All England Law Reports/2006/Volume 1 /Edlington Properties Ltd v JH Fenner and Co Ltd - [2006] 1 All ER 98

[2006] 1 All ER 98

Edlington Properties Ltd v JH Fenner and Co Ltd

[2005] EWHC 2158 (QB)

QUEEN'S BENCH DIVISION

BEAN J

21, 22 SEPTEMBER, 20 OCTOBER 2005

Landlord and tenant - Rent - Claim for rent - Set-off - Landlord and tenant agreeing for construction of building and
lease to tenant - Tenant claiming damages from landlord for defective construction of leased property - Landlord
assigning reversion to assignee landlord - Assignee landlord claiming rent from tenant for period after assignment -
Whether tenant able to set off damages claim against claim for rent - Landlord and Tenant (Covenants) Act 1995, ss
3(3), 23(1).

The owner of certain freehold property entered into an agreement with the defendant under which the owner agreed to
construct a factory on the site and the defendant agreed to take a lease of the property once the factory was built. The
factory was built and the lease granted but the defendant considered that the owner had been in breach of its building
obligations in the agreement and issued proceedings against it claiming damages. The freehold reversion had been
assigned to the claimant in July 2003 and the claimant brought proceedings against the defendant for rent and insurance
rent for a period subsequent to the assignment. The defendant considered that it had a right to set off its damages claim
against the original freehold owner against the claimant's claim for rent and the question of whether set-off was
available was directed to be included in a trial of preliminary issues. The court considered authority and the effect of the
Landlord and Tenant (Covenants) Act 1995 which applied to the lease. Section 3a of the 1995 Act provided, inter alia,
that where the assignment was by the landlord then as from the assignment the assignee became bound by the landlord
covenants, and s 23(1)b of the 1995 Act provided that where as a result of an assignment a person became bound by or
entitled to the benefit of a covenant 'he shall not ... have any liability or rights under the covenant in relation to any time
falling before the assignment'.

a
Section 3, so far as material, provides: '(1) The benefit and burden of all landlord and tenant covenants of a tenancy--(a) shall be annexed
and incident to the whole, and to each and every part, of the premises demised by the tenancy and of the reversion in them, and (b) shall in
accordance with this section pass on an assignment of the whole or any part of those premises or of the reversion in them ... (3) Where the
assignment is by the landlord under the tenancy, then as from the assignment the assignee--(a) becomes bound by the landlord covenants of
the tenancy ...'
b
Section 23, so far as material, provides: '(1) Where as a result of an assignment a person becomes, by virtue of this Act, bound by or
entitled to the benefit of a covenant, he shall not by virtue of this Act have any liability or rights under the covenant in relation to any time
falling before the assignment ...'

Held - Where a freehold owner of land agreed with a future tenant to construct a building and then to grant a long lease
of it to the tenant, and after the lease had begun, assigned the reversion, a claim by the tenant against the original
freeholder for damages for defective construction of the building could not be set
 [2006] 1 All ER 98 at 99

off against the rent due to the assignee for periods after the assignment of the reversion. A reversion, with its
accompanying right to sue for future rent, was not a chose in action and thus not affected by equitable set-off and
damages for defective construction could not create an incumbrance on the land for which set-off could be claimed. It
had been no purpose of the 1995 Act to change the law by making successors in title of the landlord or the tenant liable
for the default of their predecessors, nor to treat the benefit of all landlord covenants or tenant covenants from which an
assignee would benefit as free-standing choses in action rather than as incidents in the estate. The combined effect of ss
3 and 23(1) of the 1995 Act was to make the benefit and burden of covenants pass with the estate for the future, but to
leave past rights and obligations with the assignor. The 1995 Act did not enable every tenant to set off against rent due
to an assignee of the reversion a claim for damages against the assignor. Accordingly, the preliminary issue would be
decided in favour of the claimant (see [18], [22], [23], [27], [29], below).

Reeves v Pope [1914] 2 KB 284, dicta of Millett LJ in Mortgage Corp Ltd v Ubah (1996) 73 P & CR 500 and Muscat v
Smith [2003] EWCA Civ 962, [2003] 1 WLR 2583 applied.

Notes

For set-off in particular cases: landlord and tenant, see 42 Halsbury's Laws (4th edn reissue) paras 465-467, for
assignment of choses in action: set-off and cross-claims, see 6 Halsbury's Laws (4th edn) (2003 reissue) para 64, for
authorised deductions from rent, see 27(1) Halsbury's Laws (4th edn reissue) para 234, and for the transmission of the
benefit and burden of covenants in leases beginning on or after 1 January 1996, see Supp to 27(1) Halsbury's Laws (4th
edn reissue) para 466A-466C.

For the Landlord and Tenant (Covenants) Act 1995, ss 3, 23, see 23 Halsbury's Statutes (4th edn) (2004 reissue) 1168,
1203.

Cases referred to in judgment

British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1979] 2 All ER 1063, [1980] QB
137, [1979] 3 WLR 451.

Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 4 All ER 834, [1994] 1 WLR 501, CA.

Duncliffe v Caerfelin Properties Ltd [1989] 2 EGLR 38.

Federal Commerce and Navigation Ltd v Molena Alpha Inc, The Nanfri, The Befri, The Lorfri [1978] 3 All ER
1066, [1978] 1 QB 927, [1978] 3 WLR 309, CA.

Government of Newfoundland v Newfoundland Railway Co (1888) 13 App Cas 199, [1886-90] All ER Rep Ext
1590, PC.

Green v Rheinberg (1911) 104 LT 149, CA.

Hanak v Green [1958] 2 All ER 141, [1958] 2 QB 9, [1958] 2 WLR 755, CA.

Liverpool City Council v Irwin [1976] 2 All ER 39, [1977] AC 239, [1976] 2 WLR 562, HL.
 Lotteryking Ltd v AMEC Properties Ltd [1995] 2 EGLR 13.

Mortgage Corp Ltd v Ubah (1996) 73 P & CR 500, CA.

Muscat v Smith [2003] EWCA Civ 962, [2003] 1 WLR 2583.

Reeves v Pope [1914] 2 KB 284, CA.

Roxburghe v Cox (1881) 17 Ch D 520, CA.

[2006] 1 All ER 98 at 100

Preliminary issues

Edlington Properties Ltd (Edlington), the assignee of the reversion of a lease granted by the Welsh
Development Agency (the WDA) to JH Fenner and Co Ltd (Fenner) and assigned to Edlington on 15 July
2003, issued a claim on 16 November 2004 against Fenner for rent due on 29 September 2004 and insurance
rent for the year beginning 24 June 2004 due under the terms of a lease. Fenner had issued proceedings
against the WDA claiming damages for breach of its building obligations in constructing the premises the
subject of the lease and sought to set off its damages claim against Edlington's claim for rent and insurance
rent. On 16 August 2005 Master Yoxall ordered the trial as preliminary issues of the questions set out at [7],
below. The facts are set out in the judgment.

Timothy Fancourt QC and Edward Peters (instructed by Mishcon de Reya) for Edlington.

Christopher Lundie (instructed by Rollits, Hull) for Fenner.

Cur adv vult

20 October 2005. The following judgment was delivered.

BEAN J.

[1]

The principal question raised by this trial of preliminary issues may be stated as follows. L, the freehold owner of a site,
agrees with T to construct a building on the site and to grant a long lease of the premises to T. After the lease begins L
assigns the reversion to A. Can a claim by T against L for damages for defective construction of the building be set off
against the rent due to A for periods after the assignment of the reversion?

THE FACTS

[2]

Maerdy Colliery, known in its heyday as 'Little Moscow', closed in 1990. The Welsh Development Agency (WDA)
came into possession of the site and on 8 February 1996 concluded a written agreement with the defendant, JH Fenner
and Co Ltd (Fenner). The agreement obliged the WDA to construct a factory on the site and Fenner to take a lease of
the premises once the factory was built. The obligation to grant the lease accrued when the WDA's architect certified
practical completion of the factory.
[3]

Fenner contends that the WDA was in breach of its building obligations in the agreement by constructing a factory that
was seriously defective and inadequate for Fenner's purposes. Fenner has issued proceedings in the Technology and
Construction Court against the WDA claiming more than £52m in damages.

[4]

The reversion was assigned by the WDA to Bradbury Corp Ltd on 19 October 1998, and then further assigned by
Bradbury to the claimant, Edlington Properties Ltd (Edlington) on 15 July 2003. It is common ground that the
interposing of Bradbury between the WDA and Edlington makes no difference to the point of law. Edlington can be
treated as 'A' for the purposes of the question posed in [1], above.

[5]

The rack rent payable under the lease is now £581,192 per year plus VAT. The present claim, issued on 16 November
2004, is for the quarter's rent due on 29 September 2004 and insurance premiums due under the terms of the lease for
the year beginning 24 June 2004. There are separate issues concerning the
[2006] 1 All ER 98 at 101

insurance premiums but it is admitted that the rack rent would be payable subject to the defendant's claim of set-off.

[6]

It is no part of my task to assess the strength and weaknesses of Fenner's claim for damages against the WDA, which is
due to be tried in October 2006. The parties are agreed that for present purposes it should be assumed to be valid at least
to the extent of the full amount of Edlington's claim.

[7]

At a case management conference on 16 August 2005 Master Yoxall ordered that five questions be tried as preliminary
issues. As amended by consent they are as follows: (a) whether Fenner has a right to set off its damages claim against
the WDA against Edlington's claim for ground rent and insurance rent made in these proceedings; (b) if Fenner does
have such a right to set-off, whether that right of set-off is excluded by cl 16.2 of the agreement for lease and/or cl 6.1.1
of the lease; (c) whether on a proper construction of cl 1.16 of the lease the sum of £108,804·04 or £40,537·50 is due
from Fenner to Edlington in respect of insurance rent; (d) whether a particular implied term relating to insurance rent is
to be implied into the lease; (e) whether Edlington breached cl 8.8 of the lease or alternatively the implied term? Issues
(b)-(e) involve consideration of the terms of the lease and the agreement for lease. Issue (a)--the one identified in the
first paragraph of this judgment--is a pure point of law.

