Edlington Properties Ltd v J H Fenner and Company Ltd

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLORD JUSTICE NEUBERGER,LORD JUSTICE PILL,LORD JUSTICE SCOTT BAKER
Judgment Date22 Mar 2006
Neutral Citation[2006] EWCA Civ 403
Docket NumberB2/2005/2477

[2006] EWCA Civ 403

IN THE SUPREME COURT OF JUDICATURE

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE QUEENS BENCH DIVISION

(MR JUSTICE BEAN)

Royal Courts of Justice

Strand

London, WC2

Before:

Lord Justice Pill

Lord Justice Scott Baker

Lord Justice Neuberger

B2/2005/2477

Edlington Properties Limited
Claimant/Respondent
and
J H Fenner & Co Limited
Defendant/applicant

MR C LUNDIE (instructed by Messrs Rollits, Wilberforce Chambers, High Street, Hull HU1 1YJ) appeared on behalf of the Appellant

MR T FANCOURT QC and MR E PETERS (instructed by Messrs Mishcon de Reya, London WC1R 4QD) appeared on behalf of the Respondent

LORD JUSTICE NEUBERGER

Introduction

1

This is an appeal brought with the permission of the judge by J H Fenner & Company Ltd ("Fenner") , the tenant under the lease of a substantial factory, against the decision of Bean J on what amounted to three preliminary issues arising from its dispute with its landlord, Edlington Properties Ltd ("Edlington").

2

The relevant basic facts are helpfully set out in the judgment below and they are as follows:

"2. Maerdy Colliery, known in its heyday as 'Little Moscow', closed in 1990. The Welsh Development Agency ('WDA') came into possession of the site and on 8th February 1996 concluded a written agreement ['the building agreement'] with [Fenner]. The agreement obliged the WDA to construct a factory on the site and Fenner to take a lease of the premises once the factory was built. The obligation to grant the lease accrued when the WDA's architect certified practical completion of the factory. [The lease was duly granted on 24 October 1997 and it is for a term of 25 years from 4 August.]

"3. Fenner contends that the WDA was in breach of its building obligations in the [building] agreement by constructing a factory that was seriously defective and inadequate for Fenner's purposes. Fenner has issued proceedings in the Technology and Construction Court against the WDA claiming more than £52 million in damages.

"4. The reversion was assigned by the WDA to Bradbury Corporation Ltd on 19th October 1998, and then further assigned by Bradbury to the Claimant, Edlington … on 15th July 2003. It is common ground that the interposing of Bradbury between the WDA and Edlington makes no difference to the point of law. … [Both assignments were, it would appear, normal commercial transactions.]

"5. The rack rent payable under the lease is now £581,192 per year plus VAT. The present claim, issued on 16th November 2004, is for the quarter's rent due on 29th September 2004 and insurance premiums due under the terms of the lease for the year beginning 24th June 2004. There are separate issues concerning the insurance premiums but it is admitted that the rack rent would be payable subject to [Fenner's] claim of set-off.

"6. It is no part of my task to assess the strength and weaknesses of Fenner's claim for damages against the WDA, which is due to be tried in October 2006. The parties are agreed that for present purposes it should be assumed to be valid at least to the extent of the full amount of Edlington's claim.

"7. At a case management conference on 16th August 2005 Master Yoxall ordered that [the following] questions be tried as preliminary issues. As amended by consent they are as follows:

"a) Whether Fenner has a right to set off its damages claim against the WDA against Edlington's claim for … rent and insurance rent made in these proceedings;

"b) If Fenner does have such a right to set-off, whether that right of set-off is excluded by clause 16.2 of the [building] agreement and/or clause 6.1.1 of the Lease;

"c) Whether on a proper construction of clause 1.16 of the Lease the sum of £108,804.04 or £40,537.50 is due from Fenner to Edlington in respect of insurance rent; …"

3

The first issue raises a point of general principle which is not by any means free of relevant authority, although it is fair to say that not all judicial observations on the topic are entirely consistent with each other. The second and third issues turn very much on the particular terms of the lease, although the second issue does involve consideration of one particular authority.

Can Fenner's claim against the WDA under the building agreement be set off against rent due under the lease to Edlington?

