Smith v Muscat
| Jurisdiction | England & Wales |
| Judge | Lord Justice Sedley,Lord Justice Buxton,Lord Justice Ward |
| Judgment Date | 10 July 2003 |
| Neutral Citation | [2003] EWCA Civ 962 |
| Docket Number | Case No: B2/2002/2265 |
| Court | Court of Appeal (Civil Division) |
| Date | 10 July 2003 |
[2003] EWCA Civ 962
Lord Justice Ward
Lord Justice Buxton and
Lord Justice Sedley
Case No: B2/2002/2265
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BROMLEY COUNTY COURT
(His Honour Judge David Mitchell)
NICHOLAS NICOL (instructed by Balogun Kirvan, London, SE20 7DT) for the Appellant
EDWIN JOHNSON (instructed by asb law, Croydon, CR0 1SQ) for the Respondent
SMITH V MUSCAT
The issue
This appeal, which is brought by leave of the trial judge, comes before the court under CPR 52.14 which enables a case raising an important point of principle to be assigned directly to the Court of Appeal where it would otherwise be allocated to the High Court. The point of principle is whether a tenant who is sued by his landlord for arrears of rent may have an equitable set-off for damages for disrepair accruing under the previous landlord.
The history
Mr Smith, now in his seventies, has been the tenant of a small end-of-terrace house in Eden Road, Beckenham, for well over 40 years under what is now a statutory tenancy. He has been reliant for many years on housing benefit to make up his rent payments. The lessor was initially his brother, who sold the freehold to a Mr Walker about 10 years ago. The house had suffered for many years from damp, but in 1995 the local authority served a disrepair notice under s.189 of the Housing Act 1985. From June 1995 to February 1997 —"far longer than any reasonable person would expect", said the judge – the lessor's builders did remedial work in the house, causing major disruption and inconvenience. In December 1995 Mr Smith began withholding rent.
On 12 October 1999 the freehold was purchased by Mr Muscat. By then £3,860.13 —128 weeks' rent – was outstanding and by operation of law became owed to Mr Muscat. It was also, according to Mr Muscat's evidence, separately assigned to him by deed and reflected in the purchase price. Mr Smith continued to withhold rent, and on 6 March 2001 notice to quit was served on him, followed on 3 September 2001 by possession proceedings. Only then did Mr Smith resume rent payments. As a result, by the time of trial in the Bromley County Court before His Honour Judge David Mitchell on 28 August 2002, the arrears stood at £5,232.06.
By virtue of s.98(1) of the Rent Act 1977 and Case 1 of Schedule 15 to that Act, no possession order may be made against a statutory tenant unless there are rent arrears and it is reasonable to make an order. Judge Mitchell held Mr Muscat liable to Mr Smith in the sum of £2000 for disrepair since he became the lessor in October 1999. But he held that no right of set-off existed at law or, inferentially, in equity against Mr Muscat in relation to similar breaches of covenant by his predecessor in title, Mr Walker. In consequence he found that Mr Smith remained indebted to Mr Muscat for arrears of £3,232.06 which he had no prospect of paying off, and made an outright possession order which he stayed pending appeal. He also held that, had a right of equitable set-off existed, he would not have allowed it because of Mr Smith's delay in asserting it and the availability to him of an action against Mr Walker.
The issues
It is accepted by Nicholas Nicol for Mr Smith that if the arrears were what the judge held them to be, an outright possession order is unappealable, even though (as the judge noted) Mr Smith would almost certainly be treated as intentionally homeless thereafter. It is accepted by Edwin Johnson on Mr Muscat's behalf that if in principle an equitable set-off was available in respect of damages for breaches of covenant on Mr Walker's part, the amount of these and the appropriateness of an outright possession order will have to go back for trial.
The major issue is therefore the availability of an equitable set-off. But if it is available, we have also to decide whether the judge's two contingent grounds for denying it in the present case are sustainable. In short, Mr Nicol contends that these grounds were adopted by the judge without notice or argument and so should fall without more; and that in any event, on the facts, neither delay on Mr Smith's part nor the possibility of his suing Mr Walker directly was a proper ground for refusing an equitable set-off.
