17.1 Improvements & Dilapidations
In the context of lease extensions
Treatment of Tenant's Improvements
The Act explicitly addresses tenant's improvements in the valuation process. Under paragraph 3(2)(c) of Schedule 13, when determining the value of the landlord's interest:
"on the assumption that any increase in the value of the flat which is attributable to an improvement carried out at his own expense by the tenant or by any predecessor in title is to be disregarded;"
This provision ensures that the tenant does not pay a higher premium as a result of value added through their own investments, such as structural alterations, extensions, or upgrades to fixtures and fittings. In practice, valuers must assess the 'unimproved' value of the flat by deducting the uplift attributable to these works from the current market value.
Although this assumption is specified for the landlord's interest, it is standard practice to apply a similar disregard when valuing the tenant's interests for marriage value purposes. This maintains consistency and fairness, preventing the tenant from being penalised for enhancements that would otherwise inflate the overall premium. Valuers should document the nature and estimated value impact of any improvements, relying on evidence such as comparable sales data for unimproved properties.
Treatment of Dilapidations
Unlike improvements, the Act does not explicitly mandate disregarding dilapidations or disrepair in the valuation. Dilapidations typically refer to defects or deterioration resulting from the tenant's failure to comply with repairing covenants in the lease. Paragraph 3(2)(d) states that the valuation assumes the interest is sold:
"with and subject to the rights and burdens with and subject to which the relevant lease has effect or (as the case may be) is to be granted."
This implies that the lease's covenants, including repair obligations, are factored in as they stand. However, there is no direct instruction to assume full compliance or to ignore the impact of existing disrepair on market value.
That said, paragraph 3(4) allows for additional assumptions where appropriate. In professional practice, valuers often disregard the negative impact of tenant-caused dilapidations by valuing the flat as if it were in the state of repair required by the lease covenants. This approach prevents the tenant from benefiting from their own breach (e.g., a lower premium due to reduced market values stemming from disrepair) and aligns with the Act's aim of equitable compensation for the landlord. If dilapidations were fully reflected, the estimated values for both the existing and extended leases could be depressed, potentially reducing the marriage value and thus the premium.
Evidence from guidance sources, such as those from the Leasehold Advisory Service, reinforces that condition-related factors like major disrepair are not always straightforward, but the focus remains on open market comparables adjusted for statutory assumptions. Where dilapidations are significant, valuers may need to consider whether they constitute a 'defect in title' under paragraph 3(5), allowing a deduction in value, though this is rare in lease extension contexts.
Practical Implications for Valuers
When estimating the value of the flat, professional valuers should:
- Disregard tenant's improvements explicitly, as mandated by paragraph 3(2)(c), ensuring calculations reflect the unimproved state.
- For dilapidations, while not statutorily required to be ignored, adopt the additional assumption under paragraph 3(4) to value as if covenants have been complied with, avoiding unfair advantage to either party.
This approach is supported by tribunal decisions and RICS guidance, which emphasise fairness in applying the Act. Valuers are advised to inspect the property, gather evidence on condition, and clearly justify any adjustments in their reports.