Smith v Muscat

The Court of Appeal held that a statutory tenant may set off unliquidated damages for breaches of a repairing covenant committed by a previous lessor against a claim for rent arrears that have passed to a successor lessor by assignment. The court treated rent arrears transferred under section 141 of the Law of Property Act 1925 as a chose in action taken by the assignee subject to equities available against the assignor. Section 142 does not prevent an equitable set-off from being raised in answer to a claim by the assignee; Duncliffe v Caerfelin Properties Ltd was held not to exclude set-off though it precludes a direct cause of action against the assignee in respect of earlier breaches. The appeal was allowed and the claim and counterclaim were remitted for trial to quantify damages and determine whether an outright possession order remains appropriate.

Background and parties. The appellant, Mr Smith, a long-term statutory tenant, withheld rent after prolonged disrepair and a statutory notice; the freehold and the accrued rent arrears were acquired by Mr Muscat in October 1999. At first instance the county court awarded Mr Smith damages of 2,000 for disrepair occurring after Mr Muscat's acquisition but rejected an equitable set-off in respect of damages attributable to the previous lessor, Mr Walker, and made an outright possession order (stayed pending appeal).

Nature of the claim and procedural posture. This was an appeal by leave under CPR 52.14 from Bromley County Court (His Honour Judge David Mitchell). The central question was whether a tenant sued for assigned rent arrears can assert an equitable set-off for unliquidated damages arising from a predecessor lessor's breach of covenant. Secondary contested issues were whether the trial judge properly refused equitable relief on grounds of delay and because the tenant had an alternative remedy against the previous lessor.

Issues framed.

• Is an equitable set-off available against an assignee of rent arrears in respect of unliquidated damages for breaches of a repairing covenant by the assignor?
• If so, were the trial judge's alternative reasons for refusing equitable relief (delay and availability of an action against the previous lessor) sustainable?

Court's reasoning. The court reviewed the development of recoupment and equitable set-off (including Lee-Parker v Izzett, British Anzani and Hanak v Green) and the effect of assignment and the Law of Property Act 1925 provisions (notably ss.141 and 142). It concluded that an assignee takes the chose in action subject to equities and that equity treats an abatement of rent by way of quantified expenditure and an unliquidated claim for damages as sufficiently connected to permit set-off against the assignee's claim. Duncliffe was taken to decide only that no direct cause of action lies against the assignee for pre-assignment breaches; it did not prevent equitable set-off. The Court of Appeal therefore allowed the appeal and remitted the claim and counterclaim for trial to quantify damages and to reconsider possession in the light of that quantification.

Wider context. The court observed that the result avoids an asymmetry penalising tenants unable to fund repairs themselves and prevents an assignee from obtaining rent arrears free of equities that existed against the assignor.

Appeal allowed. The Court of Appeal held that rent arrears assigned to a successor lessor vest as a chose in action subject to equities; a tenant may set off unliquidated damages for breaches of a repairing covenant by a previous lessor against a claim for assigned arrears. Duncliffe does not preclude set-off though it limits direct actions against an assignee. The claim and counterclaim were remitted for trial to quantify damages and reconsider the possession order.

Appeal from Bromley County Court (His Honour Judge David Mitchell). The appeal was assigned directly to the Court of Appeal under CPR 52.14 and heard as [2003] EWCA Civ 962.