Agricultural holdings — Case D notice to quit — Whether tenant entitled to set off against rent contingent liability to pay land drainage rates — Whether notice to pay rent complied with
The appellant
landlords are the owners of an agricultural holding let to the respondent tenant
under a yearly agricultural tenancy granted pursuant to an agreement dated
January 28 1970. The rent, which at the material time was £21,500 pa, was
payable half-yearly in arrear. The instalment of £10,750 due on October 11 1990
was not then paid.
pursuant to Case D of the third Schedule to the Agricultural Holdings Act 1986.
On January 7 1991 the tenant paid the sum of £9,821.38. The difference of
£928.62 represented the owner’s drainage rate payable under the Land Drainage
Act 1976. On January 14 1991 the landlords served a notice to quit under Case
D. The owner’s drainage rate is recoverable by the internal drainage board from
the occupier of land under section 72 of the 1976 Act, who is then entitled
under section 72(5)(d) to recover any amount paid by him from the owner
and may deduct that amount from any rent payable. On January 17 the tenant paid
the owner’s drainage rate to the internal drainage board. Following a reference
to arbitration, the arbitrator upheld the validity of the notice to quit,
holding that before the tenant was entitled to deduct any sum for rates that
sum must have actually been paid by the tenant. The tenant’s appeal by way of a
case stated to the county court was allowed on the ground that the tenant had
an equitable set-off in the respect of the drainage rate. The landlords
appealed contending that the words ‘rent due’ in Case D must be given a
benevolent construction in favour of the tenant and that there can be an
equitable set-off of a contingent liability to pay the rates against the rent
due.
section 72(5)(d) of the Land Drainage Act 1976 to recover from the landlord or
to deduct from the rent any amount in respect of the owner’s drainage rate
unless and until the tenant has paid that amount. Both at the date when the
notice to pay rent was served and when that expired the tenant had not paid the
owner’s drainage rate, so that the sum stated in the notice to be rent due was
always due. The words of Case D cannot be construed as entitling a tenant to
diminish the amount of the ‘rent due’ by some contingent liability. Further,
equitable set-off cannot arise from a contingent liability of the kind which
arose in this case.
The following
cases are referred to in this report.
British
Anzani (Felixstowe) Ltd v International Marine
Management (UK) Ltd [1980] QB 137; [1979] 3 WLR 451; [1979] 2 All ER 1063;
(1978) 39 P&CR 189; [1979] EGD 414; (1978) 250 EG 1183, [1979] 1 EGLR 64
Dallhold
Estates (UK) Pty Ltd v Lindsey Trading
Properties Inc [1994] 1 EGLR 93; [1994] 17 EG 148, CA
Dickinson v Boucher [1984] EGD 19; (1983) 269 EG 1159, [1984] 1 EGLR
12, CA
Hanak v Green [1958] 2 QB 9; [1958] 2 WLR 755; [1958] 2 All ER
141, CA
Official
Solicitor v Thomas [1986] 2 EGLR 1; (1986)
279 EG 407
Rawson v Samuel (1841) G & Phil 161
This was an
appeal by the landlords, Sloan Stanley Estate Trustees, from a decision of
Judge Brunning, sitting in Lincoln County Court, who allowed an appeal by way
of a case stated by the tenant, Mr Barribal, from an award of an arbitrator
upholding the validity of a notice to quit served by the landlords on the
tenant in respect of Dunsby Fen Farm, Bourne, Lincolnshire.
William Poulton
(instructed by Lee & Pembertons) appeared for the landlords; Derek Wood QC
(instructed by Burges Salmon, of Bristol) represented the tenant.
Giving the
first judgment, BALCOMBE LJ said: This is an appeal by landlords from an
order made by Judge Brunning in Lincoln County Court on April 1 1993.
In order to
understand the order which is appealed from and the nature of the appeal I must
first set out certain basic facts. On January 28 1970, a tenancy agreement
relating to Dunsby Fen Farm, Rippingale and Dunsby, near Bourne, Lincolnshire,
was made between the predecessors in title to the appellants and the
respondent. The respondent, a Mr Barribal, I shall call ‘the tenant’; I shall
call the appellants in this court ‘the landlords’.
The farm was
let on an annual tenancy from April 6 1970. The rent was payable half-yearly in
arrear. There was the usual clause to pay the rent (the exact amount of rent I
will deal with in a moment) and there was a covenant by the tenant under clause
2, subclause 2:
(2) To pay all present or future taxes rates
(including occupier’s drainage rates if any and water rates) and other
outgoings payable in respect of the property . . .
At the
material time the annual rent was £21,500, so that the rent payable on the
half-yearly days on which it was payable was the sum of £10,750.