(A) CAN FENNER'S CLAIM AGAINST THE WDA BE SET OFF AGAINST RENT DUE TO EDLINGTON?

[8]

It is important to distinguish between three factual situations: (i) L claims rent. T counterclaims for damages for breach
of L's covenant to repair or for defective construction of the premises in question. (ii) L is owed rent for a particular
period. At the end of that period, with the rent still owing, he assigns the reversion to A. A claims from T the rent for
the pre-assignment period. T seeks to set off against that claim his claim for damages against L for breach of a repairing
covenant or for defective construction of the building. (iii) L assigns the reversion to A. A claims from T rent for a
subsequent period. T seeks to set off against that claim his claim for damages against L for defective construction of the
building. (This is the present case, omitting from the story, as it is agreed one can, the intermediate assignee, Bradbury.)

[9]

It is now well established that a claim for set-off is available in case (i), even where T's damages claim is for breach of a
term of the agreement for the lease rather than of the lease itself. This was the basis of what was later to be described by
Millett LJ as the 'celebrated' judgment of Forbes J in British Anzani (Felixstowe) Ltd v International Marine
Management (UK) Ltd [1979] 2 All ER 1063 at 1076-1077, [1980] QB 137 at 156. Forbes J said:

'It would in my view be manifestly unjust to allow the landlord to recover the rent without taking into account the damages which it
is alleged the tenant has suffered through failure by the landlord to perform his part of the agreement. Not only is there in my view
an adequate connection between the transactions giving rise to claim and cross-claim, there is also the fact that the breach by the
landlord is said to render the premises unfit at least in part for the purpose for which they were let. For both these reasons, it seems
to me that the defendants' cross-claim can be said to impeach the title to the plaintiffs' legal demand.'

[10]

Case (ii) was considered by the Court of Appeal in Muscat v Smith [2003] EWCA Civ 962, [2003] 1 WLR 2583, on
which both Mr Timothy Fancourt QC for
[2006] 1 All ER 98 at 102

Edlington and Mr Christopher Lundie for Fenner relied. Mr Smith had for over 40 years been the statutory tenant of a
terraced house owned originally by his brother and from the early 1990s by a Mr Walker. It was in a poor state of repair
and in 1995 became subject to a statutory disrepair notice served by the local authority. Remedial work was begun on
the property causing inconvenience to the tenant who began withholding rent. In October 1999, with the repair work
remaining incomplete, the property was sold to the current landlord, Mr Muscat, at a price that reflected 128 weeks' rent
arrears. The outstanding arrears were also separately assigned by deed. On the landlord's claim for possession and the
tenant's counterclaim for an equitable set-off against rent arrears in respect of breaches of covenant to repair by the
landlord's predecessor in title, the county court judge found the landlord liable to the tenant for damages for disrepair
since his purchase of the property, but held that in respect of breaches by the landlord's predecessor in title the tenant
had no right of set-off. He made an order for outright possession, stayed pending appeal. The Court of Appeal allowed
Mr Smith's appeal and remitted the case to the county court for trial.

[11]

Before considering the judgments in detail it is necessary to set out, so far as material, ss 141 and 142 of the Law of
Property Act 1925.
'141. Rent and benefit of lessee's covenants to run with the reversion.--(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.

142. Obligation of lessor's covenants to run with reversion.--(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 ...'
It should be noted that s 30(4) of the Landlord and Tenant (Covenants) Act 1995 provides that these two sections are
not to apply to tenancies granted after the 1995 Act came into force (on 1 January 1996). This change did not affect
Muscat v Smith since the lease had been granted long before 1996. The 1995 Act does apply to this case and I shall
return to it later in the judgment.

[12]

In Muscat v Smith Sedley and Buxton LJJ gave substantive judgments. Ward LJ agreed with both, adding that the
following rule, derived from Roxburghe v Cox (1881) 17 Ch D 520, determined the outcome of the appeal:
'The assignee of a chose in action cannot acquire a better right than the assignor had, and the assignee takes the chose in action
subject to all the equities affecting it in the hands of the assignor which are in existence before notice is received by the debtor.'
(See [2003] 1 WLR 2853 at [56].)

