Hi all, welcome to the first post of my blog.
I am a property and insolvency barrister at the Victorian Bar and I intend to use this site to provide comments on interesting developments in the law that I come across in practice.
To start the ball rolling, I’ll tell you about a case I am involved with that I think will have an impact on Australian leasing practitioners.
A Full Federal Court recently heard an appeal from the decision of Norman; in re Forest Enterprises Australia Ltd v FEA Plantations Ltd [2010] FCA 1444, in which Justice Finkelstein reluctantly found that the words “without deduction” in a rental covenant, without more, were not sufficient to contract out of an equitable set-off. An appeal was heard in early March 2011 and the Full Court has reserved its decision.
The context of the decision was quite unusual – the landlord and the tenant were related companies and, for reasons not relevant to this post, the landlord promised to pay the tenants debts up to a particular amount. However, the impact of the decision could be significant.
When leases are terminated for non-payment of rent, tenants often bring a damages claim against the landlord. Typical claims are over pre-contractual representations about the quality of the property or traffic flow in a centre, or over a failure to adequately repair and maintain the premises. If the tenant can establish a credible claim for more than the rental arrears, it can usually argue for an equitable set-off and obtain an injunction to secure its possession of the premises until trial. This leaves the tenant in a strong bargaining position (particularly in a no-cost jurisdiction) and often results in the case settling in the tenant’s favour. A failure to secure an injunction often results in the tenant’s insolvency.
However, it is possible to contract out of an ability to claim an equitable set-off. There are conflicting Australian decisions about whether the words “without deduction” are enough, or whether express reference to set-off is required. This case should be the first appeal court decision in Australia on this issue.
There are a lot of leases around, including some of the copyright leases in Victoria, that do not include the magic words ‘set-off‘. Consequently, the decision has the potential to affect a significant number of leases.
I will post a note as soon as the Full Court decision is handed down.
Has anyone had any recent experience of a dispute where this issue arose?
Sam Hopper Barrister 
June 12, 2011 at 5:08 am
Hello Sam – I’ve had a look at this case – not sure whether Full Court judgment has been handed down as yet? A query – the set-off in this case relates to setting-off of a cross-debt which arose under a separate but ancillary “loan” document against the rent in the lease. Do you think this fact makes a difference in the context of leasing disputes? The reason I ask is that in my experience, the set-off in leasing disputes arises under the same document viz. the lease itself (with perhaps the main exception being a set-off under a related agreement for lease (with construction obligations on the landlord), against the rent payable in the lease. In that context, major tenants often try to negotiate in an express right to set-off).
June 12, 2011 at 10:03 am
Thanks for the comment Malwina.
We are still waiting for the Full Court’s decision. I will add a post as soon as it comes down.
The counterclaim does not have to arise under the same document to give rise to an equitable set-off, although in practice they often do. To claim an equitable set-off, the tenant needs to show that the counterclaim impeaches the landlord’s claim for rent. In modern terms, that means that means that the tenant must show that it is unconscionable for the landlord to claim rent without first dealing with the counterclaim.
Cliff Pannam QC for the Administrators of the head tenant in the FEA case described like this: before the merger of the common law courts with the courts of equity, a landlord would either sue in the common law courts for rent and possession or re-enter the premises and distrain for rent. The tenant could not seek assistance from the common law courts because it was in arrears and the landlord was entitled to rent and possession, so went to the courts of equity and asked for an injunction to restrain the common law courts from dealing with the landlord’s claim for rent and possession, or restrain the landlord from terminating and distraining for rent, until the counterclaim has been dealt with. Consequently, so the argument goes, there is no ‘deduction’ from the rent.
I have always understood it slightly differently. Common law set-off operates after judgment – the landlord has a claim for $200 rent arrears and gets judgment for $200; the tenant has a counterclaim for $50, resulting in judgment for $50; the two judgments are set off against each other and the court gives a final order for payment of $150 to the landlord. Equitable set-off operates in a different way. We argued that the relationship between the debt and the counterclaim mean that the counterclaim acts to discharge the debt itself, meaning that the rental arrears never actually accrued.
A typical example of an equitable set-off that does not arise out of the lease document is a counterclaim from the tenant based on pre-contractual misrepresentations by the landlord or the landlord’s agent (or even post-contractual representations). If the reliance by the tenant on the landlord’s misconduct has caused or contributed to the tenant’s inability to pay the rent, or makes it unconscionable for the landlord to demand rent, then the tenant can argue that it has an equitable set-off.