Q&A: The high-risk strategy of set-off
Question
I am a tenant of commercial premises. My landlord has repeatedly failed to carry out repairs to the roof despite numerous requests that he do so. If I carry out the works myself, can I set off the repair costs against my rent due on 25 December 2017? Will this affect me exercising an option to break the lease should I wish to do so?
Answer
In certain circumstances, cross-claims, namely your landlord’s claim for rent and your claim for the repair costs, can cancel each other out. You will need to check the provisions of your lease to see if set-off is expressly excluded. You should consider your position carefully before withholding rent and asserting a set-off as, if you are wrong, your lease is liable to forfeiture and you may not succeed in exercising the break option.
Explanation
The original law of set-off was developed by legislation which saved a debtor from prison when the creditor owed the debtor more than the debtor owed the creditor. However, the principle was limited to “ascertained” cross-debts, so both debt figures had to be certain. An uncertain (or unliquidated) cross-claim for damages gave no defence to a certain debt claim for a particular figure. This was the original law of set-off.
However, the law most relevant today is known as general equitable set-off, which is more comprehensive in scope. For this to be available, there must be a close connection between the claim and the cross-claim and an example is your case, where both claims arise from the landlord and tenant relationship.
A second requirement is that it must be unjust to enforce the claim without taking account of the cross-claim (Compania Sud Americano de Vapores v Shipmair BV (The Teno) [1977] 2 Lloyd’s Rep 289). In the case of general equitable set-off, unlike set-off at law, the claim and cross-claim do not have to be certain figures. So a damages cross-claim which is uncertain can be set-off against a certain debt claim (British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1979] 1 EGLR 65) or even an uncertain damages claim.
Accordingly, a landlord’s claim for rent or service charge arrears (which is certain) can be met with, for example, a tenant’s cross-claim for damages for breach of the landlord’s repairing obligation or covenant for quiet enjoyment (which is uncertain). The cross-claim provides a defence of set-off.
This has most significance if the tenant’s set-off is greater than the landlord’s claim, because the landlord’s claim is then entirely extinguished and the set-off operates as a complete defence. In litigation this may mean that the claimant landlord will be liable to an adverse costs order. It is for this reason, of course, that a landlord should carefully assess his tenant’s potential cross-claim (which may provide a set-off defence) before issuing proceedings for arrears.
Equally, a landlord can take advantage of set-off, so a tenant’s claim for landlord’s breach of covenant can be met by a landlord’s set-off for rent and service charge arrears.
However, the right of set-off can be excluded by a term in the lease. Such terms are not uncommon in modern leases drafted in favour of the landlord. These leases usually have a clear “no set-off” clause, which will operate effectively as intended.
Older leases may be less clear. An example of the latter was a lease clause in Connaught Restaurants Ltd v Indoor Leisure Ltd [1993] 2 EGLR 108 which provided that the rent should be paid “without any deduction”. The court held that clear words were required to exclude the tenant’s right of set-off, and these words were not clear enough. However, the law of interpretation of contracts has moved on, and there is probably no special high hurdle for “clear words” to exclude a right of set-off (Arnold v Britton [2015] UKSC 36; [2015] EGLR 53).
If your lease includes a “no set-off” clause, your landlord may be in breach of a repairing covenant, making him liable to you in damages, but you cannot withhold rent without the risk of an entirely successful action against you. There is a practical solution though: if you have sufficient funds, you can carry out the landlord’s repairs, pay for them and that payment is treated as though it were a direct payment of rent. There is therefore no need to argue set-off (Lee-Parker v Izzet (No. 1) [1971] 1 WLR 1688).
The stakes are higher if you withhold rent, claim the defence of set-off and your landlord threatens forfeiture. Set-off could certainly provide a defence (unless excluded), but you should ensure that your cross-claim is worth more than the rent arrears. If it is not, it is open to your landlord, as these are commercial premises, peaceably to re-enter and you will then be in the position of having to apply to the court to seek relief from forfeiture, with the consequent risks and costs.