One instalment
of that rent in the sum of £10,750 was due on October 11 1990 and was not then
paid. On November 10 1990, the landlords served a notice to pay pursuant to
Case D of Schedule 3 to the Agricultural Holdings Act 1986. I will turn to
consider the provisions of that case in a moment.
That notice to
pay required payment of the half year’s rent, namely the sum of £10,750, within
two months, that is by January 10 1991. The tenants did not, in fact, pay the
£10,750 within the two-month statutory period, but on January 7 1991 paid the
sum of £9,821.38. The difference between the £10,750 and the £9,821.38, namely
the sum of £928.62, represented the owner’s drainage rate. Again, I shall refer
in a moment to what that meant.
On January 10
1991, the time for payment pursuant to the notice to pay expired. On January 14
1991 the landlords served a notice to quit upon the tenant. That was in the
appropriate statutory form. On January 17 1991 the tenant paid the sum of
£928.62, the owner’s drainage rate, to the appropriate land drainage authority.
Before I turn
to consider what happened next, I think it is appropriate that I should refer
to the provisions of the Land Drainage Act 1976. That was the Act in force at
the relevant time. Section 63 of that Act makes general provision for drainage
rates. It says in subsection (1):
(1) The expenses of an internal drainage board
under this or any other Act . . . shall, in so far as they are not met by
contributions from the water authority, be raised by means of drainage rates
made by the drainage board under and in accordance with this Part of this Act.
(2) A rate made by an internal drainage board may
be either —
(a) an owner’s drainage rate, that is to say, a
rate raised for the purpose of defraying expenses incurred in connection with
new works or the improvement of existing works and charges in respect of
contributions to be made by the board to a water authority; or
(b) an occupier’s drainage rate, that is to say,
a rate raised for the purpose of defraying any other expenses or charges.
(3) Every owner’s drainage rate and every
occupier’s drainage rate shall be assessed and levied by the board on the
occupiers of hereditaments in the drainage district subject to and in
accordance with this Part of this Act.
So although
you have the two types of drainage rate — the owner’s drainage rate, which
might generally be said to be assessed in respect of capital matters, and the
occupier’s drainage rate, which is largely concerned with income matters — they
are both assessed upon the occupier for the time being of the premises. Section
64 gives provisions for the assessment of those drainage rates on the basis of
annual value.
I turn now to
section 72, which is the section with which this appeal is most concerned. It
is headed ‘Operation and incidence of drainage rates’. Subsection (5) provides
that:
(5) Subject to section 73 below . . .
— which is
immaterial for present purposes —
. . . the
following provisions shall have effect with respect to the assessing of persons
to a drainage rate in respect of any hereditament, and their liability in
regard to the rate.
Then para (a)
makes the point which I have already mentioned:
(a) every rate shall be assessed on the person
who at the date of the making of the rate is the occupier of the hereditament;
(b) the full amount of the rate may be recovered
by the drainage board from any person who is the occupier of the hereditament
at any time during the period in respect of which the rate is made . . .
Subpara (d)
is the most important:
(d) the occupier of any hereditament may (subject
to any agreement to the contrary) recover from the owner thereof any amount
paid by him on account of an owner’s drainage rate and may deduct that amount
from any rent payable by him to the owner.
There are only
two other provisions of Act to which I need refer. Section 80(1) provides:
(1) Arrears of any drainage rates made under this
Act may be recovered by an internal drainage board in the same manner in which
arrears of a general rate may under the General Rate Act of 1967 be recovered
by a rating authority.
Therefore that
includes a right to distrain as well as a right to sue by personal action for
recovery. Then section 83, dealing with unoccupied land, says:
For the
purposes of the provisions of this Part of this Act with respect to drainage
rates . . . the owner of any hereditament shall be deemed to be its occupier
during any period during which it is unoccupied.
To summarise,
one can say that the drainage rate, whether it be an occupier’s drainage rate
or an owner’s drainage rate, is in fact assessed and charged upon the occupier
and the remedies for its recovery are primarily against the occupier, but at
the same time under section 72(5)(d) the occupier has a right to recover
the amount of the owner’s drainage rate from the owner provided, as the section
provides, it has been paid by him. I stress again, he may recover from the
owner any amount paid by him on account of an owner’s drainage rate and may
deduct that amount from any rent payable by him to the owner.
