The High Court has identified a legal loophole that will force tenants to continue paying rent while suing a landlord for defective building construction.
The court has held that, by assigning the reversion of a building, a landlord can “evade” a possible set-off against a claim for rent. A tenant suing the landlord would then be forced to pay rent to the assignee with no possibility of set-off.
The ruling means that engineering firm JH Fenner & Co has been ordered to continue paying rent for Welsh factory premises to assignee landlord Edlington Properties, despite bringing a £52m damages claim against the original landlord, the Welsh Development Agency (WDA), for allegedly “serious defects” in the building’s construction.
Bean J said that legal precedent forced him to find in the assignee’s favour, even though the decision will leave tenants with a “worthless damages claim but an obligation to keep paying rent” if the landlord ever became insolvent.
The WDA built the industrial unit situated on 6.7ha (16.5 acres) of land at the former Maerdy colliery site in Ferndale, Mid Glamorgan specifically for Fenner, which took a lease in 1996. Two years later, the WDA assigned the reversion to Bradbury Corporation, which further assigned it to Edlington in 2003.
Fenner subsequently issued proceedings against the WDA in the Technology and Construction Court, claiming that the agency had breached its building obligations by constructing a factory that was seriously defective and inadequate for its purposes.
It sought to set off the damages claim against a £225,000 legal action brought by Edlington for ground rent and insurance arrears.
Rejecting that approach, Bean J held that Fenner had no right of set-off against the arrears claim, noting, however that if no previous authorities had been found on the issue, he would have “decided it the other way”.
“I can envisage cases in which a landlord will assign the reversion in order to evade what would otherwise be a possible set-off against its claim for rent,” he said.
“If the original landlord then becomes insolvent, the tenant is left with a worthless damages claim for defective construction of the building but an obligation to pay rent that takes no account of that claim. In another case, it may have to be decided whether an artificial transaction by the landlord makes any difference.”
Edlington Properties Ltd v JH Fenner & Co Ltd Queen’s Bench Division (Bean J) 20 October 2005.
Timothy Fancourt QC and Edward Peters (instructed by Mishcon de Reya) appeared for the claimant; Christopher Lundie (instructed by Rollits) appeared for the defendant.
References: EGi Legal News 21/10/05