4

Where there has been no transfer of the reversion, it is clear that the tenant can in principle set off against its liability for rent, a claim for damages arising from a breach by the landlord of a term of the agreement from the lease, as well as any claim against the landlord for a breach of the provision of the lease itself. That point has been regarded as conclusively determined by the judgment of Forbes J in British Anzani (Felixstowe) Limited v International Marine Management (UK) Ltd [1977] 1 QB 137, a decision which has been approved on a number of occasions in this court, for example Connaught Restaurants v Indoor Leisure [1994] 1 WLR 501 at 505C and 511C, Mortgage Corporation v Ubah [1996] 73 P&CR at 500 and 507, and Muscat v Smith [2003] 1 WLR 2853 paragraph 9. Accordingly, it is common ground in this case that, had the WDA not assigned the reversion to the lease to Edlington, Fenner would be able to settle this claim for damages under the building agreement against its liability for rent.

5

The question is therefore whether that right of setoff has effectively been lost in respect of rent which accrued due after the transfer of the reversion by the WDA. I express the issue in those terms because, as the judge rightly pointed out, there is a difference in this connection between rent which had fallen due and was not paid at the time the WDA transferred away its reversion, and rent which fell due after that date.

6

It is not uninstructive to consider the issue in its commercial context before turning to address the principles and the authorities which bear on the issue. It does not require much thought to see that the problem is difficult because, as the facts of this case show, both Fenner and Edlington have strong practical arguments. It would seem arbitrary and unfair to Fenner if its obviously valuable right to set off against rent its claim for damages under the building agreement was lost as a result of an action wholly out of its control, and wholly within the control of the very person against whom the right to set off could be claimed, namely the landlord, the WDA, by the WDA simply transferring the reversion away. On the other hand one can equally well see that a purchaser of the reversion, such as Edlington, would regard it as illogical and unfair if Fenner could invoke such a right of set-off against a successor landlord. Illogical because the set-off would be in respect of a claim which self-evidently could not be maintained against Edlington, who could in no way be bound by building agreement; unfair because Edlington would by no means necessarily know or have the means of knowing that a claim could be mounted under the building agreement.

7

In paragraph 28 of his judgment, Bean J expressed the view that, if the matter had been free of authority, he would have found in favour of Fenner on this issue. That was essentially because he regarded it as more unfair on Fenner that its right of set-off was lost by an assignment of the reversion than it would be on Edlington if the right of set-off was preserved. I see the force of that point, not least because Edlington acquired its interest substantially after Fenner took the lease.

8

On the other hand it can be said that it was open to Fenner to insist, albeit subject to the WDA agreeing, that the lease to be granted pursuant to the building agreement should contain a reddendum which effectively provided it with the right of set-off which it now claims could be invoked against the landlord for the time being. If the lease had contained such a term then, as against a transferee of the reversion, the tenant would have been able to invoke a term of the lease, indeed of the reddendum, rather than relying on a right of equitable set-off as Fenner is doing here.

9

The argument that a tenant is entitled to invoke, by way of set-off against the rent due to a transferee of the reversion, a claim against the original landlord for unliquidated damages for a breach of the term of the contract pursuant to which the lease was granted, is said on behalf of Fenner to be based on two alternative propositions, namely (1) the transferee of the reversion takes subject to the equities which as at the date of the transfer should have been invoked against the transferor; and (2) the tenant's right of equitable set-off against the original landlord is a right which runs with the land and is therefore enforceable against a transferee of the reversion.

10

In my view, neither proposition is correct – at least where the transfer is an arm's length sale.

11

So far as the first proposition is concerned, the effect of a transfer of the reversion to the lease is governed by section 141 of the Law of Property Act 1925 ("section 141") in relation to leases granted before 1 January 1996, and, in relation to leases granted after that date, by section 3 of the Landlord and Tenant Covenants Act 1995 ("section 3") . The law in this connection can be traced back via section 8 of the Conveyancing Act 1881 to the Grantees of the Reversion Act 1540. Section 141, which applies to leases granted before 1 January 1996, provides:

"(1) Rent reserved by a lease, and the benefit of every covenant or provision therein contained, having reference to the subject-matter thereof, and on the lessee's part to be observed or performed, and every condition of re-entry and other condition therein contained, shall be annexed...

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