Landlord and tenant — Rent payable ‘without any deductions’ — Whether provision excluded equitable right of set-off
On June 10
1992 the official referee gave judgment for the respondent landlords for arrears
of rent in the sum of £202,690 and judgment for the appellant tenants on their
counterclaim for damages for breach of repairing covenants in the sum of
£435,760. Interest was added to the claim and counterclaim, and costs were
awarded to each party (indemnification in the case of the tenants’ costs of the
counterclaim) and the two sets of costs to be set off against each other. The
tenants appealed, contending that their counterclaim should be set off against
the rent due and that accordingly they obtained a surplus of damages which
would have provided a more favourable claim for interest and award of costs. On
behalf of the landlords it was contended that the provision in the lease that
the rent was to be paid ‘without any deductions’ excluded any right of set-off.
tenant’s remedy of an equitable right of set-off. The word deduction is not a
term of art, but a useful and flexible word heavily dependent upon the context
in which it is used; if that context provides no guidance, it cannot be
described as a clear word. The simple expression ‘without any deduction’ is
insufficient in itself, in the absence of any context suggesting the contrary,
to exclude the tenants’ equitable right of set-off. Added words of exception or
qualification are relevant to the construction of the phrase, but they, too,
are subject to the general requirement of clarity. In seeking to exclude a
tenant’s equitable right of set-off, the draftsman should do it explicitly: see
Lewison Drafting Business Leases.
The following
cases are referred to in this report.
Akehurst v Stena Sealink Ltd unreported, February 17 1993
British
Anzani (Felixstowe) Ltd v International Marine
Management (UK) Ltd [1980] 1 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
Famous
Army Stores v Meehan [1993] 1 EGLR 73; 9 EG
111
Federal
Commerce & Navigation Co Ltd v Molena Alpha
Inc [1978] QB 927; [1978] 3 WLR 309; [1978] 3 All ER 1066, CA
Gilbert-Ash
(Northern) Ltd v Modern Engineering (Bristol)
Ltd [1974] AC 689; [1973] 3 WLR 421; [1973] 3 All ER 195, HL
Grant v NZMC Ltd [1989] 1 NZLR 8
Hanak v Green [1958] 2 QB 9; [1958] 2 WLR 755; [1958] 2 All ER
141, CA
Lee-Parker v Izzet [1971] 1 WLR 1688; [1971] 3 All ER 1099
Sapsford v Fletcher (1972) 4 Term Rep 511
SL Sethia
Liners Ltd v Naviagro Maritime Corp [1981] 1
Lloyd’s Rep 18
Young v Kitchen (1878) 3 ExD 127
This was an
appeal by the defendant tenants, Indoor Leisure Ltd, from the decision of the
official referee, Judge Bowsher QC, giving judgment to the plaintiff landlords,
Connaught Restaurants Ltd, for arrears of rent and judgment on their
counterclaim to the tenants for damages for breach of repairing covenants in a
lease dated December 7 1983 of part of the basement of the Connaught Rooms,
London WC2: see [1992] 2 EGLR 252.
Colin Rimer QC
and Robert Powell-Jones (instructed by McBride Wilson & Co) appeared for
the appellants; Kim Lewison QC and Mark Warwick (instructed by Howard Kennedy)
represented the respondents.
Giving the
first judgment, WAITE LJ said: This appeal raises the question whether a
provision in a lease that the rent should be paid ‘without any deductions’ had
the effect of excluding the tenant’s equitable right of set-off. There were
serious breaches of covenant by the landlords, causing the tenants to cease
payment of rent. The damages for breach of the lessors’ covenants have now
become quantified by unchallenged findings of the court below and it is
accepted that they exceed substantially any arrears of rent which became owing
to the lessors as a result of the lessees’ decision to stop payment. It is also
accepted that, at the time when the lessees ceased paying rent, the damages to
which they were then entitled for breach of covenant already exceeded the
amount of the rent due on that, and on every subsequent, occasion when rent was
withheld.
