The Secretary of State for Defence v Spencer & Ors

Equitable set-off may be relied on in the Case D statutory procedure under the Agricultural Holdings Act 1986. “Rent due” means rent which the landlord has an enforceable right to recover. A substantive equitable set-off may therefore reduce the rent stated in a notice to pay, including where the claim consists of unliquidated damages.

The tenant must establish that the set-off was properly asserted, quantified, and advanced reasonably and in good faith. The statutory arbitrator need not determine the tenant’s damages claim as a cross-claim. A court answering a question of law may give a qualified, fact-sensitive answer rather than a binary response.

The Secretary of State appealed from a decision of Mr Recorder Norman in the County Court concerning a statutory arbitration under Case D in Schedule 3 to the Agricultural Holdings Act 1986. The dispute concerned notices to pay rent and to quit agricultural holdings.

The Recorder held that the tenants could rely on equitable set-off of unliquidated damages claims where specified conditions were met. The Secretary of State challenged the availability of equitable set-off. The first defendant cross-appealed against the limiting conditions. The central issues were whether equitable set-off could invalidate a Case D notice and whether the Recorder had been entitled to qualify his answer.

1. Appeal and cross-appeal dismissed. The tenant could rely on equitable set-off of unliquidated damages to invalidate a Case D notice to pay, and consequently the notice to quit, subject to the stated conditions.
2. Case D notices to pay are strictly construed because non-compliance gives the landlord a right to serve a notice to quit. If equitable set-off operates as a substantive defence, the rent is not recoverable to that extent and is not “rent due” in the ordinary meaning of those words. The reasoning in Alexander v Royal Hotel (Caithness) Ltd [2001] EGLR 6 was applicable despite differences between Scots and English law.
3. Section 17 of the Agricultural Holdings Act 1986 did not exclude equitable set-off. Its reference to set-off concerned liquidated claims capable of legal set-off. Equitable set-off is a substantive defence which, when properly asserted, can answer a demand for rent immediately.
4. The necessary safeguards were that the set-off be properly asserted, quantified, and asserted and quantified reasonably and in good faith. These criteria were drawn from Fearns v Anglo-Dutch Paint and Chemical Co Ltd [2010] EWHC 2366 (Ch). They prevent vague, unmeritorious or disingenuous claims from frustrating the statutory procedure.
5. The absence of jurisdiction in the statutory arbitrator to determine the damages claim as a cross-claim did not make equitable set-off unavailable. The arbitrator would determine whether the criteria were satisfied as questions of fact.
6. A court determining a question of law under paragraph 26 of Schedule 11 to the Agricultural Holdings Act 1986 was not required to give a binary answer. The Recorder was entitled to state the legal conditions while leaving their factual application to the arbitrator.

• High Court (Chancery Division): Mr Justice Birss dismissed both the Secretary of State’s appeal and the first defendant’s cross-appeal against the County Court decision.
• County Court: Mr Recorder Norman held that equitable set-off could invalidate the Case D notice to pay, subject to conditions concerning assertion, quantification, reasonableness and good faith.