Connaught Restaurants Ltd v Indoor Leisure Ltd
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE WAITE,LORD JUSTICE NEILL,LORD JUSTICE SIMON BROWN |
| Judgment Date | 19 July 1993 |
| Judgment citation (vLex) | [1993] EWCA Civ J0719-4 |
| Date | 19 July 1993 |
| Court | Court of Appeal (Civil Division) |
[1993] EWCA Civ J0719-4
(His Honour Judge Bowsher)
Before: Lord Justice Neill Lord Justice Simon Brown and Lord Justice Waite
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUDICATURE
MR C RIMER QC and MR R POWELL-JONES (instructed by Messrs McBride WIlson & Co., London WC2) appeared on behalf of the Appellant
MR M WARWICK (instructed by Messrs Howard Kennedy, London W1A) appeared on behalf of the Respondent
Monday 19th July, 1993
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 substantially exceed any arrears of rent that 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 10th June 1992 the Official Referee, His Honour 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 7th December 1983 and made between the respondent landlords Connaught Rooms Ltd ("the lessors") of the first part, the appellant tenants Indoor Leisure Ltd ("the lessees") of the second 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 of that year 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 2nd June 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. Rimer for the appellant lessees and Mr.Lewison 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 QB 137).
(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 p 717 and Lord Salmon at p 722...
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