On June 10
1992 the official referee, Judge Bowsher QC, gave judgment for the landlords in
their action for rent unpaid in the sum of £202,690, and judgment for the
tenants on their counterclaim for damages for breach of covenant in the sum of
£435,760. Interest was awarded in the claim in the sum of £44,832, and in the
counterclaim in the sum of £52,323, bringing the judgments on the claim and
counterclaim to a total (in round figures) of £247,500 and £488,000
respectively. Each party was awarded the costs of the claim and counterclaim
respectively (on an indemnity basis in the case of the tenants’ costs of the
counterclaim) and the two sets of costs were ordered to be set off against each
other.
In their
appeal to this court the lessees contend that the judge was wrong to have
expressed the result in the form of judgments favourable to each party on the
claim and counterclaim respectively. The real victors were the lessees, who
established a substantial surplus of damages over rent. The judge ought,
therefore, they say, to have given judgment with costs for the defendant
lessees in the plaintiff lessors’ action for rent, and judgment with costs for
the defendant lessees on their counterclaim in a sum representing the excess of
the damages over the rent, with interest on that balance.
An order in
that form would produce a substantially more favourable result for the lessees,
in terms not only of costs but also of interest. It is accepted by the lessors
that if the tenants’ right of equitable set-off has not been excluded by the
lease, the appellant lessees are entitled to have the order expressed in that
way. The sole issue in the appeal is therefore whether the lessees’ right of
set-off has or has not been excluded. The judge held (albeit with expressed
reluctance) that it had been so excluded. The appellant lessees claim that he
was wrong.
The relevant
lease is an underlease (which will hereafter be called ‘the underlease’ dated
December 7 1983 and made between the respondent landlords Connaught Rooms Ltd
(‘the lessors’) of the first
part and certain sureties for the lessees of the third part.
The demised
premises were part of the basement of the Connaught Rooms at Great Queen
Street, London WC2. The term was for 12 1/2 years from October 1983 to February
1996. The lessors hold the leasehold reversion to the entirety of the Connaught
Rooms under a lease expiring at a date well into the next century. The lessees
carry on the business of a snooker and health club at the demised premises.
Clause 2 of
the underlease demised the premises to the lessees for the term already
mentioned and continued:
PAYING FIRST
(a) for the period from the 18th day of October 1983 to the 18th day of October
1984 the yearly rent of £32,500 (b) for the period from the 18th day of October
1984 to the 25th day of December 1986 the yearly rent of £40,000 and (c)
thereafter the yearly rent payable under the Third Schedule such rent to be
paid without any deduction (except as required by any Act) by four equal
quarterly payments in advance the first payment to be made on the execution of
this Underlease and to be in respect of the period from the 18th day of October
1983 to the next succeeding usual quarter day . . . .
The same
clause then set out five further categories of payment to be treated as rent —
namely contributions to the cost of insuring, heating and maintaining the main
building and so on. Neither side has sought to attach any significance to these
additional rents. Each of them was expressed to be payable ‘on demand’, but
there was no equivalent reference to payment ‘without any deduction’.
The lessees’
covenants were set out in clause 3 of the underlease, and read (so far as
relevant) as follows:
3. THE TENANT
covenants with the Landlord:
Rent
(1) To pay the Rents at the times and in manner
aforesaid without any deduction (except as aforesaid) and if so required by
banker’s standing order
Outgoings
(2)(A) To defray (or in the absence of direct
assessment on the Premises to pay to the Landlord a fair proportion of)
existing and future rates taxes assessments charges and outgoings payable in
respect of the Premises or any part thereof by any estate owner landlord tenant
or occupier thereof . . .
Requirements
of any Act or competent authority
(17) To comply in every respect with the
provisions of any Act or the requirements of any competent authority in respect
of the Premises or any part thereof or in respect of the occupation or user
thereof and to indemnify the Landlord against all claims demands expenses and
liability in respect thereof and to pay all costs charges and expenses incurred
by the Landlord in connection with any such provision or requirement
The Third
Schedule contained provision for review of the principal rent at specified
review dates during the term of the demise.
Clause 4 of
the underlease contained the lessors’ covenants in common form (including the
covenant for quiet enjoyment) and there is no dispute that these covenants, as
well as those implied into the underlease by law, provided the basis for the
lessors’ liability in damages.
The events
leading up to these proceedings are not in dispute and can be summarised as
follows. Following a change of ownership of the share capital of the lessors in
the summer of 1987, the premises demised to the lessees by the underlease began
from November 1987 to suffer severe damage caused by flooding from the lessors’
retained portion of the building. The damage continued down to the date of the
hearing before the judge and caused major disruption to the lessees’ business.