[13]

There are some differences of emphasis between Sedley and Buxton LJJ. But since Sedley LJ said that he was 'adopting
with gratitude the fuller account of the law contained in the judgment of Buxton LJ' (see [31]) and Ward LJ refers to
'Buxton LJ's illuminating judgment on the nature of equitable set-off', it seems to me that Buxton LJ's judgment is to be
treated as authoritative.
[2006] 1 All ER 98 at 103

[14]

Buxton LJ said:
'[34] The appeal was argued before us on the basis that Mr Smith was entitled to set off his claim against Mr Walker in defence of
the claim made on him by Mr Muscat by the operation of the general rules of equitable set-off, quite simply because Mr Smith's
claim against Mr Walker can be said to be "so closely connected with [Mr Muscat's] demands that it would be manifestly unjust to
allow [Mr Muscat] to enforce payment without taking into account the cross-claim": a formulation that adapts to the present facts
the observations of Lord Denning MR in [Federal Commerce and Navigation Ltd v Molena Alpha Inc, The Nanfri, The Befri, The
Lorfri [1978] 3 All ER 1066 at 1078, [1978] 1 QB 927 at 975]. However, that argument must fail because, for reasons that I
develop in more detail below, it is not and never has been the law that A when sued by B can set off as against B a debt or liability
owed to A by C, however much the relationship between the three parties falls within the verbal terms quoted above.

[35] However, in the present case Mr Muscat's right against Mr Smith comes to him by assignment by Mr Walker of the rights
under the reversion that were originally held by Mr Walker, and which were the basis and context of Mr Smith's claim. It is that
assignment, and the rules of equity that are applied to it, rather than the more general law of set-off, that supports Mr Smith's
defence against a claim made by Mr Muscat as assignee.'

[15]

After referring to Hanak v Green [1958] 2 All ER 141, [1958] 2 QB 9 and the historical distinction between common
law and equitable set-off, the former being confined to liquidated cross-claims, Buxton LJ ([2003] 1 WLR 2853)
continued:
'[40] This institution is called "equitable" set-off because, but only because, it permits the setting off in an action at law of
unliquidated claims that, before 1873, could only be pursued at law by a separate action, and could only affect the proceedings at
law by way of an equitable injunction. The institution does not otherwise appeal to any specifically equitable doctrine, and in
particular does not permit of any deduction from or reduction of the claim other than by the assertion of a counterclaim that is
sufficiently connected with or related to the original claim.

[41] In the present case the tenant wished to assert that the value of his claim against Mr Walker can be set off against the claim
brought against him by Mr Muscat. These two claims are, no doubt, connected with each other, not least because they arise under
 the same lease; and it may appear inequitable, in the general sense of that word, for Mr Muscat to be able to claim in respect of
arrears that arose while Mr Walker was landlord, but for Mr Smith not to be able to assert, as against Mr Muscat, breaches of
covenant on Mr Walker's part. That anomaly, if it is one, is caused by the fact that, as Garland J pointed out in [Duncliffe v
Caerfelin Properties Ltd [1989] 2 EGLR 38], section 141(2) and (3) of the 1925 Act makes specific provision to enable the
assignee of the reversion to sue for accrued arrears of rent, whilst there is no statutory provision enabling the tenant to complain as
against the assignee in respect of accrued breaches of covenant committed by the latter's predecessor in title. But that is all that the
1925 Act does. It says nothing as to set-off.

[2006] 1 All ER 98 at 104

[42] Mr Smith therefore has to assert his set-off by appealing to general principle, reaching well outside the law of landlord and
tenant. There is no case supporting, or coming anywhere near to supporting, a general principle making set-off available where the
defendant has a claim against someone other than the plaintiff; and such a rule would be contrary to elementary principles of the
law of contract; contrary to the essential nature of set-off; and contrary to assumptions made in cases of high authority, including
many that bind this court ...

[45] ... The dearth of specific statements supporting the proposition that a cross-claim must be a claim against the original claimant
is attributable to the fact that that proposition has always been taken for granted. All of the recent cases discussing whether the
cross-claim was sufficiently closely connected with the claim to be set off against it in the same litigation presuppose that the
claims, whatever they are, lie between the same parties. That stands out from, for instance, the various discussions cited in the
judgment of Forbes J in [British Anzani (Felixstowe) Ltd v International Marine Management (UK) Ltd [1979] 2 All ER 1063 at
1075-1076, [1980] QB 137 at 154]. Counsel for Mr Smith sought to suggest that a wider rule could be found in the dictum of Lord
Denning MR in [Federal Commerce and Navigation Ltd v Molena Alpha Inc, The Nanfri, The Befri, The Lorfri [1978] 3 All ER
1066 at 1078, [1978] 1 QB 927 at 974]:

"We have no longer to ask ourselves: what would the courts of common law or courts of equity have done before the [Supreme
Court of Judicature Act 1873]? We have to ask ourselves: what should we do now so as to ensure fair dealing between the parties?"

But that observation went only to a more liberal attitude to the question of whether a cross-claim sufficiently impeached the claim
to create a set-off: the issue discussed in the passage with which this dictum culminates, and to which reference has already been
made in paragraph 44 above. It certainly cannot be relied on to convert the rule of set-off into some more general equitable
doctrine, and much less into a form of palm-tree justice.

[46] The general principles of set-off therefore do not assist Mr Smith. However, the unfairness that appears from Mr Muscat being
able to sue for rent arrears dating back to the time of Mr Walker, without being liable for the breaches of covenant committed by
Mr Walker, is underlined by Mr Muscat's title to sue being itself derived from Mr Walker by assignment. It is the particular rules
that apply after assignment that determine this appeal.'

