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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Edlington Properties Ltd v J H Fenner & Co Ltd [2006] EWCA Civ 403 (22 March 2006) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2006/403.html Cite as: [2006] 1 WLR 1583, [2006] WLR 1583, [2006] EWCA Civ 403 |
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IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEENS BENCH DIVISION
(MR JUSTICE BEAN)
Strand London, WC2 |
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B e f o r e :
LORD JUSTICE SCOTT BAKER
LORD JUSTICE NEUBERGER
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EDLINGTON PROPERTIES LIMITED | CLAIMANT/RESPONDENT | |
- v - | ||
J H FENNER & CO LIMITED | DEFENDANT/APPLICANT |
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Smith Bernal Wordwave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
MR T FANCOURT QC and MR E PETERS (instructed by Messrs Mishcon de Reya, London WC1R 4QD) appeared on behalf of the Respondent
____________________
Crown Copyright ©
LORD JUSTICE NEUBERGER:
Introduction
"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 8th February 1996 concluded a written agreement ['the building agreement'] with [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. [The lease was duly granted on 24 October 1997 and it is for a term of 25 years from 4 August.]
"3. Fenner contends that the WDA was in breach of its building obligations in the [building] 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 £52 million in damages.
"4. The reversion was assigned by the WDA to Bradbury Corporation Ltd on 19th October 1998, and then further assigned by Bradbury to the Claimant, Edlington ... on 15th July 2003. It is common ground that the interposing of Bradbury between the WDA and Edlington makes no difference to the point of law. ... [Both assignments were, it would appear, normal commercial transactions.]
"5. The rack rent payable under the lease is now £581,192 per year plus VAT. The present claim, issued on 16th November 2004, is for the quarter's rent due on 29th September 2004 and insurance premiums due under the terms of the lease for the year beginning 24th June 2004. There are separate issues concerning the insurance premiums but it is admitted that the rack rent would be payable subject to [Fenner'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 16th August 2005 Master Yoxall ordered that [the following] 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 ... 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 clause 16.2 of the [building] agreement and/or clause 6.1.1 of the Lease;
"c) Whether on a proper construction of clause 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; …"
Can Fenner's claim against the WDA under the building agreement be set off against rent due under the lease to Edlington?
"(1) Rent reserved by a lease, and the benefit of every covenant or provision therein contained, having reference to the subject-matter thereof, and on the lessee's part to be observed or performed, and every condition of re-entry and other condition therein contained, shall be annexed and incident to and shall go with the reversionary estate in the land …
"(2) Any such rent, covenant or provision shall be capable of being recovered, received, enforced, and taken advantage of, by the person from time to time entitled, subject to the term, to the income of the whole or any part, as the case may require, of the land leased".
"(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."
"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."
(He returned to re-emphasise that point at the end of his judgment at 289). He then went on as follows:
"But that is not the real question in this case. The whole point depends upon whether or not Mr Crawford is right in saying that his client would be entitled to set off this claim, notwithstanding that it is not an interest in land. That is the whole matter in dispute. If what his client had was an interest in land which he desired to set off against the mortgagees in possession, no doubt the cases which he has quoted are in point as authorities for that proposition; but the moment it is ascertained that in this case the claim is not an interest in land, 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, it becomes apparent that those cases have no application."
At 289 Buckley LJ said this:
"The mortgagees were entitled, as mortgagees, to the reversion expectant on the determination of the lease under which the defendant held, and as such mortgagees they were entitled in their own right to enforce payment of the arrears of rent. They were not assignees of the rent; they were persons claiming to enforce payment of rent as entitled thereto as mortgagees; they could have distrained for the rent."
He then observed:
"Then it was said that there was a right of set-off by reason of the fact that the damages in question were damages arising from a breach of contract to do something upon the land within a time.
"Now that, I conceive, is wholly a misconception. The doctrine is this – that whether there be a purchaser or mortgagee (it does not matter which) and the purchaser or mortgagee finds a tenant in possession, he is bound to assume that the tenant in possession has some interest in the land … [The damages gained under the building agreement] were not any incumbrance on the land, and the right to them was no estate or interest in any way in the land. The damages in question, therefore, are not within the principle which is to be found in and perfectly indisputably established by the cases which have been cited to us".
"The reasoning of the Court of Appeal was that a mortgagee or transferee of a property subject to a lease does not become entitled to the rents … as an assignee [of] a chose in action by the original owner. What the original owner transfers to his mortgagee or to his transferee is not simply a right to receive the rent, which if it were an ordinary debt might be set-off against a cross-indebtedness by the transferor. It is the land itself. The mortgagee becomes entitled to collect the rent not as assignee of the rent but by virtue of having an interest in the land".
