Underlease — Provision in underlease that rent to be paid without deductions — Whether tenants’ equitable right of set-off thereby excluded — Official Referee holding it was — Court of Appeal allowing appeal against that decision
Connaught Restaurants Ltd (“the landlords”) granted to Indoor Leisure Ltd (“the tenants”) an underlease of premises, which were part of the basement of the Connaught Rooms, Great Queen Street, London WC2. The term was for 12 1/2 years from October 1983 to February 1996. The landlords held the leasehold reversion to the whole of the Connaught Rooms under a lease expiring at a date well into the next century. There was a provision in the lease that the rent should be paid “without any deduction”. There were serious breaches of covenant by the landlords, causing the tenants to cease payment of rent. On June 19 1992, the Official Referee gave judgment for the landlords in their action for unpaid rent of £202,690 and judgment for the tenants in their counterclaim for damages for breach of covenant of £435,760. The tenants appealed.
The tenants claimed that the judge was wrong to have expressed the result in the form of judgments favourable to each party. They were the real victors, as they had established a substantial surplus of damages over rent. They argued that the judge ought to have given judgment with costs for the tenants in the landlords’ action for rent; and judgment with costs for the tenants on their counterclaim in a sum representing the excess of the damages over the rent with interest on that balance.
Held The appeal was allowed.
1. The sole issue was whether the tenants’ right of set-off had been excluded in the lease, which provided for payment of rent “without any deductions”. That provision needed clear words to exclude a tenant’s remedy of an equitable set-off.
2. The word “deduction” had never achieved the status of a term of art, but was an expression employed at one moment in its strict sense to describe the ordinary process of subtraction with which it was grammatically associated, and then in the broader sense to describe the result which followed when one claim was set against another and a balance was struck. It was thus a useful and flexible word, but heavily dependent upon the context in which it was used.
3. It followed that the expression “without any deduction” was insufficient by itself, in the absence of any context suggesting the contrary, to operate by implication as an exclusion of the tenants’ equitable right of set-off.
4. Added words of exception or qualification were relevant to the construction of such a phrase, but they, too, were subject to the general requirement of clarity and would only be effective to displace the tenants’ right of equitable set-off if their effect was to create a clear context for exclusion.
5. Bearing those considerations in mind, the parties in this case had used language that was insufficiently clear to carry the implication of an intention to exclude the tenants’ equitable right of set-off.
6. Those involved in the drafting of leases who were concerned to exclude the tenant’s equitable right of set-off would therefore be well advised to do so explicitly.
Colin Rimer QC and Robert Powell-Jones (instructed by McBride Wilson & Co) appeared for the tenants; Kim Lewison QC and Mark Warwick (instructed by Howard Kennedy) appeared for the landlords.
