Case notes

Dilapidations – diminution in value to the Reversion

There are occasions when a decision handed down by the Court of Appeal, although deciding nothing new, sheds light on issues which are sometimes troubling both for surveyors and lawyers.

The decision in Van Dal Footwear Ltd v Ryman Ltd [2009] EWCA Civ 1478 is one such decision. 

S.18(1) of the Landlord and Tenant Act 1927 has two parts which are generally referred to the first and second limbs. This case dealt with only the first limb, namely the valuation cap on the landlord’s claim for damages.

As is well known, a landlord cannot recover by way of dilapidations a sum which is greater than the amount by which the reversionary interest is diminished owing to the breach of the repairing covenants.

The test is a relatively easy one to state, but surprisingly difficult to apply.

Van Dal pursued a claim for terminal dilapidations against Ryman. The Judge at first instance found, quite correctly, that, in assessing the value of the premises in and out of repair at the end date of the lease, the property would have had to have been marketed for a period of six months.

Prior to the valuation date, Ryman had made offers to take a new lease of the premises in its existing state.

The issue for the court was whether, in the hypothetical valuation exercise undertaken pursuant to s.18(1), the valuer should take into account the possibility that Ryman would have repeated the offers during the notional six-month marketing period and the hypothetical purchaser would have found such an offer attractive.

In giving the leading judgment of the Court of Appeal, Lewison J said:

“… what the Judge was required to do was to value the bundle of rights that the landlord actually had on the valuation date. On the valuation date, the landlord did not have the benefit of an agreement for a lease with Ryman, or even any offer capable of acceptance. Such offers as Ryman had made had been rejected; and in any event were made before the beginning of the hypothetical marketing period.”

The Judge went on to say:

“The only hypotheses required or permitted by s.18(1) are, first the hypothesis that there are two simultaneous sales of the reversion; and second, the hypothesis, that, in relation to one of those sales, the property was in the physical condition required by the repairing covenants. No other hypothetical facts are required or permitted.”

The Judge at first instance considered that he was bound to take into account the possibility of Ryman making a further offer during the valuation period, and that such an offer would have been attractive to the hypothetical purchaser.

Lewison J explained that the Judge had fallen into the error of valuing the freehold with the benefit of an agreement for lease with Ryman. That was not a right that the landlord had, and it was not therefore not part of the reversion.

So the overall message is that the valuation hypothesis must not be modelled with actual events which come later. The valuation is a hypothetical one.

It can take into account the likelihood of certain events happening, but it was not appropriate in the Van Dal case to take into account offers which had already been rejected and to assume that they would have been repeated and accepted by the hypothetical purchaser during the notional marketing period.

Matthew Marsh is head of property litigation at Collyer Bristow LLP