There is no appeal from the judge’s findings that the bulk of this damage was
suffered as a result of breaches by the lessors of the lessors’ covenants in
the underlease. In June 1989 the lessees withheld the rent of £12,500 due for
that quarter in respect of the principal rent and paid no further instalments
thereafter. Throughout the period from June 1989 to the date of judgment on
June 2 1992 the amount of damage for which the lessors were liable for breach
of the lessors’ covenants substantially exceeded the amount of any rent
accruing due from the lessees.
The primary
meaning of the verb ‘to deduct’ is given in the Shorter Oxford Dictionary
as ‘To take away or subtract from a sum or amount’; and of the noun ‘deduction’
as ‘The action of deducting or taking away; subtraction; that which is
deducted’. The relevant issue before the judge, and before this court on
appeal, has been the effect of the use, in the words of demise and in the
covenant for payment of the principal rent, of the formula
without any
deduction (except as required by any Act).
The lessors
contend that the effect of that formula was to operate, as a contractual
exclusion of the lessees, equitable right of set-off for all purposes. The
lessees contend that it operated only to exclude such deductions from rent as
they would have been entitled (but not statutorily bound) to make under the
general law and by statute, and had no application to rights of equitable
set-off arising from breaches of covenant by the lessors.
These opposing
contentions have been ably urged by Mr Colin Rimer QC, for the appellant
lessees, and Mr Kim Lewison QC, for the respondent lessors. There are two
propositions of law as to which they are in agreement, namely:
(1) The lessees were entitled in equity to set
off unliquidated claims for damages for breach of covenant against the rent
accruing due under the underlease on the basis approved in British Anzani
(Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] 1
QB 137*.
*Editor’s
note: Also reported at (1978) 250 EG 1183, [1979] 1 EGLR 64.
(2) It was open to the parties to exclude this
equitable right of set-off by express words or by implication from the language
of the contract as embodied in the underlease. There is, however, a starting
presumption that neither party intends to abandon any remedies for breach
arising by operation of law, and clear language must be used if this
presumption is to be rebutted — Gilbert-Ash (Northern) Ltd v Modern
Engineering (Bristol) Ltd [1974] AC 689 per Lord Diplock at p717 and Lord
Salmon at pp722-723.
There, however,
the agreement between counsel ends. Their submissions were first addressed to
the general instances which are to be found in the authorities of the use by
judges indiscriminately of the expressions ‘deduction’ and ‘set-off’ to
describe the state of affairs which arises when a claim is matched, or partly
matched, with a crossclaim to which rights of set-off are accorded in equity.
It will be sufficient to refer to three of those instances only.
Hanak v Green [1958] 2 QB 9 is the chief authority establishing
the principle (conceded in this case) that where the result of applying rights
of equitable set-off is to produce an excess of the amount of the crossclaim
over the amount of the claim, the counterclaiming defendant is entitled to
judgment in the action as well as judgment for the balance in the counterclaim.
The basis for that, as Morris LJ said at p26, was that the ‘defendant had an
equitable set-off which defeated the plaintiff’s claim’. He described that
conclusion, however, as resulting from the authorities he had cited earlier in
his judgment, including Young v Kitchen (1878) 3 ExD 127 and
specifically the observation in that case of Cleasby B that the defendant could
not recover anything from the plaintiff, but was entitled ‘by way of set-off or
deduction from the plaintiff’s claim, to the damages which he had sustained . .
.’.
In Federal
Commerce & Navigation Co Ltd v Molena Alpha Inc [1978] QB 927,
Lord Denning, in a passage of his judgment tracing the historical genesis of
the right of equitable set-off, said at p974E:
But the
courts of equity, as was their wont, came in to mitigate the technicalities of
the common law. They allowed deductions — by way of equitable set-off —
whenever there were good equitable grounds for directly impeaching the demand
which the creditor was seeking to enforce . . .
In The
Kostas Melas [1981] 1 Lloyd’s Rep 18† , Robert Goff J, in holding that by
the principle of equitable set-off a charterer may set off certain claims
against hire even where the contract did not expressly give him the right to do
so, said at p26:
Furthermore,
the exercise of a right of deduction or set-off is essentially an act of self
help.