"The appellant's evidence was that in 1987, that is before the mortgage was granted to the respondents, the appellant arranged for work to be carried out on the flat. The Chief later agreed with him that he would pay £13,873 towards the cost of those repairs and in the words of the appellant 'the Chief told me to set my rent against what he owed me'. That agreement was effective between the parties, but it did not confirm upon the appellant an interest in land capable of binding successors in title to the Chief whether with or without notice of the arrangements unless the right the right of deduction which was given to the appellant fell within one of the two established rights of deduction which are capable of binding successors in title".
"the ordinary equitable right of set-off which arises whenever the defendant's claim is so closely connected to the plaintiff's as to impeach the plaintiff's demand."
"As against the Chief in my opinion the appellant may well be entitled to deduct the amount which the Chief owes him from payments of rent which are due to the Chief. But the money judgment below is entirely in respect of rent to due the respondents after the date that 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. It is, of course, settled law that an interest which is not capable of binding successors in title cannot be an over-riding interest within section 70(1)(g) of the Land Registration Act 1925."
"Millett LJ, with the enthusiasm of an in inquisitor rooting out heresy, devoted the whole of his judgment to the set-off issue, which had not been argued on appeal."
Nonetheless, as he went on to say, although the judgment was "obiter … it comes from the source of the greatest distinction." In particular it appears to me to undermine the second of the two propositions upon which Fenner's case rests. The Land Registration Act 1925 to which Millett LJ made reference has, of course, now been replaced by the Land Registration Act 2000, but, rightly in my view, it is not suggested on behalf of Fenner that that makes any difference to the authority of that case.
"the fuller account of the law contained in the judgment of Buxton LJ at paragraph 31".
And Ward LJ began his brief judgment at paragraph 56 by saying that:
"Buxton LJ's illuminating judgment upon the nature of equitable set-off explains why the rules relating to assignment determine the outcome of this appeal."
"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 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".
He then went on to say in paragraph 54 that he saw:
"no reason for thinking that section 141 of the 1925 Act was intended to exclude that rule of equity, confirmed by statute, from a case where the landlord asserts a claim as an assigned chose in action.
It is clear that that observation was apt to apply to the rent which had accrued due before the transfer of the reversion, but not to the rent which accrued due after the transfer of the reversion.
"Mr Smith is entitled to set off against Mr Muscat's claim for assigned rent arrears any damages due to him for the assignor's breach of his repairing obligations because the debt, a chose in action, vests in Mr Muscat as assignee subject to all equities which were available to Mr Smith against the assignor".
"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. There is no universal rule that claims arising out of the same contract may be set against one another in all circumstances."
"I take the law as stated in 1853 by Lord Kinsgdown (then Mr Pemberton Leigh) in Barnhart v Greenshields 99 Moore, P.C.18, 32): 'With respect to the effect of possession merely, we take the law to be, that if there be a tenant in possession of land, a purchaser is bound by all the equities which the tenant could enforce against the vendor, and that the equity of the tenant extends not only to interests connected with his tenancy, as in Taylor v Stibbert (2 Ves. Jun. 437), but also to interests under collateral agreements, as in Daniels v Davison (16 Ves. 249; 17 id. 433) and Allen v Anthony (21 Mer. 282), the principle being the same in both classes of cases – namely, that the possession of the tenant is notice that he has some interest in the land, and that a purchaser having notice of that fact is bound, according to the ordinary rule, either to inquire what that interest is or to give effect to it, whatever it may be."
"It is perfectly true, as is shewn by a reference to the judgments, that there are some expressions which, taken by themselves, and leaving out altogether the matter with which the court was dealing, might be wide enough to cover the proposition for which [counsel for the tenant] has contended, but a little examination shews perfectly plainly that the Court, in laying down the proposition in those cases, never intended to go so far as [he] now suggests."
I would also refer to what Hoffmann J said in this connection in Arrows at 559c-d:
"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 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. The much debated decision in Reeves v Pope [1914] 2 KB 284 in nowise stands in the way of this conclusion".
In his judgment in Muscat, Sedley LJ at paragraphs 17 and 29 approved the view taken by Lightman J in Lotteryking, and indeed quoted, with apparent unqualified approval, that very passage in Lightman J's judgment (with the exception of the last sentence I have quoted).
"The Court of Appeal held that a tenant could not set off against a successor in title to the reversion a claim for damages for breach of his contract with the original landlord for the grant of the lease. The Court of Appeal categorised this a claim for damages for breach of a purely personal obligation as distinguished from an obligation which touched and concerned land, i.e. ran with the reversion."
Would set-off have been excluded in this case in any event?
"… 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 the Tenant under the Lease.
The insurance rent issue
"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."
"38. The scheme of Clauses 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."
Conclusion
Order: Appeal dismissed.