The other
statutory provision which is relevant to mention at the moment is the
Agricultural Holdings Act 1986. The whole of Part III deals with notices to
quit. Section 25 deals with the length of a notice to quit. Section 26 provides
for restrictions on operation of notices to quit and in subsection (1) provides
that:
(1) Where —
(a) notice to quit an agricultural holding or
part of an agricultural holding is given to the tenant, and
(b) not later than one month from the giving of
the notice to quit the tenant serves on the landlord a counter-notice in
writing requiring that this subsection shall apply to the notice to quit, then
subject to subsection (2) below, the notice to quit shall not have effect
unless, on an application by the landlord, the Tribunal consent to its
operation.
Section 27
deals with the matters which the tribunal has to take into account before it
may give consent to the operation of a notice to quit. But subsection (2) of
section 26 provides:
(2) Subsection (1) above shall not apply in any
of the Cases set out in Part I of Schedule 3 to this Act . . .
So the tribunal
does not come into the picture if the matter is within one of the cases set out
in Part I of Schedule 3.
The relevant
case in this appeal is Case D, which provides that at the date of the giving of
this notice the tenant had failed to comply with a notice in writing served on
him by the landlord, being, inter alia, notice requiring him within two
months from the service of the notice to pay any rent due in the respect of the
agricultural holding to which the notice to quit relates, and it is stated in the
notice to quit that it is given by reason of the said matter. That was the form
of the notice in this case.
The tenant, as
was his right, required that the matter be referred to arbitration. An
arbitrator was appointed on March 18 1991, and on May 5 1992 he upheld the
notice to quit. We have in our bundle his award and his statement of reasons.
His award was in the following terms, so far as relevant:
I AWARD AND
DETERMINE THAT:
1. At the
date of the giving of the Notice to Quit the tenant had failed to comply with
the Notice to Pay Rent dated 8th November 1990.
2. The amount
deducted by the tenant from the rent in respect of the unpaid owner’s drainage
rates does not constitute a ‘service charge’
— that is a
point which no longer arises —
3. The tenant
was not entitled set off the sum of £350.00, being the agreed contribution of
the landlord to the tenant’s costs of demolishing two cottages on the farm.
4. That no
pre-existing agreement, course of dealing or convention was established capable
of giving rise to any estoppel . . .
Paras 2, 3 and
4 of that award are no longer material. It was the finding at 1 which was the
subject of the appeal to the county court judge and then to this court.
The
arbitrator’s statement of reasons, after setting out the facts, deals with the
first question quite simply. Compliance with the notice to pay:
I find that
the tenant had not complied with the Notice to Pay. The Notice to Pay required
for compliance the payment of £10,750.00 within the period of two months. That
sum was the correct amount due on 11th October 1990 and unless one or more of
the questions 2, 3 and 4 are answered favourably to the tenant (for which see
later in these reasons), plainly the tenant will not have complied with the
Notice to Pay.
So far as the question
of set-off is concerned, the arbitrator’s reasons were concerned solely with
the tenant’s right to set off the sum of £350, to which I have already
referred. There was no question before the arbitrator of any other set-off.
He referred in
some detail to the provisions of section 72(5)(d), and held that the
true construction of that provision was that, for an occupier to exercise his
right to deduct, he must have actually paid the rate to the drainage board.
The tenant
appealed to the judge, as was his right, and the judge upheld the tenant’s
appeal on the ground that the tenant had an equitable set-off in respect of the
owner’s drainage rate.
He upheld the
arbitrator’s finding in relation to the meaning of section 72(5)(d) of
the Land Drainage Act 1976. I quote briefly from his judgment:
The
arbitrator construed this, and in my judgment correctly, as a right which
arises only when the tenant has actually paid the Owner’s drainage rate.
Then, after
referring to the case of British Anzani (Felixstowe) Ltd v International
Marine Management (UK) Ltd [1980] QB 137*, he held that there was an
equitable right of set-off here.
*Editor’s
note: Also reported at (1978) 250 EG 1183, [1979] 1 EGLR 64.
After
referring to that case, what the learned judge said was:
It is in my
judgment clear that if the tenant is to succeed he must demonstrate a close
connection or nexus between the claim for rent and the cross claim to support
an equitable set-off. Looking at the facts of the case, and the obligations of
the parties here that connection could in my judgment hardly be closer. The
burden to pay the owner’s drainage rate arises out of occupation of the land;
and so does the rent.
Given that
the nexus is thus established, it follows that the arbitrator erred in failing
to give effect to the set off and extend to the tenant the relief he is
entitled to. Accordingly he was wrong to order that the notice to quit should
as valid take affect. I reverse his finding and declare that the tenant
complied with the notice to pay and therefore no ground exists to support the
claim for possession under Case D.
