Landlord and tenant –– Landlord and Tenant Act 1987 –– Manager appointed under 1987 Act –– Whether manager owing duties of landlord under lease to tenant –– Whether tenant entitled to set off damages for breach of landlord’s repairing covenant against manager’s claim for service charges
The claimant was appointed manager of a block of flats appointed by the leasehold valuation tribunal (LVT) under the Landlord and Tenant Act 1987. By the terms of the LVT order, the manager was
Held: The manager did not owe the tenant the duty of, or equivalent to, that owed by the landlord. Upon taking up his appointment, the manager did not undertake duties to the tenants equivalent to those owed by the landlord. The appointment did not have the effect of creating any privity of estate or of contract between the manager and the tenants. The imposition of such duties would be inconsistent with the scheme under Part II of the I987 Act. For the purposes of the application of the tenant’s right of set-off, in respect of his claim for damages for breaches of the landlord’s repairing covenant, there was a connection with the manager’s claim for arrears of rent and service charges. However, it would be inequitable to allow such set-off. The funds held by the manager were subject to a statutory trust, and it was not appropriate to allow set-off against a statutory trust.
The following cases are referred to in this report.
Bank of Boston Connecticut v European Grain and Shipping Ltd; Colonial Bank v European Grain & Shipping Ltd [1989] AC 1056; [1989] 2 WLR 440; [1989] 1 All ER 545; [1989] 1 Lloyd’s Rep 431, HL
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] 1 EGLR 65; 250 EG 1183
British Telecommunications plc v Sun Life Assurance Society plc [1996] Ch 69; [1995] 3 WLR 622; [1994] All ER 44; (1997) 73 P&CR 475; [1995] 2 EGLR 44; [1995] 45 EG 133, CA
Business Computers Ltd v Anglo-African Leasing Ltd [1977] 1 WLR 578; [1977] 2 All ER 741
Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501; [1993] 2 EGLR 108; [1993] 46 EG 184, CA
Filross Securities Ltd v Midgeley [1998] 3 EGLR 43; [1998] 43 EG 134: (1999) 31 HLR 465
Handley Page Ltd v Customs and Excise Commissioners [1970] 2 Lloyd’s Rep 459
Leon Corp v Atlantic Lines & Navigation Co Inc (The Leon) [1985] 2 Lloyd’s Rep 470
Passley v Wandsworth London Borough Council (1998) 30 HLR 165
Timothy Fancourt (instructed by Gisby Harrison) appeared for the claimant; Anthony Tanney (instructed by Cawdery Kaye) represented the defendant.
Giving judgment, Mr RECORDER HAMLIN said:
1. I am asked, following the claimant’s opening of his case, but prior to hearing any evidence, to determine certain issues of law. This approach, with which I agree, arises in the unusual circumstances indicated in my earlier ruling, whereby I allowed the claimant’s application, also made at the end of the opening, to amend his pleadings so as to dispute the hitherto conceded assertion that the claimant owed to the defendant the duties of the landlord contained in the lease, including the duty of repair.
2. The claimant in this case is the manager of a block of flats at 14-16 Hyde Park Gardens, London W2, (the property), having been appointed as such by the leasehold valuation tribunal (LVT) on 1 December 1998. The freehold of the property is owned by church commissioners, whose position is largely irrelevant to the current case save for the single fact that the condition of the property was such that, on 19 May 1998, they served a notice of forfeiture on the intermediate landlord. That intermediate landlord was, and is, Hyde Park Estates (Guernsey) Ltd (which, for convenience, I will call the landlord), which company is now in administrative receivership. The property itself consists of some 10 flats held on long underleases.
3. The defendant is the owner of the underleasehold interest of flat 2 at the property, and was one of the two tenants of the property who pressed for the claimant’s appointment as manager.
4. The claimant sues, as it is agreed he is empowered to do, for service charges and for ground rent. His two actions have been consolidated by consent, and the claims are limited to those service charges and ground rents arising since his appointment.
5. The defendant, who is dissatisfied with the claimant’s management, and is, in particular, aggrieved by his failure to give priority to certain building works that would have benefited the flat, counterclaims. He does so asserting that these works required to be carried out with great expedition so as to prevent yet further water incursion, and that the claimant’s own proposals recognised this urgent need before they were altered by the claimant. This change was, according to the defendant, unjustified and led to a loss to him.