You are also at risk if you wish to exercise a break option and the landlord wishes the lease to continue. It would not be unusual for the lease to require all monies due to be paid as a precondition to the valid exercise of a break option. For you to say, after serving notice to break, that rent or other monies were not due because you have a set-off, is a high risk strategy. The consequences of failing to break could be financially disastrous for you, so you may be well advised to make your priority the effective break of the lease rather than adding to the already complicated law of set-off.
This article was written by Robert Highmore and Bruce Walker (Enterprise Chambers). For more information please contact Robert on +44 (0)20 7203 5201 or robert.highmore@crsblaw.com
Our thinking
IBA Annual Conference
The IBA heads to Miami for its 2022 Annual Conference bringing together thousands hundreds of lawyers from around the world.
Martin Wright
Joint Venture Opportunities
Join our panel where we will discuss various topics including Joint Venture structuring and Partner procurement.
Sarah Anticoni
FT Wealth quotes Sarah Anticoni on forum shopping
"Being the first to file for divorce is not a foolproof way of securing an English hearing"
Louise Ward
What can UK investors interested in Life Sciences learn from their more experienced, including US, counterparts?
The recent tie-up between Canary Wharf and Kadans demonstrates the enthusiasm to access the lucrative UK life sciences market.
Helen Coward
Helen Coward writes for Tax Journal on the main purpose test for SDLT group relief
Mainly ignored? The main purpose test for SDLT group relief
Patricia Nathan-Amissah
The Ayes have it - Collateral Warranties can be a ‘Construction Contract’
The Court of Appeal handed down its judgment in the case of Abbey Healthcare (Mill Hill) Limited v Simply Construct (UK) LLP
Rebecca Davies
Islamic Finance News reports on the appointment of Rebecca Davies to Legal Director in our Middle East team
Islamic Finance News reports on the appointment of Rebecca Davies to Legal Director in our Middle East team
Jonathan Morley
Charles Russell Speechlys advising Battery Ventures on the sale of SPT Labtech for £650 million.
Battery Ventures has raised over $9 billion to invest in software and services, enterprise infrastructure, and much more around the world.
Sarah Farrelly
Windrush Day 2022 – supporting access to justice
Charles Russell Speechlys is proud to continue supporting survivors of the Windrush scandal in their fight for justice.
Laura Bushaway
The Leasehold Reform (Ground Rent) Act 2022: Landlords and developers beware serious sanctions for non-compliance
The Leasehold Reform (Ground Rent) Act 2022 received Royal Assent on 8 February 2022 and will come into force on 30 June 2022.
Emma Preece
EG quotes Emma Preece on the Picturehouse and BNY Mellon rent arrears cases
“The case is being closely watched by landlords and tenants alike as the impact of the pandemic lives on in the commercial property sector”
David Coates
Charles Russell Speechlys has advised long-standing client Stonegate on a series A investment into Peckwater Brands
Stonegate is one of the largest pub companies in the UK with a rich portfolio that covers over 4,500 sites.
Sarah Farrelly
Pro bono support for major office premises move for charity in Stoke-on-Trent
Emmaus entities provide safe homes, community support and meaningful work to formerly homeless people across the UK.
Michael O'Connor
Government consults on definition of higher risk buildings
Louise Ward
Overseas investors in Life Sciences set to be caught by new beneficial ownership reporting regime
Charlotte Posnansky
Reporting Restriction Order (reprised) - "Where there is no publicity there is no justice."
Emma Humphreys
Reform on the way for the private rented sector
Rachel Warren
Financier Worldwide quotes Rachel Warren on the UK’s Economic Crime Act
Evaluating the UK’s Economic Crime Act
Samuel Lear
Property Patter: Reasonable Endeavours
What does it mean to use ‘best’, ‘all’ or ‘reasonable’ endeavours?