Edlington Properties Ltd v J H Fenner & Co Ltd

Equitable set-off against rent is personal to the tenant’s claim against the original landlord. On an arm’s-length transfer of the reversion, it does not bind the successor in respect of rent accruing after transfer, unless the lease expressly preserves it. The transferee recovers rent as an incident of the reversion, while a damages claim under a building agreement remains non-proprietary. In a lease, exclusion of set-off requires clear words; without deduction or abatement is insufficient without a clear indication. An insurance-rent proviso requiring a competing quotation must be operated before the landlord insures the following period and, in any event, before the insurance rent is paid.

Fenner occupied a factory under a lease granted after the Welsh Development Agency agreed to construct it. The Agency later assigned the reversion, ultimately to Edlington. Fenner claimed substantial damages against the Agency for defective construction and sought to set those damages off against Edlington’s claims for rent and insurance rent.

Bean J directed trial of preliminary issues concerning the availability and contractual exclusion of set-off, and the construction of the insurance-rent provision. Fenner appealed. Edlington cross-appealed on the insurance-rent issue. The central questions were whether set-off survived the transfer of the reversion and whether Fenner’s alternative insurance quotation was obtained in time.

The appeal and cross-appeal were dismissed.

1. Set-off after transfer. In principle, a tenant may set off against rent due to the original landlord damages arising from breach of the agreement pursuant to which the lease was granted, as recognised in British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1977] 1 QB 137. That right does not, however, survive an arm’s-length transfer of the reversion in relation to rent accruing after the transfer.
2. The relevant distinction is between an assignment of an ordinary chose in action and a transfer of the reversion. Under section 3 of the Landlord and Tenant Covenants Act 1995, and by comparison with section 141 of the Law of Property Act 1925, the transferee recovers rent in its own right as an incident of the reversion. The tenant’s damages claim against the predecessor landlord is personal, non-proprietary and does not run with the land. Section 3 does not transfer the building agreement because its covenant was not to be performed by the Agency in its statutory capacity as landlord under the lease.
3. The conclusion was supported by Reeves v Pope [1914] 2 KB 284, Re Arrows Ltd (No 3) [1992] BCLC 555, Duncliffe v Caerfelin Properties Ltd [1989] 2 EGLR 38 and National Provincial Bank Ltd v Ainsworth [1965] AC 1175. Muscat v Smith [2003] 1 WLR 2853 was treated as applying to rent already accrued before transfer. Any wider observations extending set-off to future rent were obiter and were not followed.
4. Contractual exclusion. Although strictly hypothetical, the alternative issue was decided. Following Connaught Restaurants v Indoor Leisure [1994] 1 WLR 501, clear and specific words are required to exclude equitable set-off. The expressions without deduction or abatement, and clause 16.2 of the building agreement, did not meet that standard.
5. Insurance rent. The tenant’s competing quotation under clause 1.16 had to be demonstrated before the landlord effectively insured for the relevant following period, subject possibly to good faith and reasonableness. In any event, the cut-off could not be later than payment of the insurance rent. Fenner’s quotation, obtained after the relevant renewal date, was therefore too late.

1. Court of Appeal (Civil Division): in [2006] EWCA Civ 403, the court dismissed Fenner’s appeal and Edlington’s cross-appeal.
2. Queen’s Bench Division: Bean J determined preliminary issues concerning set-off against rent and the construction of the insurance-rent clause. No separate citation is stated in the judgment.