The Court of Appeal has reviewed the arithmetical gymnastics behind a section 18 valuation
At common law, damages for terminal dilapidations are measured by the cost of the repairs that the tenant should have carried out, together with any rent lost during the period needed to effect the repairs. However, section 18 of the Landlord and Tenant Act 1927 caps the amount payable by reference to the diminution in the value of the landlord’s reversion. It also prohibits landlords from recovering damages for terminal dilapidations if it can be shown that the premises are to be demolished or structurally altered in such a way as to render the repairs useless.
The conventional way of calculating the diminution in the value of a reversion is by valuing the reversion in the state that it was in at the end of the lease and comparing that value with the value of the reversion in the state in which it should have been when the lease ended. The difference between the two values is the diminution in value.
Sunlife Europe Properties Ltd v Tiger Aspect Holdings Ltd [2013] EWCA Civ 1656; [2013] PLSCS 313 concerned the arithmetical gymnastics behind a section 18 valuation. The tenant accepted that it had left its building in disrepair. However, its primary case at trial had been that the landlord would have been forced to upgrade the building in order to let it, rendering repair superfluous. It abandoned this argument before the end of the trial and accepted that the landlord could have re-let the property without significant extra work, had it been in good repair. The concession was to have a significant impact on the outcome of the case.
On appeal, the tenant accepted the judge’s assessment of the value of the building as it stood at the end of the lease. It also accepted the judge’s assessment of the cost of the repairs that would have been required to comply with its repairing obligations under the lease. However, it challenged the judge’s valuation of the building in proper repair.
The tenant had calculated the value of the building in repair using a residual valuation. In other words, it worked out the capital value of the building following refurbishment and deducted the time cost and money cost of getting there. What was left was the residual value. The trial judge adopted the tenant’s methodology but, because the tenant ought to have left the building in better repair, decided that its residual value was considerably higher than the value attributed to it by the tenant.
The judge assessed the value of the reversion in the condition in which it ought to have been at £5,870,000. He found that the value of the reversion in its actual condition at the end of the lease was £4,462,000 and assessed the common law measure of damages at £1,353,254. The outcome of these figures was that the diminution in value exceeded the cost of the repairs, with the result that the statutory cap did not apply.
This would not have been the case, had the tenant’s figures been allowed to stand, because the tenant’s valuation of the property in repair was much lower. However, the Court of Appeal could find no fault with the judge’s approach and upheld the judgment in the landlord’s favour.
Allyson Colby, Property law consultant