That being the
order of the learned judge, it is from that order that the landlords appeal to
this court. The landlords’ appeal is simplicity itself. What they say is that
when one looks at section 72(5)(d) of the Act it is apparent, as indeed
both the arbitrator and the learned judge held, that there is no right in the
tenant either to recover from the landlords or to deduct from the rent any
amount in respect of the owner’s drainage rate unless and until the tenant has
paid that amount. That, it seems to me, is perfectly plain upon the wording of
the section.
If no right or
no debt exists as between the landlords and the tenant because the tenant has
not paid the sum, what is there, ask the landlords rhetorically, to set off,
whether in equity or anything else.
no debt, therefore no set off.
If I may say
so that seems to me almost too obvious to require elaboration. But Mr Derek
Wood QC, for the tenant, in this court has constructed a careful and elaborate
argument in two ways. He has not really argued before us, as he would I think
have been entitled to under the terms of the respondent’s notice, to say that
the construction of section 72(5)(d) is other than that the arbitrator
and the county court judge both held. It seems to be clear beyond a
peradventure on the wording of the statute; he does not seek to say that that
construction is wrong.
He puts his
argument in two ways: first, he turns to the provisions of Case D, under the
third Schedule to the Agricultural Holdings Act 1986, and to the words in that
case ‘rent due’. He has invited our attention to a number of authorities, which
show that the Act is to be given a reasonably benevolent interpretation in
favour of the tenant. The cases to which he referred us were Dickinson v
Boucher (1983) 269 EG 1159, [1984] 1 EGLR 12; Official Solicitor v
Thomas [1986] 2 EGLR 1; and a case in this court which has not yet been
reported, but was decided on November 19 1993, Dallhold Estates (UK) Pty Ltd
v Lindsey Trading Properties Inc*, all of which, as I say, he cites
in favour of his submission that the Act should be given a benevolent
construction in favour of a tenant, because if the consent of the tribunal to
the operation of a notice to quit is not required, it will mean, as in this
case, that the tenant loses the tenancy of the farm, which is his livelihood
and in many cases which is his home as well.
*Editor’s
note: Reported at [1994] 1 EGLR 93.
But, giving
the case the most benevolent construction I can, it does seem to me that the
words ‘rent due’ are clear and are not liable to be misconstrued.
Rent, of
course, is a term well known in the law over hundreds of years. The rent under
this particular tenancy was quite clearly stated. It was at the relevant date
£21,500 pa, and the half-yearly sum due on October 11 was £10,750. The notice
quite correctly stated that that was the rent due on the date it was given.
It may well
have been that, if the tenant had within the appropriate time-limit paid the
owner’s drainage rate, then, under the provisions of section 72(5)(d),
he would have been entitled to set off that amount against the rent due with
certain consequences. But, both at the date when the notice was given and at
the date when that notice expired, the tenant had not paid the owner’s drainage
rate, so that the sum stated in the notice to be the rent due was always then
due.
Mr Wood has
argued before us that the effect of section 72(5)(d) is to impose a
contingent liability upon the landlord to reimburse the tenant if and when the
tenant pays the owner’s drainage rate. That may well be true, although the
contingency is an unusual one in the sense that it is entirely within the power
of the tenant to decide whether or not the contingency comes about.
But, even
accepting that argument, I do not see how one can construe the words of Case D
para (a), ‘notice to pay any rent due’, as entitling one to diminish the
amount of the ‘rent due’ by some contingent liability which may or may not
arise depending on whether or not the tenant pays the owner’s drainage rate.
Really the
same argument put in a different way is relied upon by Mr Wood to support the
judge’s finding of equitable set-off. He has referred us to the well-known case
of Hanak v Green [1958] 2 QB 9, where Morris LJ in the leading
judgment goes in great detail through the different kinds of set-off, and
referring to equitable set-off, makes it clear that since the Judicature Act
1873, it is possible to rely by way of equitable set-off as a matter of defence
upon matters of equity which formerly might have called for an injunction or
prohibition. As he put it at an earlier stage of that particular judgment at
p18:
Before the
passing of the Judicature Acts there were circumstances in which a court of
equity would restrain one who was a plaintiff in an action at law from
proceeding until the further order of the court with the trial of his action at
law, or might restrain him until the further order of the court from levying
execution upon a judgment obtained in this favour. The Court of Equity would
not act merely because there were cross-demands. The assistance of the Court of
Equity would only be given to someone who could show some equitable ground for
being protected against his adversary’s demand.
Applying that
principle to the facts of the present case, the suggestion is that, at a time
when the tenant had not paid the owner’s drainage rate, he could still come to
the court of equity and say,
This gives me
good equitable ground for being protected against the landlords’ demand for
rent, because if and when I do pay the owner’s drainage rate, I can recover it
from the landlord, indeed can deduct it from my rent.
