Section 18 Dilapidations

How the Section 18 cap works

Section 18(1) has two limbs. The first limb is the diminution cap. The second limb is an absolute defence where redevelopment will overtake the tenant's repair obligations.

The first limb — diminution cap

The first limb compares two valuations of the same property:

• Value the property as it stands, with the tenant’s alleged breaches in place.
• Value the property as if the tenant had complied with the repairing covenants.
• The difference between the two figures is the statutory cap on recovery.
• If the diminution is lower than the cost of works, damages are limited to the diminution.

Where the cost of works and the diminution in value are similar — for example, where the landlord intends to carry out the repairs and re-let in the same configuration — Section 18 has less practical effect. It becomes most important where there is a clear gap between the two figures.

The second limb — intention to demolish

The second limb of Section 18(1) is a complete defence to a claim for damages for failure to repair, where at or shortly after termination the premises are to be demolished, or such structural alterations are to be made as would render the repairs valueless.

• The landlord must have a demonstrable intention to demolish or substantially alter the premises.
• Evidence usually includes planning approvals, funding arrangements, contractor instructions, or a demolition programme.
• Where the second limb applies, it can completely nullify the claim.

The stronger the evidence of committed intent — planning consent already granted, contractors instructed, a demolition or refurbishment programme already scheduled — the more likely the defence is to succeed. Vague expressions of future intention rarely meet the test.

When Section 18 matters most

• Planned demolition or comprehensive redevelopment of the building.
• A major landlord-led refurbishment that would override the tenant’s works.
• Reletting at a condition or specification very different from the one the lease required.
• Market conditions where valuation is insensitive to the condition defects on site.
• Claims where the cost of works is very high but the reversionary value is largely unaffected.

How Section 18 is used in negotiation

Section 18 is most often raised by the tenant's surveyor during negotiation of a dilapidations claim. It does not always eliminate the claim, but it can dramatically reduce the settlement figure, and strengthen the tenant's negotiating position.

• Raise Section 18 early if the facts support it, rather than leaving it to proceedings.
• Separate repair items from decoration and services so the cap can be applied proportionately.
• Avoid arguing diminution in the abstract — tie it to a clear valuation and evidence base.
• Consider whether Section 18 and supersession overlap on specific items in the schedule.
• Be realistic: if the landlord will actually carry out the repairs and re-let in the same specification, the cap may add little.

Common misconceptions

• That Section 18 is automatic — it is not, it has to be pleaded and evidenced.
• That the landlord is always entitled to the full cost of works set out in the terminal schedule.
• That any redevelopment intention is enough for the second limb — it has to be settled and evidenced.
• That Section 18 removes the need to engage with the schedule line by line — both are needed.
• That Section 18 and supersession are interchangeable — they overlap but are legally distinct.