6. The nature of the counterclaim is to the effect that the claimant, by virtue of his appointment, owed the defendant the like duties of repair as did the landlord under his underlease. Many of the defects of which the defendant complains relate to parts of the building retained by the landlord. As indicated later in this judgment, the obligation of the landlord in relation to such parts was not merely to repair them as and when they fell out of repair, but to maintain them and keep them in repair. Accordingly, in relation to such parts, the landlord was in breach as and when the want of repair arose: see Passley v Wandsworth London Borough Council (1998) 30 HLR 165, following British Telecommunications plc v Sun Life Assurance Society plc [1996] Ch 69*. It follows that one effect of this pleading, if accurate, is that a manager such as the claimant, who was, as is common in cases of this sort, appointed because a landlord had wholly failed to carry out its duties of repair and maintenance, is in breach of his obligations immediately upon appointment.
* Editor’s note: Also reported at [1995] 2 EGLR 44
7. None the less, the defendant’s assertions as to the duties owed by the claimant were admitted in the claimant’s reply and defence to counterclaim. In the event, Mr Timothy Fancourt, who appeared for the claimant, but who had not pleaded his case, applied at the end of his opening to amend his client’s pleadings, in essence so as to withdraw the concession. I allowed the claimant’s application.
8. Given this change of stance by the claimant, the defendant sought to adjourn this action so as to allow him the opportunity to recast his case by considering whether the evidence supports an alternative pleading in tort, based upon a duty of care, and, if so, then supporting such case by appropriate expert evidence. In the normal course of events, such an adjournment, brought about by a radical change to the claimant’s own case, is one that I would be almost bound to grant.
9. Here, however, the request for an early ruling arose initially because if, as a matter of law, the claimant, being a manager appointed by the LVT under statutory powers, owed no relevant duty of care to the defendant (whether at common law or in equity), then the adjournment would be pointless, and the proposed course of action one that would lead to needless expense and loss of time. Any pleading that resulted therefrom would be liable to be struck out.
10. In fact, during the course of argument, the claimant, while recognising that a distinction may be drawn between the duties of those who are appointed as receivers and managers by virtue of agreement, very often to be found in a charge or debenture, and those appointed by the court (into which category this case more obviously falls), conceded, for the purposes of this action, that, in exercising his management functions, he did owe, both to this defendant and to the tenants of the property generally, a duty of care. I was told of the practical and entirely understandable basis for this concession, and assume, for the purpose of this judgment, that it is correct.
11. As a result of the concession, the scenario changed, but it became clear that there were considerable advantages to all concerned were there to be an early ruling as to the nature of the duty owed by the claimant to the defendant. I am asked to now determine:
(a) whether the duty owed by the claimant to the defendant, following his appointment as manager by the LVT, and in relation to the management of the property, is limited to the (conceded) duty of care, or whether the duty is greater, and equivalent to that owed by Hyde Park Estates (Guernsey) Ltd, the intermediate landlord.
Given the advantages of finality, I am asked to deal with this matter not simply on the basis of whether the defendant’s points are arguable and capable of sustaining an amended pleading (which would survive any attempt to strike it out), but to make a determination for the purposes of the trial.
Further, and in the event that the duty owed by the claimant to the defendant is not equivalent to that owed by the landlord, it is also convenient that I should at the same time determine a second question, namely:
(b) whether the defendant may set off, against the claimant’s claims for service charges, such sum as he would be entitled to claim by way of damages against the landlord for breach of covenant to repair.
I should point out that the defendant only wishes to press any right to a set-off in relation to the liability of his landlord, no doubt because this is the only way that he will recover, if only in part, damages for breach of covenant. In so far as his claim against the claimant is concerned, he is content now to pay the service charges and ground rent due and to proceed with his counterclaim (when amended).
12. It is important to set this matter into its proper context. It arises from a long and difficult struggle between the undertenants of the property (or certain of them) and the landlord. I need say nothing of the historic background, save that the property consists of a terrace of three formerly grand houses in a prestigious part of central London. Each house includes a terrace at a raised ground-floor level. The defendant’s flat is a large semi-basement and extends under the terraces to all the flats above. It spans the property. By 1998, the property had fallen into a state of serious disrepair, to the extent that the defendant’s flat was rendered uninhabitable. One, perhaps the most significant, complaint made by the defendant is in relation to the terraces, which were not watertight, the resultant incursions of damp being such that neither he nor his family could live in the flat. Although I have yet to hear the evidence in the case, I believe that I am right in saying that while the landlord was undoubtedly in serious breach of its obligations generally, the defendant’s flat was the only one affected to such an extent that it was uninhabitable. It was this aspect of the case that caused the defendant to press for the claimant’s appointment, and forms that basis of his case that, following such appointment, the works to repair the terraces ought to have been given the highest priority.