† Editor’s
note: SL Sethia Liners Ltd v Naviagro Maritime Corp.
We were
invited by Mr Rimer to view those instances of use by judges of the word
‘deduction’ in the context of equitable set-off as reflecting no more than the
fact that it happens to be the most convenient and succinct term available in
the English language to describe what occurs in most cases as a result of
set-off being applied. It is a useful shorthand term which may permissibly be
employed (notwithstanding that it may involve a technical misuse of language)
to describe the operation of the set-off process whenever the court is dealing
with a case in which there is no necessity to draw any distinction between the
separate processes of set-off on the one hand and deduction — properly so
called in its strict grammatical sense — on the other. Mr Lewison urged us to
take the contrary view of those instances as indicating a deliberate
development by the judges of the expression ‘deduction’ into a term of art
embracing, when used in the context of a lease, rights of set-off in addition
to rights of strict subtraction.
The argument
next turned to cases where issues arose that were more closely comparable with
that in the present case. In none of the authorities so far mentioned was the
court required to decide whether, in the particular document under
consideration, there was any material distinction to be drawn between the terms
‘deduction’ on the one hand and ‘set-off’ on the other. Nor is there any
reported instance where that question has arisen in this court. There are,
however, two decisions at first instance and one Commonwealth authority in
which it did become necessary to grapple with the issue and they must now be
mentioned.
The appellants
in Grant v NZMC Ltd [1989] 1 NZLR 8 were lessees under a lease
providing for the payment of rent ‘free and clear of exchange or any deduction
whatsoever’. They had an unliquidated claim against the lessors in damages for
alleged misrepresentation by the lessors inducing their acceptance of the
lease, on the strength of which they had withheld rent and on which they had
sought unsuccessfully to rely at first instance when resisting a claim to
summary judgment based on the nonpayment of rent. The New Zealand Court of
Appeal allowed the appeal, holding, first, that the crossclaim was sufficiently
linked to the claim to found a case for equitable set-off and, second, that the
relevant words in the lease did not amount to a contractual exclusion of such
rights of set-off. The second holding was stated in these terms by Somers J
(giving the judgment of the court) at p13 at 35:
The more
difficult question is whether the words of the lease as to payment of rent
‘free and clear of exchange or any deduction whatsoever’ amount to . . . a
contract [to exclude a right of equitable set-off]. No case was cited to us as
to the effect of those or similar words and those we have found (some are
referred to in Hill and Redman’s Law of Landlord and Tenant (15th ed,
1970) p341 are not helpful.
Statute
apart, the recognised deductions which a tenant may make against his rent are those
authorised by the lease itself and those in respect of moneys paid by the
tenant which it was the landlord’s obligation to pay. The latter include moneys
outlaid on repairs covenanted to be, but not in fact done by the landlord (as
in Lee-Parker v Izzet [1971] 1 WLR 1688 in which their right to
deduct was described as one of ‘ancient common law’) and moneys payable by the
landlord, the failure to pay which imperils the tenant’s possession (as in Sapsford
v Fletcher (1972) 4 Term Rep 511 and the other cases mentioned in 27 Halsbury’s
Laws of England 4th ed para 232, note 7).
The covenant
to pay rent without deduction may embrace such matters. It is not easy to
envisage any other subject matter to which they relate. We do not think the
word ‘deduction’ is clear enough to hold that it was agreed that a set-off of
the kind claimed by . . . the appellants] could not be made. The word
‘deduction’ does not in its natural sense embrace a set-off.
It is common
ground between counsel in the present case that the New Zealand court was wrong
to cite nonpayments (or reduced payments) of rent made in a Lee-Parker v
Izzet [1971] 3 All ER 1099 situation as an instance of the kind of
‘recognised deduction’ to which the term ‘deductions’ when construed in its
narrowest grammatical sense might be expected to apply. The principle which
operates in that situation is that the tenant, by carrying out himself the
repairs which ought to have been done by the landlord, becomes entitled to have
his expenditure treated as though it had itself been a direct payment of rent;
so that, strictly speaking, no question of equitable set-off arises at all, and
the process of giving credit for the cost of repairs carried out by the tenant
in arriving at the figure for rent outstanding is one of recoupment rather than
deduction: see Goff J in Lee-Parker v Izzet at p1107 (although I
note that the term ‘deduction’ appears to have found its way, doubtless for the
sake of brevity, into the the judge’s formal order at p1110). It is common
ground also that the New Zealand Court of Appeal’s references to the cases of Sapsford
v Fletcher (1972) 4 Term Rep 511 and the other authorities cited at note
8 in the paragraph of Halsbury to which they referred were of no direct
assistance to their conclusion.