[16]

Buxton LJ turned to consideration of the effect of the equitable assignment. He noted that three nineteenth century
authorities which in his view remained good law, had held that 'the assignee of a chose in action ... takes subject to all
rights of set-off and other defences which were available against the assignor' (see [48]). He concluded that 'this
jurisprudence compels the recognition of a set-off against Mr Muscat's claim of the unliquidated damages owed to Mr
Smith by Mr Muscat's assignor, Mr Walker'.

[17]

This passage appears to assist the defendant in the present case. But Buxton LJ went on to say:
'[51] In [Lotteryking Ltd v AMEC Properties Ltd [1995] 2 EGLR 13] Lightman J held that the set-off operated because the assignee
had succeeded to the

[2006] 1 All ER 98 at 105

reversion and to its annexed covenants. The reversion itself is not, however, a chose in action, and Mr Muscat's claim for past rent
is not asserted simply under a covenant that he succeeded to when he succeeded to the reversion. Rather, the claim for previously
accrued arrears that he asserts against Mr Smith is specifically transferred to him by his assignor by the operation of section 141 of
the 1925 Act, as described in paragraph 41 above.'
[18]

In the opening paragraph of his judgment (at [33]) Buxton LJ had indicated that the decision had to proceed on a
'comparatively narrow ground', which was a 'somewhat less direct route than that which was urged on us by the tenant'.
The ratio of his judgment, as I read it, is that the landlord's right to sue for previously accrued arrears of rent was a
chose in action and thus affected by equitable set-off, but that the reversion itself, with its accompanying right to sue for
future rent, was not. The distinction between rent for periods before and after the assignment is emphasised by the
words 'dating back to the time of Mr Walker' (at [46]) and the italicised words 'previously accrued' (at [51]).

[19]

Mr Lundie relied on Green v Rheinberg (1911) 104 LT 149. The landlord granted a four-year lease with the rent
payable quarterly. Soon afterwards he agreed to accept, and the tenant paid, a lump sum in satisfaction of the whole four
years' rent. The landlord then mortgaged the premises to the plaintiff, who knew nothing of the advance payment. The
plaintiff's claim for rent failed at first instance and on appeal. But I do not regard this case as having anything to do with
set-off. It is perhaps an obvious proposition that once T has paid rent to L he cannot be called on to pay it again to
someone else.

[20]

Mr Lundie also relied on the decision of Lightman J in Lotteryking Ltd v AMEC Properties Ltd. The landlord had
granted a 25-year lease of two units. The two tenants alleged that the landlord had made collateral agreements with
them to rectify certain defects within six months. The tenants were to have a reduced rent in one case and a rent-free
period in the other until defects were remedied. The tenants sought injunctions to prohibit a proposed sale of the
freeholds. The matter came to court with considerable speed, judgment being given nine days after the issue of
proceedings. Lightman J dismissed the tenants' applications. He held that the collateral contracts to carry out repairs
were obligations assumed by the landlord which ran with the reversion under s 142 of the 1925 Act, and that the tenants
would not be prejudiced by the sale, since their right to set off their damages claims for breach of those contracts against
rent due under the lease would be exercisable against the landlord's successor in title. The judge also held that in any
event the tenants had no legal or equitable right to an injunction restraining sale of the land, as opposed to personal
rights of action against the landlord. The second ground of the decision is, I think, less controversial than the first.

[21]

The first ground of the decision in Lotteryking Ltd v AMEC Properties Ltd was approved by Sedley LJ in Muscat v
Smith ([2003] 1 WLR 2583 at [17]-[18]); and of course any judgment of Lightman J is entitled to great respect. But
Buxton LJ, at para [51] of Muscat v Smith, impliedly disapproves it: and it seems to me to be incompatible with his
reasoning. If Buxton LJ had considered that a landlord's repairing obligation was a covenant running with the reversion
under s 142, and that a claim for damages for breach of that covenant could be set off against any rent due to the
assignee, he would have said so, and the judgment would have been far shorter and simpler.
[2006] 1 All ER 98 at 106

[22]

Mr Fancourt QC relied on Reeves v Pope [1914] 2 KB 284. The landlord agreed with the tenant to build a hotel by a
certain date, and the tenant agreed to take a 28-year lease as soon as the building was ready. The landlord was late in
completing the hotel. On completion the tenant accepted the lease without prejudice to his damages claim. The landlord
then mortgaged its interest to the claimant. The tenant sought to set its damages claim off against the rent due to the
mortgagee for periods since the date of the mortgage. The Court of Appeal, affirming Bankes J, held that the set-off
failed. Lord Reading CJ said (at 287):
'It is perfectly plain that we are not dealing here with the right to set off against the assignment of a chose in action, in which event
quite different principles apply ... in this case the claim is not an interest in land, but if established is merely a right to damages
against the mortgagor for breach of an agreement made in respect of, or in connection with, the land.'