Duty
13. Any consideration of the duties of the claimant must begin with a review of the terms of the underleases and of his appointment. Although it appears that one of the underleases at the property contains a different scheme with regard to the recovery of service charges, it is not suggested that the differences are material to any consideration of the duties of the claimant, albeit that such will be owed to each tenant.
14. The defendant’s underlease, which is in the same form as all others than that mentioned above, provides for a ground rent of £750 pa, and, in relation to service charges, that the defendant should pay:
by way of additional rent as and when demanded a proper proportion according to rateable value (as specified by the Landlord or its Managing Agents) of the annual cost or anticipated cost in connection with the Building (hereinafter called “the service charge” as estimated by the Landlord’s Surveyor of…
and there follows a list of the relevant heads of expenditure.
The relevant obligations of the tenant can be summarised briefly: they are to pay the rent and additional rent (ie the service charges) and to keep the interior of the flat in good and tenantable repair and condition: clause 2. Those of the landlord, again in brief summary, are to maintain and keep the main structure of the building in good and substantial repair and condition and to decorate the exterior as and when it reasonably considers such to be necessary: clause 3. Clause 4(4) refers to the building as a “high class residential block”.
15. The appointment of the claimant as manager was under the provisions of section 24(1) of the Landlord and Tenant Act 1987 (the 1987 Act), and was made because the LVT was satisfied both that the landlord was in breach of obligation and that the appointment was just and convenient: section 24(2)(a)(i). Three aspects of the scheme providing for the appointment of managers contained in Part II of the 1987 Act are worth noting. The first is that the landlord concerned must be given a chance to rectify his breaches and that only if he does not do so may an application be made. Second, until 1997, when the Housing Act 1996 came into effect, such application was to the court; since that date the application is to be to the LVT: section 21(1). The third point is that although an application for an appointment may (as here) be made by some but not all tenants, the appointment if made (again, as here) extends to all the flats in the building concerned.
16. Finally, I must point out that, in the current case, the landlord consented to the appointment (albeit very late in the day), despite which the claimant was required to submit his proposals for managing the property to the LVT. At the hearing, both the members of the LVT and lawyers for the landlord asked questions of him as to his suitability to act and as to his proposals. Plainly, he satisfied the LVT. The claimant in this case is a chartered surveyor and professional property manager. The fact that he was able to make proposals at all arises out of the nature of an application under the 1987 Act, which application is by a tenant, or tenants, who will invite a prospective manager to inspect his or their own flats and (as best he can) the rest of the building concerned. This allows the manager to, in turn, submit proposals, although these may not be fully developed. This aspect of management under the 1987 Act may well be of significance in relation to the duties of the manager concerned. It is unlike the position in many cases, where a receiver and manager is appointed under debenture or charge, in which case the appointee is usually an accountant who may know little of the business over which he is appointed, which business is likely to be failing.
17. The terms of the claimant ‘s appointment are contained in the order of the LVT made on 1 December 1998. Such appointment is until further order, but is to terminate automatically upon sale or transfer of the landlord’s interest in the property. The provisions of para 3 of the order are of particular importance. Such provides that the manager is authorised (my emphasis) to carry out certain defined functions and duties. Those functions and duties include the receipt of rents and service charges, and the recovery of arrears of any such sum due by the tenants and arising from the date of the order. In addition, the claimant is authorised (again my emphasis) to carry out the obligations of the landlord with regard, inter alia, to repair. Paragraph 7 of the order provides that the parties are to have liberty to apply to the LVT for further directions or clarification in respect of the terms of the order.
18. I am unable to accept the proposition that, by taking up his appointment, the claimant undertook duties to the tenants equivalent to those owed by the landlord. I have reached this view for one primary and various secondary reasons. The primary reason is that I can see no legal route to the conclusion that the defendant advances. It is not, and cannot be, suggested that the effect of the appointment was to create any privity of estate or of contract between the claimant and either the tenants generally or those who sued for his appointment. Although Mr Anthony Tanney urged his submissions that the claimant is to be regarded as having assumed the landlord’s obligations by virtue of the order or by statutory assignment, such does not stand analysis. Part II of the 1987 Act does not provide for any such assignment, and it appears inconsistent with the terms of the order.
