Section 18 Dilapidations

Section 18(1) of the Landlord and Tenant Act 1927 imposes a statutory cap on the damages a landlord can recover in a dilapidations claim at the end of a commercial lease. It provides that the damages for breach of a repairing covenant cannot exceed the amount by which the value of the landlord's reversion in the property has been diminished by the tenant's breaches. In many cases, this means the landlord recovers less than the full cost of carrying out the repair works.

For professional advice on how section 18 may apply to a specific claim, see the dilapidations surveyor service.

How the Section 18 Cap Works

The principle is straightforward: the landlord should not recover more than the actual financial loss caused by the tenant's failure to repair. The cost of works is the starting point, but it is not necessarily the amount the landlord is entitled to. If the property would be worth the same regardless of whether the repairs were carried out — for example, because the landlord intends to demolish or substantially refurbish the building — then the diminution in value may be much less than the cost of the works, and the tenant's liability is limited accordingly.

In practice, proving diminution in value requires a valuation exercise. The property is valued in two states: with the tenant's breaches in place, and as if the tenant had complied with the repairing covenants. The difference between those two valuations is the cap on recovery.

When Section 18 Matters Most

Section 18 is most significant in the following circumstances:

• Planned demolition or redevelopment— where the landlord intends to demolish the building or carry out a major refurbishment, the cost of the tenant's repairs may have little or no impact on the value of the reversion. In extreme cases, the section 18 cap can reduce the claim to nil.
• Supersession— where the landlord carries out works that go beyond what the tenant was obliged to do, the tenant's breaches are said to be superseded, and the section 18 cap may apply to reduce or eliminate recovery on those items.
• Market conditions— where the property market means the building would sell or re-let at the same value regardless of its condition, the diminution argument becomes stronger.

Section 18 and the Cost of Works

A common misunderstanding is that the landlord is automatically entitled to the cost of the works set out in the terminal schedule of dilapidations. That is the landlord's starting position, but section 18 means the actual recovery may be lower. The tenant's surveyor will usually consider whether a diminution valuation should be commissioned to test the landlord's claim.

Where the cost of works and the diminution in value are similar — for example, where the landlord will 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

Section 18(1) also contains a second limb: where the premises are to be demolished, or such structural alterations are to be made as would render the repairs valueless, no damages are recoverable for failure to repair. This is an absolute defence for the tenant where the conditions are met, but it requires evidence that the landlord had a settled intention to demolish or substantially alter the property at or around the time of lease expiry.

How Section 18 Affects Negotiation

In practice, section 18 arguments are raised by the tenant's surveyor during negotiation of a dilapidations claim. The argument may not eliminate the claim entirely, but it can significantly reduce the settlement figure. Conversely, the landlord's surveyor will seek to demonstrate that the cost of works is a fair reflection of the loss — particularly by showing that the repairs will be carried out and the property re-let in its existing configuration.

For more on the interaction between section 18 and other valuation principles, see the supersession in dilapidations guide and the dilapidation costs guide.