Mr Rimer urges
us, nevertheless, to take the view that the New Zealand Court was right in its
basic approach to the case, starting as it did from what he asserts to be the
correct premise, namely that the word ‘deduction’ does not, in its natural
sense, embrace a set-off. Mr Lewison submits that this decision was, quite
simply, wrong and should not be followed.
We have been
shown the transcript of an unreported judgment of Clarke J in interlocutory
proceedings between landlord and tenant heard in chambers (1993 A 453) on
February 17 1993 in the action Akehurst v Stena Sealink Ltd the
opening paragraph of which reads as follows:
The clause in
this agreement . . . reads —
‘The tenant
for itself and its successors hereby covenants with the Landlord in the manner
following, that is to say —
1 (a) To pay to the Landlord the yearly rent hereby
reserved and any revised and additional rents, without any deduction’ etc.
In my
judgment that means without any deduction of any kind, and that would include
any deduction by way of equitable set-off. That appears to me to be plain on
the true construction of that provision.
It is common
ground that nothing further of relevance was said in the remainder of that
judgment. The transcript affords very little indication of the precise
circumstances with which the judge was dealing and there is no way of knowing
whether there were any other provisions in the tenancy agreement, in addition
to the very brief excerpt quoted by the judge, which might have been of
potential relevance when construing the provision he was required to consider.
The judge gave leave for the case to be reported, but with understandable
hesitation in view of the brevity of his judgment.
There had in
fact been an earlier decision at first instance on a similar provision,
although it was not reported until March 1993. It was that of Steyn J (as he
then was) in Famous Army Stores v Meehan [1993] 9 EG 111, [1993]
1 EGLR 73* when he was sitting in Liverpool on appeal from an order of the
district registrar, which had granted summary judgment under Ord 14 on a
landlord’s claim for arrears of rent. The defendant tenant had sought to plead
equitable set-off in respect of damages allegedly suffered as a result of
failure by the landlord to carry out the works necessary to achieve eligibility
for, and thereafter to obtain, a fire certificate. The district registrar
decided that set-off had been excluded by the lease and the judge upheld his
decision. The relevant passage in the judgment reads as follows:
It is
axiomatic that the right of set-off may be excluded by agreement. It is also
clear that clear express words are required to rebut the presumption that
neither party intends to abandon any remedies for breach of contract which may
arise by operation of law: See Gilbert Ashe (Northern) v Modern
Engineering (Bristol) [1974] AC 689 at p717H.
The tenants
were granted a rent-free period of three months, thereafter rent instalments
were payable. The lease provided in clause (1), and repeated in clause (2)(i),
that the payment of rent was to be made ‘without any deductions’. It was agreed
that the words ‘except as aforesaid’ which were inserted in Clause (2) (i) were
inserted by mistake and can safely be ignored. It has not been pleaded or
suggested in argument that in the context the words ‘without any deductions’
have been impressed with any special meaning by custom or usage. No implication
of any term has been put forward. The question for decision is simply a point
of construction . . . [The judge then referred to the fact that neither side
relied on surrounding circumstances
words ‘without any deductions’ in the context of the rent payable under this
lease would convey to the ordinary speaker of English. It seems to me that the
ordinary meaning of ‘without any deductions’ is that the rent must be paid in
full and that there must be no deductions of any kind which otherwise might be
permissible by law. The ordinary meaning of the words is therefore wide enough
to exclude any right of set off under this lease . . . [He then dealt with
certain arguments raised by the defendant and concluded the judgment by saying]
. . .
On behalf of
the defendants one further matter was urged on me. It was said that if I
resolved this issue in favour of the plaintiff it would come as a surprise to
conveyancers. It is not possible for the court to poll conveyancers on this
issue. In truth their answers may not be harmonious: Some may say ‘yes’, others
‘no’ and yet a larger body possibly ‘I do not know’. There is no decision on
the point and there are no obiter dicta to provide guidance. The point
was apparently argued [counsel at this hearing are agreed that the judge must
have intended to say ‘not argued’] in British Anzani (Felixstowe) Ltd v International
Marine Management (UK) Ltd [1980] 1 QB 137. In that case there is no
reasoned decision on the point.