The fallback grounds
The judge's reasoning about this part of the case was brief. He wrote:
"If I am wrong [about set-off] it seems to me that by reason of the tenant's delay and his remedy elsewhere that he should not be entitled to any equitable relief prior to Mr Muscat's acquisition of the property."
The judge can only mean that because Mr Smith had endured years of neglect by Mr Walker without suing him, it would be unfair now to let him assert his claim against Mr Muscat instead. If so, the reasoning is untenable. Its necessary premise is that Mr Smith has an equitable set-off against the rent arrears inherited by Mr Muscat from Mr Walker. The whole point of such a set-off – assuming that it was available —is that it entitled Mr Smith to await a claim for arrears and to plead his damage in answer to it.
The single question for this court is therefore whether a set-off of unliquidated damages for a previous lessor's breach of a repairing covenant is available to the lessee against a claim for rent arrears which have been assigned by the previous lessor to the claimant lessor.
The law: setting off damages for a previous lessor's breach of covenant.
In modern times it was not until the decision of Goff J in Lee-Parker v Izzett [1971] 1 WLR 1688 that it was recognised that any deduction could be made from the rent due under a lease. The decision of Goff J reasserted the ancient common law right of recoupment established in Taylor v Beal (1591) Cro. Eliz. 222. The right was fleshed out by the decision of Forbes J in British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1980] QB 137. The principle amounts to this: that money expended by a tenant on discharging his landlord's covenants will in appropriate circumstances operate as a partial or a complete discharge so as to furnish a defence at law to a claim for unpaid rent; and where the tenant has suffered damage by the breach rather than paid money to remedy it, an equitable set-off is in appropriate circumstances available. Appropriate circumstances in the latter case include (to paraphrase Forbes J) a close reciprocity in the subject-matter of the cross-claims. It is accepted that damages for breach of a repairing covenant and rent payable under the same agreement are an instance of such reciprocity.
The reason why this position had to be reached by the slow stages recounted by Forbes J in his judgment was the view which the common law had come to take of the special nature of rent, a view well illustrated by the argument of Jeremiah Harman QC for the lessor (at 140) that rent "is invested with something in the nature of an aura" because it issues out of the land and carries such unique rights as distraint and forfeiture. Forbes J (at 152) was unpersuaded "that the ancient common law remedies attached to rent should govern in the fourth quarter of the twentieth century one's approach to a tenant's claim to equitable relief".
It has been common ground before this court that a lease or tenancy agreement is today to be regarded as a contract like any other. If it has special characteristics, these are a function of construction or statutory interposition, not of principle. The reason is encapsulated in the opening paragraph of the title Landlord and Tenant in 27(1) Halsbury Laws (4 th ed.):
"The relationship of landlord and tenant was originally one of contract only, but from early times the contract conferred an estate in the land on the tenant without losing all its contractual characteristics."
This does not, of course, answer the question before the court, but it explains how the present problem arises. If this were a simple contract, there would be privity neither as to the debt owed to the previous lessor nor as to damages for the latter's failure to repair. But it is accepted that by virtue of s.141 of the Law of Property Act 1925 the entitlement to recover rent arrears runs with the reversion. It is also accepted that s.142 does not have the same effect in relation to breaches of the lessor's repairing covenant: the covenant runs with the land, making the new lessor liable from the moment of assignment for all extant disrepair but not for breaches occurring prior to the assignment. The sections (so far as material) provide:
Rent and benefit of lessee's covenants to run with the reversion
141(1) Rent reserved by a lease … shall be annexed and incident to and shall go with the reversionary estate in the land … without prejudice to any liability affecting a covenantor or his estate.
(2) Any such rent … shall be capable of being recovered … by the person from time to time entitled, subject to the term, to the income … of the land leased.
Obligation of lessor's covenants to run with the reversion
142(1) The obligation under a condition or of a covenant entered into by a lessor with reference to the subject-matter of the lease shall … be annexed and incident to and shall go with [the] reversionary estate … and may be taken advantage of and enforced by the person in whom the term is from time to time vested …
Mr Nicol accepts for the purposes of his argument the decision of Garland J in Duncliffe v Caerfelin Properties Ltd [1989] 2 EGLR 38. The defendants were assignees of the...
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