Buckley LJ was even more emphatic, saying that the tenant's argument that the right to future rent which had been
transferred was a chose in action was 'wholly misconceived' and that the mortgagees were not assignees of the rent (see
289). Of the tenant's claim to damages he said (at 290): 'Those damages were not any incumbrance on the land, and the
right to them was no estate or interest in any way in the land.' Mr Lundie submitted that a distinction can be drawn
between a claim for damages for delay in construction and one for defective construction: even if the former cannot
create an 'incumbrance on the land', the latter can. To meet that possible argument Mr Fancourt cited his next authority,
to which I now turn.

[23]

Mortgage Corp Ltd v Ubah (1996) 73 P & CR 500, not cited in Muscat v Smith, strongly supports Edlington's case. The
tenant, at the landlord's request, had carried out improvements to the premises to the value of some £13,000 which it
was argued could be set off against rent. The Mortgage Corporation obtained a possession order against the landlord
and then sought possession against the tenant. Before Judge Green the Mortgage Corporation argued firstly, that the
landlord and tenant had shared a kitchen, that the tenant was therefore occupying under a restricted contract within s 21
of the Rent Act 1977, and that this remained the case even though the reversion had passed to a corporation; secondly,
that the value of the tenant improvements could not be set off against the rent due to the mortgagee. Judge Green found
for the mortgagee on both points. On appeal only the kitchen point was argued, and the Court of Appeal upheld the
judge's decision. But Waite LJ said (at 507) that he 'would have regarded the claim to an equitable interest as quite
hopeless'; and Millett LJ, with the enthusiasm of an inquisitor rooting out heresy, devoted the whole of his judgment to
the set-off issue which had not been argued on appeal. He concluded that:
'the money judgment below is entirely in respect of rent due to the respondents after the date they had notified the appellant that
they had taken possession. The appellant has no right of set-off capable of binding successors in title such as the respondents.'

This judgment is obiter, but it comes from a source of the greatest distinction.

[24]

All the authorities to which I have referred dealt with leases to which the 1995 Act did not apply. That Act was passed
principally to enable a person bound by covenants of a tenancy to be released from the covenants on assignment of the
lease or reversion. It also abolished the distinction between covenants that
[2006] 1 All ER 98 at 107

'touched and concerned' the land and those that did not, so that all covenants except those expressed to be personal both
bound and benefited successors in title. I accept Mr Fancourt's submissions that it was no purpose of the 1995 Act to
change the law by making successors in title of the landlord or the tenant liable for the default of their predecessors, nor
to treat the benefit of all landlord or tenant covenants from which an assignee will benefit as free-standing choses in
action rather than as incidents of the estate.

[25]

The combined effect of ss 3 and 23(1) of the 1995 Act is to make the benefit and burden of covenants pass with the
estate for the future, but to leave past rights and obligations with the assignor. Section 3(3) provides that the assignee of
the reversion becomes bound by the landlord covenants of the tenancy as from the assignment. Section 23(1) leaves the
benefit of tenant covenants in so far as they antedate the assignment with the assignor, thus changing the position as it
was under s 141 of the 1925 Act. As Mr Fancourt points out, this takes away the basis on which Mr Muscat was able to
sue Mr Smith for pre-assignment rent arrears. But it does not detract from the authority of the case on the subject of
equitable set-off. The 1995 Act moves in the direction of creating a clean break on assignment. It does not enable every
tenant to set off against rent due to an assignee of the reversion a claim for damages against the assignor.

[26]

Mr Fancourt had a fallback submission on the 1995 Act, which is that the obligations of the WDA under the agreement
for lease are in any event not 'landlord covenants of the tenancy' for the purposes of s 3(1)(a) and (3)(a) of the 1995 Act,
since the obligations of the WDA fell to be completed before the lease was granted. In view of the conclusion I have
reached about the effect of ss 3 and 23 of the 1995 Act it is unnecessary to decide this interesting point.

[27]

I therefore conclude that Reeves v Pope, the judgment of Millett LJ in Mortgage Corp Ltd v Ubah and that of Buxton LJ
in Muscat v Smith indicate that the question set out at the start of this judgment should be answered 'No'.

[28]

I should say that if the matter were free from authority I would decide it the other way. As a matter of policy, as
opposed to legal principle, it is difficult to see why any distinction should be drawn between set-off against pre-
assignment and post-assignment rent. Moreover, although in the present case there is no suggestion of this, I can
envisage cases in which a landlord will assign the reversion in order to evade what would otherwise be a possible set-off
against its claim for rent. If the original landlord then becomes insolvent the tenant is left with a worthless damages
claim for defective construction of the building but an obligation to pay rent which takes no account of that claim. In
another case it may have to be decided whether an artificial transaction by the landlord makes any difference. The
observation in the opinion of the Judicial Committee of the Privy Council delivered by Lord Hobhouse of
Woodborough in Government of Newfoundland v Newfoundland Railway Co (1888) 13 App Cas 199 at 212 that--
'It would be a lamentable thing if it were found to be the law that a party to a contract may assign a portion of it, perhaps a
beneficial portion, so that the assignee shall take the benefit, wholly discharged of any counter-claim by the other party in respect
of the rest of the contract, which may be burdensome'

--suggests that it may do so. But that does not arise in the present case.
[2006] 1 All ER 98 at 108

[29]

If I am right in my conclusion that issue (a) should be decided in Edlington's favour, issue (b) becomes academic, but I
will deal with it briefly in any event.