In the
absence of a reasoned decision Anzani can be of no assistance. One is
driven back to the starting point of the process of construction, namely the
ordinary meaning of the relevant words in the lease.
In my
judgment, the words in question exclude a right of set-off: there was therefore
no defence to the claim for judgment under Ord 14 in respect of the rent . . .
[The judge then concluded with these words] . . .
Finally, I
simply add that, when announcing my decision, I made clear that I grant leave
to appeal in this case since it is a point of some importance to conveyancers
and it would be of benefit to conveyancers to have the judgment of the Court of
Appeal on the matter.
*Editor’s
note: Also reported at [1993] 1 EGLR 73.
Those last two
cases (which Mr Lewison asked us to uphold and Mr Rimer urged us not to follow)
conclude the relevant authorities. One further topic was raised in argument to
which it is necessary, finally, to refer. It is the question of whether any
light is shed upon the meaning of the phrase ‘any deduction’ in the relevant
provisions in this underlease by the words of exception which immediately
follow them in brackets ‘except as required by any Act’.
There are
instances where a tenant is empowered by statute to make deductions from rent.
They include the Income and Corporation Taxes Act 1988 section 23 (deduction of
tax collected from a derivative lessee), the Law of Distress Amendment Act 1908
(deduction of sums paid by an underlessee to preserve his goods from distress
levied on his superior lessee), the Highways Act 1980, sections 212 and 305 and
Schedule 13 (deduction of street works charges levied on the lessee as
‘occupier’), and the Public Health Act 1936 section 291 (2) (deduction of the
cost of works recovered from an ‘occupier’ by a public health authority).
This statutory
context is relied on by Mr Rimer as showing the species of deduction
that was in the mind of the draftsman of the underlease when framing the
prohibition against deductions from rent — that is to say the process of
deduction properly and grammatically so called which takes place whenever
Parliament authorises (as it has done in the instances just mentioned) a
subtraction or recoupment from rent. The validity of that argument is not, he
submits, affected by the fact that (as Mr Lewison was quick to point out) all
but one of the four possible heads of statutory deduction (the exception being
payments in avoidance of distress) were excluded already by the lessees’
covenant to defray all outgoings in clause 3(2)(A) and (17) of the underlease
(which I have already quoted).
I can now
turn, after that account of the authorities and the arguments, to the
considerations to be applied in construing the provision in this underlease
prohibiting ‘any deduction’ from rent. They should, in my judgment, be the
following:
(1) Clear words are needed to exclude a tenant’s
remedy of an equitable right of set-off.
(2) The word ‘deduction’ has never achieved the
status of a term of art, but is an expression employed (both in everyday speech
and in the language of the courts) at one moment in its strict sense to
describe the ordinary process of subtraction with which it is grammatically
associated, and at other moments in a broader sense to describe the result which
follows when one claim is set against another and a balance is struck. It is
thus a useful and a flexible word, but heavily dependent upon the context in
which it is used for an accurate understanding of the sense in which it is
being employed. If the context happens to be one that affords no guidance as to
its intended meaning, it becomes an expression which necessarily suffers from
ambiguity. It cannot, in short, be accurately described as a ‘clear’ word.
(3) It follows that the simple expression ‘without
any deduction’ is insufficient by itself, in the absence of any context
suggesting the contrary, to operate by implication as an exclusion of the
lessee’s equitable right of set-off.
(4) Added words of exception or qualification are
relevant to the construction of such a phrase, but they, too, are subject to
the general requirement of clarity and will be effective to displace the
lessee’s right of equitable set-off only if their effect is to create a clear
context for exclusion.
Issues of
construction are seldom easy, and are bound to depend in the last analysis upon
the impression left in the mind of the judge when the language used by the
parties is examined in the light of authority. When the considerations I have
just mentioned are applied to the wording used in the present case, the
impression left on my mind is that the parties to this lease used language
which was insufficiently clear to carry the implication of an intention to
exclude the tenant’s equitable right of set-off. The words of exception in
brackets do nothing to cure the want of clarity; they tend if anything (for the
reasons urged by Mr Rimer) to provide a slight indication that the parties did
not have set-off in mind when they were framing the prohibition against
deduction.