But I can see
no possible grounds for equity granting relief in those circumstances, because
the remedy is entirely in the tenant’s hands. If he wants to be able to deduct
the owner’s drainage rate from his rent, all he has to do is what the statute
provides, ie pay the owner’s drainage rate.
The same must,
it seems to me, apply to any question of equitable set-off under the modern
law. Mr Wood very fairly said he was unable to find any authority which
supported his submission that an equitable set-off can arise from a contingent
liability of the kind which arises in this case and I have to say I am not
surprised. It does seem to me that it would be remarkable if there were any
such authority.
In my view,
the learned judge erred because in holding that there was an equitable set-off
in the present case, he overlooked the fact that the arbitrator was considering
only — because that was the only case put before him — the right to set off the
£350 spent on the repairs of cottages. Although undoubtedly, for my part I am
prepared to accept that it is possible to set off against rent, as the British
Anzani case demonstrates, and further that if it were ever necessary to
rely on equitable set-off, which on the facts of this case it is difficult to
see how it ever could be, there was a sufficient connection between the two,
you must at least have an existing debt, or at least a claim which sounds in possibly
unliquidated damages for a right of set-off to arise.
I would be
repeating myself if I said once again that there was no such claim or debt in
the present case. There was, therefore, no equitable right of set-off. In my
judgment, the arbitrator was wholly right in the conclusion to which he came. I
would therefore allow this appeal and reinstate the findings of the arbitrator.
Agreeing that
the appeal should be allowed, HOBHOUSE LJ said: The tenant’s case
depends entirely upon section 72(5) of the Land Drainage Act 1976. Under para (a)
of that subsection, the board has the power to assess to a drainage rate:
. . . the
person who at the date of the making of the rate is the occupier of the
hereditament.
Under para (d):
(d) the occupier of any hereditament may (subject
to any agreement to the contrary) recover from the owner thereof any amount
paid by him on account of an owner’s drainage rate and may deduct that amount
from any rent payable by him to the owner.
Thus, the tenant
has a right which arises when he pays the amount of a demand for the owner’s
drainage rate.
If he does not
make the payment then he has no such right. If he does make the payment he has
a choice: he may either claim the sum direct from the owner or he may exercise
a right to deduct the amount from the rent payable by him to the owner.
The tenant, in
the present case, did not make any payment of the drainage rate until after the
notice to quit had been served upon him. In view of the smallness of the sum
involved, £928.62, it is difficult to see what motivated the tenant to behave
as he did. That is not a matter for us.
The fact is
that until after he had received the notice to quit he had not made the payment
which gives him the relevant right under section 72(5)(d). That
conclusion is fatal to the tenant’s case.
He put his
case in a number of ways. The first was that, under Case D of Schedule 3 to the
Agricultural Holdings Act 1986, the rent was
the giving of the notice to quit.
That
submission is not sound. At the material time, both in November when the notice
was served and in January when the notice to quit was served, the rent was
still payable in full, the tenant had not done anything to entitle him to make
a deduction from that rent. Therefore, that ground of argument fails.
The
alternative ground of argument, which was the argument which appealed to the
county court judge, was that there should be some equitable set-off. The way
that the county court judge put it was:
It is, in my
judgment, clear that if the tenant is to succeed he must demonstrate a close
connection or nexus between the claim for rent and the cross claim in support
of equitable set-off. Looking at the facts of case and the obligation to the
parties here, that connection could in my judgment hardly be closer. The burden
to pay the owner’s drainage rate arises out of the occupation of the land and
so does the rent.
That passage
contains an assumption, which is not made out, that there is a cross-claim by
the tenant against the landlord. Until the tenant has made the payment referred
to in para (d) of subsection (5), he has no cross-claim, so no question
of equitable set-off can arise.
Looking at the
matter more broadly in the way that was described by Lord Cottenham in Rawson
v Samuel (1841) G & Phil 161 and looking to see whether there is
an equity which impeaches the title of the landlord to claim and recover the
rent, there is clearly no such equity on any view of the case. It was entirely
within the tenant’s control whether he chose to pay the sum of £928.62 at any
of the material times. He chose not to make a payment between November and the
following January. If he had done so, then it is conceded that under the
statute there would have been the right in or before January to make the lesser
payment of rent and, therefore, make the service of a valid notice to quit
impossible. The tenant did not do that and no equity arises in favour of the
tenant from his failure pay the drainage rate.
Therefore,
however the case is looked at, the tenant’s case must fail. The county court
judge’s judgment in favour of the tenant cannot be supported and this appeal
should be allowed.
Appeal
allowed.
