Section 18 Dilapidations Cap — Landlord and Tenant Act 1927

The Two Caps Under Section 18(1) LTA 1927

Section 18(1) of the Landlord and Tenant Act 1927 provides that damages for breach of a tenant's covenant to put or keep the premises in repair shall not exceed: (a) the amount (if any) by which the value of the reversion in the premises is diminished owing to the breach of the covenant; AND (b) nothing at all where it is shown that the premises, at or after the end of the tenancy, are to be demolished or to be so changed in structure as to make valueless any repairs covered by the covenant. The first cap is the 'diminution cap' — damages cannot exceed the reduction in the open market value of the landlord's interest caused by the disrepair. The second cap is the 'supersession cap' — if the landlord intends to demolish or substantially rebuild, the tenant's failure to repair is superseded (made valueless) and damages are nil.

• Diminution cap: damages capped at the reduction in the open market value of the landlord's reversion (interest in the property) caused by the breach
• Supersession cap: if the landlord intends to demolish or structurally alter the property at or after the lease end, repairs would be valueless — damages reduced to nil (Salisbury v Gilmore [1942])
• Cost of works is the starting point, not the ceiling: the s.18(1) valuation exercise is separate from and overrides the schedule of dilapidations cost
• Expert valuation evidence: both caps require expert evidence from a RICS-qualified surveyor on the open market value of the reversion with and without the disrepair
• Burden of proof: landlord must prove diminution; tenant must prove supersession (once landlord establishes breach, diminution must be proved to recover; supersession is a tenant defence)

The Diminution Cap in Practice

The diminution cap under s.18(1) is assessed by comparing the open market value of the landlord's reversion in the condition it was left by the tenant with the open market value had the tenant complied with all repairing obligations. The difference is the maximum recoverable — this may be significantly less than the cost of works. Where the property is immediately re-let after the end of the lease (especially at the same or a higher rent), a sophisticated investor purchaser may pay the same or similar price for a property in disrepair as for a property in good repair — because the new tenancy at market rent reflects current condition, and the new tenant (or the landlord on re-letting) will carry out improvements. In such cases, the diminution may be nil even where the schedule of dilapidations runs to hundreds of thousands of pounds. Conversely, where the property cannot be re-let in its current condition without significant expenditure, or where the disrepair reduces the achievable rent or extends the void, the diminution may be closer to (though not necessarily equal to) the cost of works.

• Immediate re-letting: where landlord re-lets at market rent shortly after lease end, open market value of reversion may be unaffected by disrepair — diminution nil
• Void period risk: disrepair causing extended void can be evidence of diminution — landlord must show open market value was reduced, not just that works were needed
• Tone of market: in a rising commercial property market, an investor purchaser may factor in works costs but pay a similar net price — reducing diminution
• Expert RICS surveyors: both parties typically instruct RICS-qualified valuers to give expert evidence on the open market value — Scott Schedule format used
• Jones v Sherwood Computer Services [1992]: expert valuation evidence essential; s.18(1) is a mandatory cap, not an equitable discretion

The Supersession Cap and Landlord Intentions

The supersession cap under s.18(1) is a tenant's defence: if, at or after the end of the lease, the landlord intends to demolish or structurally alter the property to such an extent that any repairs the tenant was required to do would be rendered valueless, then damages for those repairs are nil. Key elements: (1) the intention must exist at the date of the hearing, not necessarily at the date of the lease expiry; (2) the intention must relate to the specific repairs (not all repairs if only part of the building is to be demolished); (3) a general or conditional intention is insufficient — Salisbury v Gilmore [1942] established that a firm intention is required; (4) the test is whether the repairs would be valueless — partial supersession is possible if only some repairs relate to the part to be demolished.

• Firm intention: landlord must have a firm and settled intention to demolish/rebuild — a conditional or speculative intention is insufficient to establish supersession
• At or after lease end: the intention can arise after lease expiry — e.g., planning permission obtained post-lease but before trial is relevant
• Specific repairs: supersession only applies to repairs that would be rendered valueless by the intended works — partial supersession if only part of building affected
• Hibernian Property v Liverpool Corporation [1974]: demolition intended before repairs completed — repair damages superseded; tenant not required to do works the landlord would demolish
• Evidence: planning applications, board resolutions, letters of intent — landlord will resist supersession defence with evidence of uncertain or contingent redevelopment plans

The Jervis v Harris Route — Avoiding the s.18(1) Cap

The key practical limitation of s.18(1) is that it applies to claims for damages for breach of covenant — not to claims for debt. Where a commercial lease contains a 'Jervis v Harris' clause (named after Jervis v Harris [1996] Ch 195), the landlord has the right to enter the property, carry out the repairs in default, and recover the cost as a debt. A claim to recover the cost of repairs carried out by the landlord under such a clause is a claim for debt (liquidated damages already incurred), not a claim for unliquidated damages for breach of covenant. As such, s.18(1) does not apply. The practical implication is that a landlord with a Jervis v Harris clause who actually carries out the repairs can recover the full cost without the s.18(1) cap — but must actually do the works before issuing the claim, and must comply strictly with the notice provisions in the lease.

• Jervis v Harris [1996]: cost of repairs carried out by landlord under a 'self-help' clause is a debt, not damages — s.18(1) does not apply
• Requirement to actually carry out works: landlord must complete the repairs before suing — cannot claim future repair costs as a debt under this route
• Lease must contain the clause: the right to enter and do repairs and recover as debt must be expressly included in the lease — it does not arise automatically
• Notice requirements: the clause typically requires service of a notice on the tenant specifying the breach and allowing a period for compliance before the landlord can enter
• Scott v Jacks [2019]: strict compliance with the notice provisions is essential — landlord cannot rely on Jervis v Harris route if procedural requirements are not met

Schedule of Dilapidations Process and Scotland

The dilapidations process typically follows three stages: (1) Terminal schedule of dilapidations: prepared by the landlord's surveyor at or after lease end, listing all alleged breaches and the cost of remedying them; (2) Counter-schedule: tenant's surveyor disputes items, quantum, and standard of repair; (3) Negotiation/dispute resolution: parties agree a settlement or proceed to expert determination or RICS arbitration; courts are used for high-value contested claims. The Pre-Action Protocol for Dilapidations Claims in England (annexed to RICS Dilapidations Guidance Note, 7th edition, 2016) sets out expected pre-action steps. In Scotland, there is no statutory equivalent to s.18(1) — dilapidations are governed by the common law obligation of the tenant to maintain the premises in good and tenantable repair throughout the lease and deliver them up in that condition at ish (lease expiry).

• Terminal schedule: prepared at or after lease end by landlord's surveyor; lists breaches; quantifies cost of remedial works as a starting point
• Counter-schedule: tenant's surveyor disputes individual items, standard of repair (Proudfoot v Hart (1890) — age and type of property), and cost of works
• RICS Dilapidations Guidance Note (7th ed 2016): sets out professional standard for dilapidations disputes; Calderbank offers; Scott Schedule format
• Interim schedule: landlord can serve a schedule during the lease term where tenant is in breach — Jervis v Harris route available during the term as well as at end
• Scotland: no s.18(1) cap; common law obligation to repair and leave in tenantable repair at ish; Scott Schedule process used; Scots law applies to Scottish commercial leases

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