A conclusion
once reached in a construction case is not improved by elaboration. I do not
think it is necessary for me to add more to it than this general comment, which
may be of assistance to those who are involved in the drafting of leases. The
term ‘deduction’ is one of those words for which the convenience of flexibility
has been achieved at the price of some inherent ambiguity. Draftsmen who are
concerned to exclude the tenant’s equitable right of set-off would therefore be
well advised to do so explicitly. They will find useful guidance in that regard
in Mr Lewison’s publication on the drafting of leases*.
*Editor’s
note: Lewison, Kim Drafting Business Leases 4th ed Longmans 1993.
It will be
implicit in what I have said that the decisions in Famous Army Stores v Meehan
and Akehurst v Stena Sealink Ltd should not, in my judgment, be
followed and that the approach (though not the entire reasoning) of the New
Zealand Court in Grant v NZMC Ltd was correct.
I would, for
my part, allow the appeal and substitute for the order made by the official
referee the form of order prayed by the amended notice of appeal with any
necessary amendments that may be agreed by counsel.
Agreeing, NEILL
LJ said: I agree that this appeal should be allowed for the reasons given
by Waite LJ. I add only a short judgment of my own because we are differing
from the decision of Judge Bowsher QC.
It seems that
the obligation to pay a periodic rent reserved under the reddendum in a
lease is capable of being reduced in a number of different circumstances. These
circumstances include:
(1) A contractual provision for a deduction in
the lease.
(2) A statutory provision for a deduction: see,
for example, Law of Distress Amendment Act 1908, section 3; Income and
Corporation Taxes Act 1988, section 23(5). It may be noted that any agreement
not to allow a deduction of tax under section 23(5) of the 1988 Act is void:
see Taxes Management Act 1970, section 106(2).
(3) A payment made by the tenant by way of proper
expenditure on repairs which the landlord has neglected to carry out; in that
event the payment will be regarded pro tanto as payment of the rent, and
will certainly be an answer to an action for the rent, and possibly an answer
to a claim to distrain: see Lee-Parker v Izzet [1971] 1 WLR 1688,
at p1693.
(4) The exercise of an equitable right of
set-off: see British Anzani (Felixstowe) Ltd v International Marine
Management (UK) Ltd [1980] 1 QB 137.
(5) The exercise of a statutory right of set-off:
see, for example, Agricultural Holdings Act 1986, section 17.
The question
which arises in this case is whether the word ‘deduction’ in the phrase in the reddendum
‘. . . To be paid without any deduction (except as required by any Act) . . .’
is to be construed so as to enable the lessors to claim the rent in full
despite the existence of an equitable right of set-off in respect of breaches
of the lessors’ covenants.
As Waite LJ
has demonstrated, it is a simple matter to find authorities where judges have
used indiscriminately the expressions ‘deduction’ and ‘set-off’ to describe the
state of affairs which arises when a claim is matched, or partly matched, by a
crossclaim to which rights of set-off are accorded in equity. It seems to me,
however, that where, as here, it is necessary to examine the use of the word
‘deduction’ more closely the distinction between a contractual or statutory
‘deduction’ and an equitable right of set-off becomes apparent. As I understand
it, it is still the general rule of the law of distress that apart from
deductions authorised by contract or statute a set-off cannot be used to reduce
the amount for which a landlord is entitled to distrain: see 13 Halsbury’s
Laws para 286; 27 Halsbury’s Laws, para 232. Furthermore, I share
the view of the Court of Appeal in New Zealand in Grant v NZMC Ltd
[1989] 1 NZLR 8 at p13 that ‘the word ‘deduction’ does not in its natural sense
embrace a set-off’. Accordingly, I, too, am satisfied that the lessees are
entitled to rely on their equitable set-off.
I would note
in conclusion only that it may be that (though the point is not relevant to
this underlease) sections 119, 120 and 349 of the Income and Corporation Taxes
Act 1988 provide examples of deductions from the rent which are required to be
made by statute.
SIMON BROWN
LJ agreed and did not add anything.
Appeal
allowed with costs and costs of the counterclaim.
