The schedule prices the works; the diminution valuation decides what is recoverable, and the landlord's own plans for the building can shrink the claim to a fifth.
A terminal dilapidations claim is the cost of the works the tenant should have done, plus professional fees, plus the rent and empty costs lost while the works are carried out, and in England and Wales it is then capped, under section 18(1) of the Landlord and Tenant Act 1927, at the fall in the value of the landlord's interest. On an illustrative 1,500 m² office the claim is 736,250 and the diminution in value 792,250, so the claim stands. If the landlord plans a refurbishment that strips out most of the items, the recoverable figure falls to 147,840, a fifth of it.
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The schedule of dilapidations is the part everyone sees; the diminution valuation is the part that decides the settlement. An asset manager approaching a lease expiry needs both before the business plan says what the building will do next, because that plan is itself evidence of the landlord's loss.
| Input | Value |
|---|---|
| Area, m² | 1,500 |
| Repairs (roof, M&E, finishes) | 380,000 |
| Reinstatement of tenant alterations | 70,000 |
| Redecoration | 50,000 |
| Professional fees, share of works | 12% |
| Works period, months | 3 |
| ERV per m² a year | 360 |
| Empty costs per m² a year (rates, service charge, insurance) | 110 |
| Buyer's risk allowance on works and fees | 10% |
| Valuation yield | 6.5% |
Claim = works + fees + ERV × works months ÷ 12 + empty costs × works months ÷ 12
Recoverable = MIN(claim, diminution in value of the reversion)
In Excel, with works in B1, the fee rate in B2, annual ERV in B3, annual empty costs in B4 and months in B5: =B1*(1+B2)+(B3+B4)*B5/12, then =MIN(claim,diminution).
Step 1, the works. 380,000 + 70,000 + 50,000 = 500,000, priced at the date of the claim, not at the date of the lease.
Step 2, the fees. 12 per cent for surveyor, contract administration and design: 60,000.
Step 3, the works period. The landlord cannot let the floor while the works are done. Three months at an ERV of 540,000 a year is 135,000 of lost rent, and three months of empty costs at 165,000 a year is 41,250.
Step 4, the claim. 500,000 + 60,000 + 135,000 + 41,250 = 736,250, 491 per m² and 16.4 months of ERV.
Under section 18(1) of the Landlord and Tenant Act 1927, damages for disrepair cannot exceed the amount by which the disrepair reduces the value of the landlord's interest. The test is a valuation, done as a buyer would: value in repair, less what a buyer would deduct to put the building in that state.
In repair, the floor is worth 540,000 ÷ 6.5 per cent = 8,307,692. A buyer intending to re-let would deduct the works, the fees, the rent and costs of the works period, and a 10 per cent risk allowance on the works and fees, 56,000: a total of 792,250, valuing the floor at 7,515,442 in its actual state. The diminution, 792,250, exceeds the claim, so the cap does not bite and 736,250 is recoverable.
The buyer in the valuation does what the market would do with the building, and the landlord's own intentions are strong evidence of that. If the next step is a refurbishment, most of the schedule is superseded: the new scheme strips out the finishes, replaces the plant and removes the tenant's partitions anyway.
| Landlord's plan | Works that survive | Diminution | Recoverable | Share of claim |
|---|---|---|---|---|
| Re-let in repaired condition, 3-month works | 500,000 | 792,250 | 736,250 | 100% |
| Partial upgrade, half superseded, 2-month works | 250,000 | 425,500 | 425,500 | 57.8% |
| Full refurbishment; only roof and structure survive | 120,000 | 147,840 | 147,840 | 20.1% |
| Demolition or redevelopment | 0 | 0 | 0 | 0% |
Under a full refurbishment no works period is charged, because the floor would be empty for the refurbishment programme in any case; the surviving roof and structure items are done within it. The second limb of section 18(1) removes the repair element entirely if the premises are to be demolished or altered so that the repairs would be valueless, which is the last row. The works period moves the claim as well: one month gives 618,750, six months 912,500, so the programme assumption deserves the same scrutiny as the rates in the schedule.
The cap in section 18(1) applies to repairing covenants. Reinstatement and redecoration claims are measured by the landlord's actual loss at common law, which in practice is tested in a similar way. The Dilapidations Protocol expects the landlord to say what it intends to do with the premises and to support a claim with a diminution valuation where relevant. This is an illustration, not legal advice.
Serving the schedule at full cost while the business plan already provides for a comprehensive refurbishment. The tenant's surveyor will ask for the plan, and on these figures a claim presented at 736,250 is worth 147,840. Worse, a business plan that books 736,250 of dilapidations income and also budgets the refurbishment counts the same money twice: the refurbishment replaces most of the works the claim was meant to pay for. The decision to refurbish should be made on its own numbers, as in whether to refurbish before selling, and the dilapidations figure taken from that decision, not the other way round.
The lease expiry and break profile, and the capital plan that a dilapidations settlement feeds, are in the free workbooks for this book.
Under section 18(1) of the Landlord and Tenant Act 1927, damages for breach of a repairing covenant cannot exceed the diminution in the value of the landlord's reversion, and nothing is recoverable for repairs if the premises are to be demolished or altered so that the repairs would be valueless. On the illustrative office the cap is 792,250 if the landlord re-lets, 147,840 if it refurbishes, and nothing if it redevelops.
Yes, for the period reasonably needed to carry out the works, subject to the diminution cap. On the illustrative office a three-month works period at an ERV of 540,000 a year adds 135,000 of lost rent and 41,250 of empty costs to the 560,000 of works and fees, a claim of 736,250. A six-month programme would take it to 912,500.
Only if the landlord cannot recover it. Damages are compensation for loss, so a landlord that has opted to tax and recovers input VAT on the works cannot add it to the claim. A landlord that cannot recover VAT, for example on residential or some exempt property, can include it, which on 560,000 of works and fees at 20 per cent would add 112,000.
This article is one calculation from The Real Estate Asset Manager. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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