(B) WOULD SET-OFF BE EXCLUDED BY THE TERMS OF THE AGREEMENT FOR THE LEASE OR OF
THE LEASE ITSELF?

[30]
Clauses 16.1 and 16.2 of the agreement for lease provide:
'16.1. Non-Merger etc. All the provisions of this Agreement shall (to the extent that they remain to be observed and performed)
continue in full force and effect notwithstanding completion of the Lease and the conditions of this Agreement shall take
precedence until so fully observed and performed.

16.2. Save as provided in the Building Contract, this Agreement and in any document supplemental thereto or made in furtherance
thereof, no defect in the Works or the Premises at the date on which the Lease is granted shall in any way lessen or affect the
obligations of the Landlord or Tenant under the Lease.'

Clause 6.1.1 of the lease contains a covenant by the tenant 'To pay the said yearly rent and the said additional rents
hereby reserved and made payable at the times and in the manner aforesaid without deduction or abatement'.

[31]

In Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 4 All ER 834, [1994] 1 WLR 501 flooding from the
landlords' retained portion of a building had disrupted the tenants' business causing them loss and damage. The
landlords brought proceedings for possession and arrears of rent; the tenants counterclaimed damages and equitable set-
off in defence. A covenant in the lease provided for rent to be paid 'without any deduction'. The Court of Appeal held
that clear words were needed to exclude a tenant's equitable right of set-off; that the meaning of the term 'deduction' was
dependent on its context, and where the context afforded no guidance as to its intended meaning it could not be
described as a clear word. The court held that in the absence of any context suggesting the contrary the expression
'without any deduction' was insufficient to exclude the tenants' equitable right of set-off. Waite LJ said ([1994] 4 All ER
834 at 838, [1994] 1 WLR 501 at 505):
'it was open to the parties to exclude this equitable right of set-off by express words or by implication from the language of the
contract as embodied in the underlease. There is however a starting presumption that neither party intends to abandon any remedies
for breach arising by operation of law and clear language must be used if this presumption is to be rebutted ...'

[32]

This decision, in my view, clearly demonstrates that cl 6.1.1 of the lease does not exclude set-off. The present case is
not one of abatement, and the words 'without deduction' do not appear to have any context in this case different from
that of the Connaught case.

[33]

I also accept Mr Lundie's submission that cl 16.2 of the agreement for lease is likewise ineffective to exclude set-off. If
the parties had intended to exclude set-off against rent the most logical place for such a provision would have been in
the lease itself, using the words 'without deduction or set-off'. Even within the agreement for lease there is another
clause (5.1.4.3, relating to reimbursement of the value of tenants' works in the event of termination) requiring the
landlord to make payment to the tenant of the amount of the
[2006] 1 All ER 98 at 109

agreed assessment 'without deduction or set-off'. Moreover, the existence of a cross-claim does not 'lessen or affect the
obligations of the tenant under the lease': the tenant is still liable for the rent, but if set-off is established payment of the
rent will not be ordered without taking account of the cross-claim. Accordingly, if I had not already found for Edlington
on issue (a), I would have found against them on issue (b).

(C) WHETHER ON A PROPER CONSTRUCTION OF CLAUSE 1.16 OF THE LEASE THE SUM DUE IN
RESPECT OF INSURANCE RENT FOR THE YEAR BEGINNING 24 JUNE 2004 WAS £108,804·04 OR
£40,537·50?

[34]

Clause 1.16 of the lease defines the insurance rent as:

'the sum or sums equal to the amount which the Landlord may expend in effecting and maintaining the insurance of the demised
premises in accordance with its obligations herein against loss damage or destruction by the insured risks in their full value and
also for insuring two years rent of the demised premises; provided that in the event that the Tenant shall demonstrate that it can
obtain a bona fide quotation from a reputable insurer, for not less than the same risks insured for by the Landlord during the
previous period of twelve months, at a premium which is less than that quoted by the Landlord's insurers for the same risks for the
following period of twelve months, then the Insurance Rent for such following twelve months shall be reduced by the difference
between such quotations.'

[35]

The lease placed the obligation to insure the premises on the landlord. The first insurance policy covering the premises
was taken out on 15 July 2003 for the period ending 23 June 2004. From 2004 onwards the annual renewal date was 24
June. Clause 8.8 provided:
'Landlord's insurance covenants.

