Section 18 of the Landlord and Tenant Act 1927 plays a crucial role in dilapidation claims in the UK. This section of the act is particularly significant for landlords and tenants involved in commercial end-of-lease disputes, as it sets the boundaries for claims related to property disrepair at the end of a lease term.
In this article, we will examine how section 18 affects dilapidation claims and the implications for landlords and tenants.
What is section 18?
Section 18 of the Landlord and Tenant Act 1927 limits the amount a landlord can claim for damages when a tenant fails to fulfil their repairing obligations under a lease. It places a statutory cap on damages, ensuring that landlords cannot claim more than the actual diminution in the value of their property caused by the tenant's breach of the repairing covenant.
The two limbs of section 18
Section 18 consists of two essential parts, often referred to as "limbs," which provide a framework for assessing and limiting claims:
The first limb: diminution in value
This limb restricts the landlord's claim to the amount by which the disrepair has reduced the value of the landlord's interest in the property. It means that the landlord can only claim for the actual financial loss incurred rather than the cost of repairs.
To determine this, two valuations are necessary: one assessing the property's value in its current state of disrepair and another estimating the value had it been properly maintained. The difference between these valuations represents the diminution in value.
Using an example, if the value of the building in repair and in the condition the tenant should have left it is £1million, but the value of it in disrepair and in breach of the lease obligations is £850,000, then the landlord can only claim £150,000 of loss, even if the cost of works has been estimated at £300,000.
The second limb: future plans for the property
Under the second limb, if it is proved that the property will be demolished or significantly altered after the lease ends, rendering the repairs valueless, then no damages are recoverable. If the landlord plans to redevelop the property, they may not be entitled to claim damages for repairs that would become irrelevant.
Practical implications for landlords and tenants
Understanding section 18 is vital for both landlords and tenants as it directly impacts the financial and legal aspects of dilapidation claims:
For landlords
Landlords need to provide a detailed breakdown of their claim, and if they have not carried out and paid for the repair works, they may often need to produce a diminution valuation. This valuation must justify the claim by demonstrating how the tenant's failure to repair has reduced the property's value.
Landlords should consider their future plans for the property, as any intended redevelopment could limit their ability to claim damages.
For tenants
Tenants can use section 18 as a defence against excessive claims by landlords. By challenging the landlord's valuation, tenants can argue that the claimed damages exceed the actual diminution in value.
Tenants should also be aware of the landlord's future intentions for the property, as this could significantly affect the outcome of a dilapidation claim.
The dilapidations protocol
The Property Litigation Association has established a dilapidations protocol, which outlines the procedures for handling dilapidation claims. This protocol encourages the early exchange of information and aims to resolve disputes without litigation.
Key steps include:
Schedule of dilapidations: After the lease ends, landlords must provide this document detailing the disrepair and the costs involved within a reasonable timeframe.
Quantified demand: This follows the schedule of dilapidations and specifies the monetary sums sought by the landlord.
Tenant's response: Tenants must respond to the quantified demand, often within 56 days, outlining their position on each item claimed.
Negotiations: The landlord and tenant are encouraged to negotiate and disclose relevant information to settle the dispute without court proceedings.
Conclusion
Section 18 of the Landlord and Tenant Act 1927 is a critical piece of legislation for anyone involved in commercial property leases. By capping the damages, landlords can claim and considering future property plans, it provides a balanced approach to resolving dilapidation disputes. Both landlords and tenants should engage with experienced professionals to navigate the complexities of this area and ensure that their interests are adequately protected. Understanding and applying the principles of section 18 can lead to fairer outcomes and help avoid costly litigation.
