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11 January 2018

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

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