The Landlord covenants with the Tenant in relation to the policy of insurance effected by the Landlord pursuant to its obligations
contained in this Lease to produce to the Tenant upon request particulars of any policy of insurance effected under this Lease
sufficient to enable the Tenant to know the full extent of the property covered the risks and sums insured and any exception
exclusions conditions or limitations to which the policy is subject and to provide evidence of payment of each year's premium.'

[36]

On 23 July 2003 Edlington invoiced Fenner for the premium for the period 15 July 2003 to 23 June 2004. Two days
later Fenner wrote to Edlington's agent asking for 'a copy of the policy details and schedule relating to the All Risks
Property Insurance'. On 4 August 2003 Edlington's agent replied 'please find enclosed as requested a copy of the
insurance policy and schedule'. It is now accepted that this letter was received and copied to two or three people within
Fenner's organisation and that it indicated what risks were insured.

[37]

There was then a pause until 2 June 2004 (22 days before the renewal date) when Fenner wrote to Edlington's agent
asking for 'a copy of the policy details and schedule as requested last July'. Evidently the writer of the letter had mislaid
or was unaware of the August 2003 communication. By a further letter of 7 June Fenner asked for the identity of the
insurance company and details of the cover provided. Edlington's agent did not reply giving this information until 28
June. On 19 August 2004 Fenner wrote to Edlington's agent enclosing what was described as 'a bona fide quotation for
the property insurance' at a premium of £34,500.
[2006] 1 All ER 98 at 110

[38]

The scheme of cll 1.16 and 8.8 of the lease is clear. The landlord has the obligation to insure and must do so by the due
date for renewal so that the insurance is 'maintained'. If the tenant furnishes a satisfactory alternative quotation in
advance of 24 June, and the landlord decides nevertheless (as it is entitled to do) to make its own arrangements, the
tenant's liability for insurance rent for the year beginning 24 June is reduced by the difference between the quotations.
[39]

There is an issue between the parties as to whether the alternative quotation covered 'the same risks insured for by the
Landlord during the previous period of twelve months'. But it is not necessary to decide that issue, since even if the
alternative quotation did meet that requirement, it was provided too late. The insurance rent for the year beginning 24
June 2004 is therefore the higher of the two sums set out in issue (c).

(D) IS THE TERM SET OUT IN PARAGRAPH 14 OF THE DEFENCE AND COUNTERCLAIM TO BE
IMPLIED INTO THE LEASE?

[40]

Paragraph 14 of the defence and counterclaim pleads that it is necessary to imply into the lease, 'for reasons of business
efficacy and or because the same are obvious requirements of the procedure envisaged by Clause 1.16 of the Lease', the
following implied term:
'A reasonable period of time prior to making a demand for payment of the Insurance Rent in accordance with Clause 5.2.2 of the
Lease the Landlord must:-

1. Provide the Tenant with a quotation which the Landlord has received from its insurers for the next 12 month period in respect of
which the demand is to be made and

2. Comply with any reasonable requests made by the Tenant for details of the insurance obtained by the Landlord for the previous
12 month period so as to enable the Tenant to obtain an alternative quotation within the terms of Clause 1.16 of the Lease prior to
the demand being made.'

[41]

It is trite law that a term cannot be implied into a contract merely because it is reasonable: it must be necessary. In other
words, it must be shown (per Lord Wilberforce in Liverpool City Council v Irwin [1976] 2 All ER 39 at 43, [1977] AC
239 at 253) that 'without it the contract will not work'. It is similarly trite law that a term cannot be implied if it is
inconsistent with an express term. It is plain from reading cl 1.16 of the lease that the tenant cannot obtain an alternative
quotation unless it is given information as to the risks which have to be covered and the amount for which the property
has to be insured. Clause 8.8 provides that this information must be furnished on request, together with 'any exceptions
exclusions conditions or limitations to which the policy is subject'. Further, the landlord must on request 'provide
evidence of payment of each year's premium'. But neither clause requires the landlord to provide the tenant in advance
of the renewal date with the quotation from the landlord's insurers for the forthcoming year. Such an arrangement might
be considered sensible and reasonable, but it is not necessary. Clause 8.8 contains the express provisions necessary to
make the contract work. I do consider--indeed I do not think Mr Fancourt disputed--that the requirement in cl 8.8 for
particulars of the insurance policy to be produced to the tenant on request means that they are to be produced within a
reasonable time of the request. But subject to that, no implication of a term is necessary.
[2006] 1 All ER 98 at 111

(E) WAS THERE A BREACH OF CLAUSE 8.8 OF THE LEASE?

[42]

Counsel were agreed, on reflection, that I should not decide this question at the trial of the other preliminary issues. It
would require further evidence as to whether Edlington (through their agents) took an unreasonable length of time to
reply to the letter of 2 June 2004. In any event, even if the answer to the question is 'Yes', it does not take the matter
much further unless Fenner can be shown to have sustained loss by reason of the breach. If the parties cannot resolve
their differences on this issue it may benefit from being reformulated prior to trial.

Order accordingly.

Aaron Turpin Barrister.