What Is a Diminution Valuation?
A diminution valuation is designed to consider the effect that a certain act or event will have on the value of a property. In the world of dilapidations, the act is the failure to comply with the covenants of the lease.
A valuer will look at the anticipated value of a property as if all the lease covenants were complied with, normally in good repair, and in compliance with all other dilapidations requirements (like reinstatement of alterations and redecoration). They will then follow the same process and re-value the property in its current state, guided in part by their instructing party’s dilapidation surveyor for the value of remedial building work and the extent of the disrepair. The difference between these two values give the diminution in value.
How Does Section 18(1) Apply to a Diminution Valuation?
This diminution valuation can then be used hand in hand with the first part, or the first ‘limb’, of Section 18(1) of the Landlord and Tenant Act 1927, which effectively caps a disrepair claim at a maximum of either:
• The cost of the works (including on-costs) or;
• If appropriate, the diminution in the value of the landlord’s reversionary interest.
Reversionary interest essentially means the value of the bit of property that the lease related to. For example, this doesn’t have to be a freehold building – it could be part of a building that’s leased to the landlord with a sub-tenant in situ. Since the Act was written, some courts have taken the principles set out in Section 18(1) and extended them to cap the entire claim, including other heads of claim other than just disrepair.
Who Carries Out a Diminution Valuation?
Usually, diminution valuations are done by valuation surveyors. While they’re great at what they do, they may not have a detailed understanding of the dilapidations process, and so are often guided by the dilapidations surveyor or building surveyor working on behalf of the instructing party. This setup can cause a few minor difficulties, and in many cases, it results in an inaccurate diminution valuation, since the valuer is only able to rely on the information that’s presented to them. This doesn’t always take into account negotiations that have already happened between the parties, and the valuation surveyor often isn’t in a position to sift through the information to figure out what work is really required and what work the instructing party’s surveyor is asserting is required.
When the original Act was written in the 1920s, it was common for surveyors to be much more general in their practice than they are today. But as with many professions, the generalisation has lessened, and more specialist areas have developed – surveyors have niched. So, while the diminution provision was originally intended to be done with the same person completing the dilapidations work and the valuation work, it doesn’t work that way anymore. This has led to a gap in understanding between the valuer and the dilapidations surveyor. Of course, the dilapidations surveyor normally won’t really understand how to put a commercial valuation together, and the valuation surveyor isn’t likely to have a strong understanding of dilapidations. So even when a diminution valuation is presented to a court, it can still be difficult to figure out whose diminution valuation is more accurate – the landlord’s or the tenant’s.
To add more confusion, diminution valuations commissioned by a tenant will look very different from one commissioned by a landlord. This is partly because of misunderstandings and differences of opinion between the surveyors involved, but also because their instructing party’s interests are so misaligned.
When Is a Diminution Valuation Useful?
While the theory of how a diminution valuation can help to cap a dilapidations settlement is well established, there is so much nuance involved that using them this way should be done with caution. In fact, we recommend that diminution valuations should only be relied upon if they’ve been prepared by very experienced surveyors. Since these valuations are often expensive to prepare and the courts are uncertain of how to treat them, these kinds of valuations often aren’t done, particularly for relatively low value claims.
It also isn’t always the case that a diminution valuation will actually be able to cap a claim. Often with run of the mill or smaller claims, the diminished value can simply match the cost of works required. Diminution valuations are most effective at capping a claim if a property has clear redevelopment potential, since in these cases it’s regularly the case that dilapidation works will be subject to strike out through supersession, coming from the second limb of Section 18(1).
Why Are Diminution Valuations Often Difficult to Rely On?
As this is a quite difficult type of valuation to complete, there might be more defined guidance on their preparation released in future. But since diminution valuations aren’t really an everyday part of dilapidations for most practising surveyors (as most dilapidations claims proceed without them), there may not be a real demand to tighten this up. So it’s more likely that the issue is going to continue for some time into the future.
Given the difficulties surrounding Section 18(1) diminution valuations, it’s important to have the right advice from the outset. After all, having a diminution valuation that’s not really understood by anyone is unlikely to help in settling a dilapidations claim. It’s a complex issue, and one we always recommend getting advice from a professional on. At Harrison Clarke, our team of surveyors each have their own specialties, so that we can cover every aspect of surveying our clients might need. If you have any questions, or would like to discuss your Section 18(1) options, just get in touch and one of our team will be happy to help.
FAQ SECTION
What is a diminution valuation?
A diminution valuation considers the effect that a failure to comply with lease covenants has on the value of a property.
How is diminution in value calculated?
A valuer assesses the property’s value assuming lease covenants have been complied with and compares it with the property’s value in its current condition. The difference is the diminution in value.
Who carries out a diminution valuation?
Diminution valuations are usually carried out by valuation surveyors, often with input from dilapidations surveyors or building surveyors.
Can a diminution valuation cap a dilapidations claim?
A diminution valuation can be used alongside Section 18(1) of the Landlord and Tenant Act 1927, which may cap a claim depending on the circumstances.
When is a diminution valuation most effective?
Diminution valuations are often most effective where a property has redevelopment potential and dilapidation works may be affected by supersession.
Need Advice on a Diminution Valuation?
Diminution valuations and Section 18(1) claims can be complex, and getting the right advice early can make a significant difference to the outcome of a dilapidations dispute.
Whether you’re a landlord or tenant, our experienced surveyors can help you understand your position and assess the options available to you.
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