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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Smith v Muscat  EWCA Civ 962 (10 July 2003)
Cite as:  EWCA Civ 962,  1 WLR 2853
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BROMLEY COUNTY COURT
(HIS HONOUR JUDGE DAVID MITCHELL)
London, WC2A 2LL
B e f o r e :
LORD JUSTICE BUXTON
LORD JUSTICE SEDLEY
| JOHN SMITH
|- and -
|JOSEPH SAMUEL MUSCAT
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
EDWIN JOHNSON (instructed by asb law, Croydon, CR0 1SQ) for the Respondent
AS APPROVED BY THE COURT
CROWN COPYRIGHT ©
Crown Copyright ©
Lord Justice Sedley:
The fallback grounds
"If I am wrong [about set-off] it seems to me that by reason of the tenant's delay and his remedy elsewhere that he should not be entitled to any equitable relief prior to Mr Muscat's acquisition of the property."
The judge can only mean that because Mr Smith had endured years of neglect by Mr Walker without suing him, it would be unfair now to let him assert his claim against Mr Muscat instead. If so, the reasoning is untenable. Its necessary premise is that Mr Smith has an equitable set-off against the rent arrears inherited by Mr Muscat from Mr Walker. The whole point of such a set-off assuming that it was available - is that it entitled Mr Smith to await a claim for arrears and to plead his damage in answer to it.
The law: setting off damages for a previous lessor's breach of covenant.
"The relationship of landlord and tenant was originally one of contract only, but from early times the contract conferred an estate in the land on the tenant without losing all its contractual characteristics."
Rent and benefit of lessee's covenants to run with the reversion
141(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.
Obligation of lessor's covenants to run with the reversion
142(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
"I have formed the conclusion, albeit with some reluctance because of the unhappy state that the plaintiff finds herself in, that what s.142 is talking about is the obligation arising under the lease to observe and perform the repairing covenant as a repairing covenant running with the land and binding the assignee of the reversion. I would find it very hard indeed to construe "obligation" as it is used in this section as meaning the consequences of a past breach prior to the assignee becoming entitled to the reversion . This is of course a matter of first impression on the construction of the statute."
"A tenant's right to set off (against any liability to make payment to the landlord due under the lease) his claim for damages for breach of a provision in a collateral contract which runs with the reversion is exercisable (equally with his right to set off a claim for damages for breach of such a covenant contained in the lease) not merely against the person entitled to the reversion at the date of the breach, but also against any successor in title. The successor in title acquires the reversion and the benefit of all covenants contained in the lease subject to all equities existing at the date of his acquisition."
"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.
Unliquidated damages may be set off as between the original parties, and also against an assignee if flowing out of and inseparably connected with dealings and transactions which also give rise to the subject of the assignment."
It also endorses the holding of James LJ in Roxburghe v Cox (1881) 17 Ch.D 520, 526 that
"an assignee of a chose in action . takes subject to all rights of set-off and other defences which were available against the assignor...."
Lord Justice Buxton :
Set-off and assignment
"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 v Molena Alpha  1 QB 927 at p 975A. 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.
The nature of equitable set-off
"We no longer have to ask ourselves: what would the courts of common law or courts of equity have done before theJudicature Act? 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 §44 above. It certainly cannot be relied on a convert the rule of set-off into some more general equitable doctrine, and much less into a form of palm-tree justice.
The effect of an equitable assignment
"the assignee of a chose in action ..takes subject to all rights of set-off and other defences which were available against the assignor ."
Lord Hobhouse said:
"Unliquidated damages may be set off as between the original parties, and also against an assignee if flowing out of and inseparably connected with dealings and transactions which also give rise to the subject of the assignment."
The "fallback" grounds
Lord Justice Ward :
"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."
The authority for that proposition is Roxburghe v Cox (1881) 17 Ch.D 520 and my Lords have cited the relevant passage from the judgment of James L.J.