The Full Court of the Federal Court today handed down its decision in the FEA case. A copy of the court’s reasons is available here.
The case is discussed on an earlier post here.
In summary, the Full Court:
- discussed the legal principles surrounding equitable set-off (paragraphs [135] to [163]);
- for reasons not relevant to this post, found that the head tenant was not able to claim an equitable set-off against the rent (paragraphs [164] to [179]);
- found that the weight of appellate authority does not support the view that the words “without deduction” exclude equitable set-off. However, their Honours also said that they saw considerable force in the remarks of Bryson J in Batiste v Lenin (2002) 10 BPR 19,441; [2002] NSWSC 233 (see [192] to [194]). In that case, Bryson J held that the words “without deduction” were sufficient to exclude an equitable set-off, and held that (at [105]):
…if the words “without deduction” did not achieve this result I cannot see what they would achieve as the ordinary obligation of a debtor is to pay the whole debt.
- found that (see [195] to [201]):
- the words in lease in this case were “without any deductions whatsoever“. The Full Court held that the word “whatsoever” is an “added word of exception” which is relevant to the construction of the phrase;
- it is difficult to see how the words “without any deductions whatsoever” are consistent with an entitlement to maintain an equitable set-off; and
- a commonsense businesslike approach to the construction of what reasonable people would understand by this expression is that the parties intended that the head tenant could not make any deduction of any kind from the rent, including by way of equitable set-off; and
- in an appropriate case, the apparent harshness of such a result may be ameliorated by the well developed jurisdiction of equity to relieve against forfeiture for non-payment of rent (see [202]).
It seems to me that the acknowledgement that the weight of appellate authority supports the conclusion that the words “without deduction” are not sufficient to exclude equitable set off coupled with the reliance placed by the Court on the word “whatsoever” still leaves some doubt as to the operation of the words “without deduction” in a lease. The Full Court seems to have left that question open. This is potentially significant, as the LIV standard lease used the words “without any deductions“, a hybrid of the two phrases.
The suggestion that relief against forfeiture addresses the harshness of the finding is also interesting. In light of those comments, a tenant with a damages claim who is facing re-entry and has contracted out of their right to claim an equitable set-off will need to:
- file a counterclaim for damages and seek relief from forfeiture if the landlord is seeking possession by court or Tribunal order; and
- issue proceedings seeking damages and relief from forfeiture and seek an urgent interlocutory injunction restraining the landlord from re-entering if the landlord is seeking to re-enter by self-help (ie changing the locks). Although it is not without conceptual difficulties, there are authorities suggesting that a tenant can obtain an interlocutory injunction before their right to relief from forfeiture has crystallised.
However, the costs consequences of this approach creates some difficulties. Ordinarily, costs follow the event (ie the loser pays the winner’s legal costs). However, leaving aside statutory intervention under the VCAT Act or the Retail Leases Act, a tenant generally pays its landlords costs in an application for relief from forfeiture because the tenant has admitted having breached the terms of its lease.
One inevitable outcome is that the landlord will succeed in its claim for possession and rental arrears, and that the tenant will also succeed in its damages and relief against forfeiture claims. Resolving the question of costs in those circumstances might prove to be challenging.
Given that many of these cases arise when a tenant is financially distressed, an order for costs could have as great an effect on the tenant’s solvency as the rental arrears themselves.
Sam Hopper Barrister 
August 10, 2011 at 9:41 am
For more discussion on this topic, have a look at Robert Hay’s blog post at http://roberthaypropertybarrister.wordpress.com/2011/08/10/setting-off-damages-claims-against-the-rent/#respond