19. While parts of the 1987 Act may be regarded as having, to use Mr Tanney’s description, “a pre-emptory flavour”, and section 24(4) does provide for the LVT to give directions to the manager, the only possible provision under which it might be said that the manager was to assume the obligations of a landlord is in section 24(5). It was, however, agreed (I believe correctly) by both parties that section 24(5) relates not
20. The order is both predicated upon the basis that the landlord’s interests and obligations continue and that it is those obligations that the claimant is authorised to carry out until such interest is disposed of. I accept Mr Fancourt’s submission that I should be reluctant to impose the obligations relied upon by the defendant in the absence of clear words in the order providing for them. In his turn, Mr Tanney urged the imperative nature of para 3(d) of the order and the importance to the tenants that the covenants should be complied with. The position in this regard was, he added, and I accept, the more important in a case where, as here, the appointment of a manager was for an indefinite period and where the landlord could not be relied upon to carry out any of its obligations. I do not doubt the desirability of restoring the property to full repair. I cannot, however, see why this should mean that the claimant, who has, as manager, agreed to further this objective, should be regarded as having undertaken the responsibilities of the landlord. In my view, there is no sustainable legal route to the conclusion asserted by the defendant, and that is enough for it to fail.
21. There are, however, other reasons for coming to this conclusion. First, it seems most unlikely that any professional manager could sensibly be expected to shoulder the obligations of a landlord when that landlord was, and was known to be, in breach of covenant. At the very least, I would expect him to insist upon an indemnity against claims such as the present counterclaim. Although it is common ground between the parties that, in such circumstances, a manager would be in breach immediately he was appointed, Mr Tanney sought to mitigate the position by suggesting that the manager be allowed a reasonable time to comply with the obligations. The difficulty with this submission is that the requirement for a reasonable time to comply is a pointer not to the manager owing the duties of a landlord, but of a duty of care. Second, I regard it as inconsistent with the scheme under Part II of the 1987 Act for these obligations to be imposed; the purpose of Part II is one that enables tenants to outflank an irresponsible landlord and to retain a skilled professional to allow the building concerned to be put back into repair. That professional cannot be regarded as the guarantor of the landlord.
22. Third, and as indicated earlier in this judgment, the manager, when assuming his position, is likely to have inspected some, perhaps most, but not all of the premises. It is unlikely that he is to assume responsibility for defects of which he may not know or have had the means of knowing. Fourth, compliance by a manager with the landlord’s obligations is necessarily dependent upon receipt of funds from the tenants. There may, as here, be an issue as to payment that leaves him short of funds. One can see why a landlord who owns the property concerned may well be required to expend funds on its maintenance and then to recoup them under the provisions of the leases he grants. It is, however, difficult to see why a manager should have to have recourse to his own funds to carry out the obligations of the landlord.
23. For these reasons, I rule that the claimant did not owe to the defendant the duty of, or equivalent to, that owed by Hyde Park Estates (Guernsey) Ltd, the intermediate landlord.
Set-off
24. The liability of the defendant to pay both ground rent and service charges is admitted, as is the power of the claimant to sue for them. It is also agreed that, as a matter of law, clause 2 of the lease, which provides that the tenant is to pay rent “clear of any deduction whatever“, does not of itself prevent a set-off against a claim for rent: Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501*.
* Editor’s note: Also reported at [1993] 2 EGLR 108
25. In these circumstances (and subject to the issue under section 42 of the 1987 Act dealt with later in this judgment), I take as my starting point the view that, following the decision of the Court of Appeal in Filross Securities Ltd v Midgeley [1998] 3 EGLR 43, the defendant would be entitled, in equity, to set off counterclaims of the nature that he advances in the current action as against the landlord’s claims for rent and service charges. The real issue for me to decide is whether such an equitable set-off can still be advanced when the landlord’s claims are brought by the claimant as manager.
26. I phrase the matter in that way deliberately. One matter, which was to the fore in submissions made to me, was the question of mutuality. The claimant relied upon the fact that the parties in the current action differed from the normal position in landlord and tenant disputes, and drew attention to the separate position of a manager, involving as it does independent rights and duties.
27. While this assertion is doubtless correct, I do not regard the fact that the parties differ from the norm to be, of itself, an impediment to the defendant’s right to set off. While analogy of the position of a manager with that of, for example, an assignee is at the end of the day unhelpful, it must be noted that, provided the essentials of set-off are established, the fact that the set-off is, for example, against a receiver is not fatal: see Handley Page Ltd v Customs and Excise Commissioners [1970] 2 Lloyd’s Rep 459, as explained in Business Computers Ltd v Anglo-African Leasing [1977] 1 WLR 578 at p585. I would also add that, as it is common ground that the liabilities of the landlord continue despite the appointment of the claimant, and as both the claim brought for rent and service charges and the claimed set-off relate to the same period, albeit after such appointment, the right to set off cannot simply be dismissed on the basis, as may happen in receiver cases, that in relation to new transactions the appointee takes free of previous equities.
