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Set-off

This page contains material dealing with
  • The right (or otherwise) of a tenant to set-off a valid claim against his landlord against the new landlord after the reversion has been assigned; and
  • Anti-set off clauses.
Set-off by tenant after landlord has assigned the reversion

Arrears accruing prior to assignment of the reversion

Smith v Muscat
[2003] EWCA Civ 962

Introduction

In a lease to which the Landlord and Tenant (Covenant) Act 1995 does not apply, on assignment of a landlord's interest in the property, the right to the rent including arrears passes to the landlord by virtue of s141 of the Law of Property Act 1925. By virtue of s142 the new landlord becomes liable to comply with the landlord's obligations under the lease but he is not liable in damages for breaches that occurred prior to the date of the assignment of the landlord's interest (Duncliffe v Caerfelin Properties Ltd [1989] 2 EGLR 38).

Facts

In this case T was a Rent Act tenant. In December 1995 T began to withhold rent from his landlord because of disrepair. In 1999 the landlord sold the reversion to the new landlord. T continued to withhold rent. The new landlord served a notice to quit and commenced possession proceedings. The judge held that T was entitled to set off damages in respect of the period that had accrued since the assignment of the reversion but was not entitled to set-off against the rent that had accrued prior to that date. T appealed.

Decision

Appeal allowed. T was not prevented from relying upon set-off by ss141 and 142. Those provisions only exclude
    "... a cause of action against an assignee landlord for his assignor's breach of covenant, not a set-off against a rent debt which has passed under s141... Mr Smith is entitled to set off against Mr Muscat's claim for assigned rent arrears any damages due to him for the assignor's breach of his repairing obligations because the debt, a chose in action, vests in Mr Muscat as assignee subject to all equities that were available to Mr Smith against the assignor." (Sedley LJ at para 28 and 33).

Arrears accruing after assignment of the reversion

Edlington Properties Ltd v JH Fenner & Co Ltd
[2006] EWCA Civ 403

A tenant is not entitled to set-off a damages claim that he has against a previous landlord against the rent that has fallen due after the assignment. Neuberger LJ at para 64:
    "In all these circumstances, it appears to me that the weight of principle, authority and textbooks all point firmly in the same direction. Where the reversion to a lease is transferred, a tenant cannot set off, against rent falling due after the transfer, a claim for damages he has arising out of a breach by his original landlord of the lease, let alone of the agreement pursuant to which the lease was granted, unless of course the lease specifically provides that he should have that right."

Tenants right of equitable set-off excluded

Altonwood Ltd v Crystal Palace F.C. (2000) Ltd [2005] EWHC 292 (Ch)

In this case the court held that an anti set-off clause was valid. Lightman at paras 31 and 32:
    "The fourth issue raised is whether CPFC can deduct from the Basic Rent and Turnover Rent which subsequently accrue due under the Lease the payment of sums in respect of the issue of complimentary tickets as part of the Turnover Rent which it previously made under the erroneous view that they were payable as part of the Turnover Rent or other like erroneous payments which it made.

    CPFC covenants in clause 5.1.1 of the Lease to pay the Basic Rent without deduction or set off by twelve equal payments in advance and under clause 5.1.2 to pay any balance of the Rent due under clause 4.3 (i.e. Turnover Rent) by equal quarterly instalments in arrear credit being given for any over payments made in respect of a previous quarter such payments to be made without deduction or set off. The first question raised is as to the effect of such provisions on any right of set-off or deduction which might otherwise exist. Certain legal principles are clear. In the absence of any contractual provision to the contrary a tenant is entitled to deduct from the rent payable, so as to extinguish or reduce an instalment of rent due, any cross claim arising out of the provisions of the lease and the operation of the lease: see Federal Commerce & Navigation Company Limited v. Molena Alpha Inc [1978] QB 927 and British Anzani v. International Marine Management (UK) Limited [1980] QB 137. The right of deduction and set off has been judicially described as essentially an act of self-help: see Robert Goff J in SL Sethia Liners Ltd v. Naviagro Maritime Corporation [1981] 1 Lloyds Rep 18 at 26. To meet this situation, express provisions are often inserted in leases which take away the tenants right to make such deductions. The language must be clear if it is to exclude the tenants remedy of equitable set-off. A provision requiring payment without any deduction has been held to be insufficiently clear for this purpose: see Connaught Limited v. Indoor Leisure Limited [1994] 1 WLR 501. On the other hand a provision requiring payment without any deduction or set off whatsoever has been held sufficient to exclude any right of deduction or set-off: see Star Rider Limited v Inntrepreneur Pub Co [1998] 1 EGLR 53. In my judgment the formula used in the present case in respect of payment both of Basic Rent and Turnover Rent, without any deduction or set-off, omitting the word whatsoever, is likewise clear and sufficient (if less emphatic) to exclude any right of deduction or set-off." (GWs emphasis).

Edlington Properties Ltd v JH Fenner & Co Ltd
[2006] EWCA Civ 403

The CA has also affirmed the decision in Connaught Restaurants v Indoor Leisure [1994] 1 WLR 501. Neuberger LJ at para 75:
    "The point is a difficult one and I am not sure that I would have decided it the same way as the judge in the absence of the decision in Connaught. However I consider it would be wrong for this court to depart from the strict approach it adopted in that case, that approach being to hold that the right of set-off against rent in a lease is not to be excluded except by words which cannot sensibly be interpreted as not extending to set-off. In my judgment the effect of the decision of the court in Connaught was almost this: that at least in the absence of any clear indication to the contrary in the lease, a covenant or other provision relating to the payment of rent will not exclude the tenant's normal right to claim equitable set-off, save where the word "set-off" is specifically used."


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