First limb: cap on damages
The first limb of Section 18(1) provides that damages for breach of a covenant to repair shall not exceed the diminution in the value of the reversion caused by the breach. Even if the cost of works is, say, £200,000, recovery is capped at the diminution figure, which can be materially lower or, in some cases, nil.
Second limb: superseded works
The second limb of Section 18(1) prevents recovery where the landlord has, at or shortly after lease end, demolished or structurally altered the premises in a way that makes the repair works valueless. In practical terms, refurbishment or redevelopment that supersedes the schedule items often defeats the claim on those items entirely.
How diminution is assessed
Diminution is assessed by reference to the value of the landlord's reversion in two states:
- Value of the reversion in the actual condition at lease end
- Value of the reversion in the condition required by the lease
The difference is the diminution and the cap on recovery. Establishing both figures requires valuation expertise applied to the specific property, location and market evidence.