Summary of Financial Claim which breaks the total claim down into relevant sub categories of claim.

In order to to claim loss such as rent, service charge, rates and insurance, the Landlord would need to clearly show that on balance of probability, carrying out the remedial works would prevent occupation by a new Tenant. This is often difficult to demonstrate in the current economic climate where typical commercial premises may take considerable time to re-let. Loss of rent claims are relatively few and far between at present.

Limbs 1 and 2 of Section 18(1) of the Landlord and Tenant Act 1927 were introduced to modify the common law which applied prior to the Act.

The Courts in the 19th Century were assessing damages for breach of repairing covenant as the cost of remedial works to bring the property back to the condition required by the covenants.

This led to anomalies in the scale of damages which did not fairly reflect the loss incurred by the Landlord (Joyner v Weeks 1891). The Act therefore aimed to limit the loss a Landlord could justifiably claim to more closely reflect the loss as measured by the diminution in the value of the reversionary interest.

Limb 1 states:-

‘Damages for a breach of covenant or agreement to keep or put premises in repair….shall in no case exceed the amount (if any) by which the value of the reversion….in the premises is diminished owing to the breach of such covenant or agreement……’

In simple terms, this means that if a property valued at £100,000 and requiring repair at a cost of £100,000 would only be worth £150,000 once repaired, then the measure of damages in accordance with Section 18 (1) would be £50,000. The valuation is assessed on the date that the lease expires.

However, the Act only applies to ‘repair’ and reinstatement and redecoration works are excluded from the provisions in Section 18. The PLA Dilapidation Protocol recommends that Schedules of Dilapidation reports are separated into Reinstatement; Redecoration and Repair sections.

Whilst there are some subtle differences between the common law approach and Section 18 approach to assessing loss, these elements are normally assessed by reference to diminution in value in the same way as repair.

In practical terms, Landlords are not required to provide a diminution valuation as part of the initial Schedule of Dilapidations and if a Landlord carries out work to a property to remedy breaches of a Tenants repairing obligations, then the cost of reasonably required work is usually accepted as the fair measure of the damages.

The formal method of assessing the diminution in reversionary value is to carry out two valuations. The first hypothetical valuation assuming that all breaches of repairing covenant have been rectified; the second valuation based on the existing condition of the building.

This process is a fairly specialised area of commercial valuation and depends on many market factors.

Limb 2 states:-

‘… and in particular no damage shall be recovered … if it is shown that the premises … would at or shortly after the termination of the tenancy have been or be pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant or agreement.’

In simple terms again, it would be pointless replastering and repainting the wall that is in disrepair, if the Landlord intends to remove the wall as part of refurbishment or improvement works.

This concept is know as supercession and in the example above, the Landlords intention to remove the wall in question has superceded the requirement to carry out the necessary repair. Ultraworth Ltd v General Accident Fire & Life Assurance Corp Plc [2000]

Establishing the Landlord’s intentions regarding the future use of a building is essential as part of the claim mitigation process. The degree of supercession could range from minor issues relating to small proposed changes that would have a minimal effect upon the claim for damages to complete dismissal of the claim if the Landlord proposes to demolish and redevelop the building.