Smith v Muscat

An assignee of accrued rent arrears takes the assigned debt subject to equities available against the assignor. This includes an equitable set-off for unliquidated damages caused by the assignor’s breach of repairing obligations, where the damages and rent arise from the same lease and are inseparably connected.

Ordinary equitable set-off does not permit a defendant to set off a claim against a third party. The result instead follows from the law of assignment. Statutory provisions allowing rent to pass with the reversion do not exclude that equity.

The claimant landlord bought the freehold reversion of the defendant tenant’s statutory tenancy. Substantial rent arrears had accrued while the former landlord owned the property. The tenant alleged that the former landlord had caused prolonged disrepair and sought to set off damages against those arrears.

In Bromley County Court, the judge allowed £2,000 for disrepair after the purchase but held that damages for the predecessor’s breaches could not be set off. He made an outright possession order. The appeal concerned whether an assignee landlord’s claim for accrued rent remained subject to the tenant’s equitable set-off, and whether delay or a direct remedy against the former landlord defeated that defence.

Appeal allowed. Lord Justice Sedley gave the leading judgment. Lord Justice Buxton agreed for additional reasons, and Lord Justice Ward agreed with both judgments.

1. The general law of equitable set-off did not itself permit the tenant to set off a damages claim against the former landlord against a claim brought by the current landlord. Equitable set-off is a litigational defence and a privileged form of counterclaim. It requires a cross-claim against the claimant, not a third party.

2. That principle did not decide the appeal because the current landlord claimed accrued rent as assignee of the former landlord. An assignee of a chose in action takes it subject to existing equities. The authorities on assignment therefore entitled the tenant to rely on an unliquidated damages claim against the assignor where it flowed from dealings inseparably connected with the assigned debt.

3. The required connection was present. Both the rent arrears and the repairing obligations arose under the same lease. The tenant could accordingly set off damages for the former landlord’s disrepair against the rent arrears assigned to the current landlord.

4. Law of Property Act 1925, sections 141 and 142 did not displace that result. Section 141 transferred the right to accrued rent, but subject to the equities affecting that right. Section 142 prevented a direct damages action against the assignee for the predecessor’s past breach; it did not prevent the tenant from asserting the pre-existing set-off against the assigned rent debt.

5. The tenant’s delay and the availability of a direct action against the former landlord were not grounds for refusing the set-off. The purpose of a valid set-off was to permit the tenant to await a claim for rent and plead the damages in answer.

The claim and counterclaim were remitted to the County Court for trial in accordance with the Court of Appeal’s judgments.

• Court of Appeal (Civil Division): Appeal allowed in [2003] EWCA Civ 962. The claim and counterclaim were remitted to the County Court.
• Bromley County Court: His Honour Judge David Mitchell held that damages for the predecessor landlord’s disrepair could not be set off against assigned rent arrears, made an outright possession order, and stayed it pending appeal.