28. The key question is whether the counterclaim “must impeach the title to the legal demand, or in other words go to the very foundation of the landlord’s claim”: see Forbes J in British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137* at p152E-G. It seems to me that this defendant’s counterclaim does indeed fulfil this test. Both claim and counterclaim arise out of the same contract, the lease, and it is difficult to imagine a counterclaim more directly connected with a claim for rent and service charges than one that alleges that, due to the landlord’s defaults, the demised premises were unable to be used for the purposes for which they were let, and for which the rent and service charges were levied. At the end of the day, the fact that the terms of the order merely authorise the claimant to carry out the functions of the landlord assists him in asserting that he did not adopt the liabilities of the latter, but makes it clear that the rent and service charges are due to the landlord, the claimant’s functions being to collect and apply them. The defendant is further assisted by the provisions of para 3 of the order, stating that the claimant is authorised to recover arrears of sums due. This must mean due under the lease to the landlord, and, as Mr Tanney points out, a sum is not due if it is subject to the defence of set-off.
* Editor’s note: Also reported at [1979] 1 EGLR 65
29. Once the conclusion is reached that the counterclaim does indeed impeach the claim, a particular problem arises. I must consider whether, and to what extent, I have any discretion to state that there should not be any set-off because it would be inequitable for any such set-off to be asserted. The decisions in British Anzani, and in many other cases, allow a set-off impeaching the claim because it is just and equitable for it to be allowed. That is far from the position in the current case. I am very much of the view that for the defendant, as here, to bring proceedings for the appointment of a manager, to secure that appointment, but then to seek to set off against the manager’s proper claims the liabilities of the landlord whose functions he was to carry out would be quite inequitable. It is difficult to see how a manager can function properly in such circumstances, especially as he is dependent upon the income derived from the service charges to carry out the functions that he has been appointed to fulfil. It seems to me that
30. One question that arose in Leon Corp v Atlantic Lines & Navigation Co Inc: The Leon [1985] 2 Lloyd’s Rep 470*, and also in Bank of Boston Connecticut v European Grain & Shipping Ltd [1989] AC 1056, was whether a set-off should be allowed when it was “manifestly unjust” not to so allow, but where the counterclaim did not impeach the claim. Hobhouse J, in The Leon at pp474-475, made it clear that there is no general discretion in a court to allow such a set-off. This approach reflects a modern view of equity, recognising that while its rules were created to mitigate the rigours of the common law, they are rules none the less, and the days are long gone when “the length of the Chancellor’s foot” allowed a court exercising an equitable jurisdiction to apply an unfettered view. I also note that there are categories of case in which the courts have refused to allow a defence of equitable set-off even when the impeachment test is fulfilled. These categories include those of dishonoured bills of exchange, direct debits and claims for charterhire of vessels. They arise where there is a clear public policy in denying a right to set off. I have considered whether the modern approach indicated above precludes me from admitting a set-off that fulfils the impeachment test but is not within any of the recognised categories of exception. I have concluded that it cannot. It seems to me that the fundamental basis for this sort of set-off is the injustice to the defendant in refusing to allow his cross-claim to be balanced against the primary claim. I do not regard the position to have hardened to the extent where all the court has to do is to consider whether the claim and counterclaim are sufficiently connected.
* Editor’s note: Reported at [1985] 2 Lloyd’s Rep 470
31. The effect of the reasoning set out above is that the defendant may not set off his claim against the landlord in the current proceedings. Even if such were not my view, there remains an impediment to the defendant’s claim to set off. Section 42 of the 1987 Act provides that the service charges levied in relation to residential tenancies are to be held on trust primarily to defray the costs incurred in connection with the matters for which the service charge was payable. The clear reason for this provision is to “ring-fence” such sums, and one cannot but note that the reserve fund believed to have been built up by the tenants of the property was, in this case, found to have been wholly dissipated. It is not, in my view, appropriate to allow a set-off of the nature envisaged in this case as against a statutory trust. Accordingly, I would, if necessary, have concluded that the defendant is not in any event entitled to set off, as against the claimant’s claims for service charges, the counterclaim for damages that he brings in respect of breaches of covenant to repair by the landlord. These considerations do not, of course, apply to set-off as against the claim for ground rent.
32. The matters under consideration in this judgment have not been easy to rule upon. The position of a manager appointed by the LVT is a unique one, and, I am told, has not been the subject of any known decision. I am particularly grateful to both counsel for the assistance that I received from them both in their skeletons and in their oral arguments.
