Calculating compensation for property damage

Where works carried out on one property damage another, should compensation be payable on the basis of reinstatement costs or diminution in value? The High Court tackled that issue recently in the case of Lea Valley Developments Limited v Derbyshire.

The owner of a house had obtained an award under the Party Wall etc. Act 1996 that authorised a building project, including excavation works. The award required the owner to make good any decorative or structural damage caused to a neighbouring property, a block of flats, or to make payment in lieu.

The works caused damage to the block that was agreed to be so serious that it was beyond economic repair. The costs of demolishing and rebuilding the block were estimated at between £1 million and £2 million.

However, the house owner said that the diminution in the block’s value arising from the damage was between £500,000 and £1 million. The owners of both properties sought declarations as to the correct basis on which compensation was payable.

The Court rejected the owner of the block’s arguments that, on a true reading of the Act and the terms of the party wall award, there was no issue to be tried and that damages had to be calculated on a reinstatement basis. However, it also refused to grant the owner of the house a declaration that, as a matter of common law, the diminution in value basis necessarily prevailed.

The issue of whether reinstatement or diminution in value represented the correct approach to the assessment of damages was highly fact sensitive and dependent on a wide range of factors. There was no rule of law that prohibited awards on either basis or that required one to prevail over the other. It was thus inappropriate to resolve the issue without hearing detailed factual evidence.

--Rex Cowell Solicitors

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[edit] Related articles on Designing Buildings Wiki

• Compensation event.
• Cost recovery clauses.
• Defective premises - liability and measure of damages.
• Defective premises and freeholder liabilities.
• Liquidated damages in construction contracts.
• Loss and expense.
• Property disrepair and landlord liabilities.