Agricultural holdings – Notice to quit – Equitable set-off – Claimant serving notice to quit on defendants under Case D in Schedule 3 to Agricultural Holdings Act 1986 for failure to pay rent – Dispute concerning validity of notice – Recorder concluding defendants could rely on equitable set-off of unliquidated claims for damages to invalidate notice to pay subject to limitations – Parties appealing – Whether equitable set-off applicable to statutory procedure under Case D – Whether recorder right to impose qualifications – Appeal and cross-appeal dismissed
The claimant was the freehold owner and landlord of an agricultural holding known as Choulston Farm, Wiltshire, of which the defendants were joint tenants under a yearly tenancy protected by the Agricultural Holdings Act 1986. A dispute arose involving a statutory arbitration to determine the validity of the claimant’s notice to quit, served under Case D in Schedule 3 to the 1986 Act, on the ground that the defendants had failed to comply with a notice to pay rent due.
The arbitrator stated a case for the court on a point of law whether the defendants could rely upon equitable set-off of unliquidated claims for damages in order to invalidate the notice to pay, because it overstated the rent due, and so to invalidate the notice to quit.
The recorder concluded that the defendants could rely upon the equitable set-off of unliquidated claims for damages if, applying the limiting criteria in Fearns v AngloDutch Paint and Chemical Co Ltd [2010] EWHC 2366 (Ch): (i) before the date of the notice to pay, the claim to be set-off in equity had been asserted expressly in reduction or extinction of the rent claimed by the landlord in the notice to pay; (ii) the claim had been quantified; and (iii) both the assertion and the quantification of the claim were bona fide and on reasonable grounds. If those requirements were met, the equitable set-off could be relied upon in reduction of the rent due as at the date of the notice to pay to the extent of the quantification of the claim. The claimant appealed. The defendants cross-appealed.
The two issues on appeal were: (i) whether equitable set-off could be applied to the statutory procedure under Case D; and (ii) if so, whether the recorder was right to impose qualifications on his decision, regarding the circumstances in which equitable set-off could be relied upon.
Held: The appeal and cross-appeal were dismissed.
(1) Notices to pay under Case D were strictly construed because failure to comply with the notice gave the landlord a right to serve a notice to quit. Even if the rent due was overstated by a small amount, the notice to pay would be invalid because termination by a notice to quit was a serious measure which greatly advantaged the landlord and disadvantaged the tenant; strict construction of the statutory procedure provided the tenant with a degree of protection. The question was whether the words “rent due” in a notice to pay under Case D meant rent due taking account of any claim against the landlord in equitable set-off or rent due irrespective of any such set off: Dickinson v Boucher [1984] 1 EGLR 12 followed.
(2) The meaning of “rent due” in the context of Case D was not subject to any binding authority in the courts of England and Wales. However, in the Scottish case of Alexander v Royal Hotel (Caithness) Ltd [2001] EGLR 6, the meaning of “rent due” was considered in the context of the equivalent Scottish statutory provision, section 22(2)(d) of the Agricultural Holdings (Scotland) Act 1991, which was the same for these purposes. The court held that a landlord ought not to be entitled to claim sums as rent due under the statutory procedure if he or she would not be entitled to recover such sums by way of legal proceedings. Applied to the present case, the amount of rent due stated in a Case D notice to pay should be reduced by any sums which the landlord could not take legal action to recover. In contrast to English law, Scots law was founded on the principle of mutuality of obligations and the tenant had an automatic entitlement to retain rent where the landlord was in breach. However, that distinction did not make a sufficient difference to justify reaching a different conclusion from Alexander. Under English law, an equitable set-off would have the same ultimate effect in that it would prevent the landlord from recovering rent which was otherwise due. Accordingly, the reasoning in Alexander was applicable and the recorder was correct to hold that, if an analysis of the English law of equitable set-off led to the conclusion that at the date of the demand there was a substantive defence of set-off, to the extent that the set-off operated to render unrecoverable the rent that had accrued, there was no enforceable obligation to pay it. If there was not an enforceable obligation to pay the money said to be due as rent in the Case D notice, as a result of an equitable set off, then that sum was not the “rent due” as a matter of ordinary language.
(3) The recorder was correct to adopt the limiting criteria derived from Fearns and apply them to the availability of equitable set-off in the context of “rent due” under Case D. A tenant attempting to set off unmeritorious and/or disingenuous claims would fail, as they would not meet the Fearns criteria. Provided the equitable set-off was properly asserted, quantified, and asserted in good faith, it was sufficient to invalidate a notice to pay which did not take it into account. The defendants could rely upon equitable set-off of unliquidated claims for damages in order to invalidate the notice to pay, because it overstated the rent due, and so to invalidate the notice to quit.
(4) Schedule 11 to the 1986 Act provided for the opinion of the county court on any question of law arising in the course of the arbitration. There was no requirement for the court to give a binary, “yes or no” answer to the question of law. The limiting criteria formed a proper part of the correct answer to the question of law. The recorder was right to hold that the tenant could rely upon equitable set-off for unliquidated damages to invalidate the notice to pay (and therefore the notice to quit), subject to the limiting criteria set out.
Rebecca Cattermole (instructed by BDB Pitmans LLP) appeared for the claimant; The defendants did not appear and were not represented.
Eileen O’Grady, barrister
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