It is a well-established principle that parties in litigation have a right to set off claims against each other.
For example, if a defendant owes a claimant £300, but the claimant owes the defendant £100, then the claimant will only be able to recover £200 from the defendant. The sums are ‘set-off’.
In a property management context, if a landlord has failed to comply with its obligations to repair, a leaseholder may wish to set off any damage against the service charge he owes.
Whilst useful for leaseholders, this can cause problems for landlords and managing agents if it creates a shortfall in service charge revenue.
If the lease allows a leaseholder to exercise a right to set off, he can withhold payment without having proven that he is owed the money
If the lease allows a leaseholder to exercise a right to set off, he can withhold payment without having proven that he is owed the money. The landlord then has to take legal action to recover the sums and the tenant will have to prove their claim for the sums they have set off – all of which leads to a delay in the recovery of service charges.
For this reason, leases often seek to exclude the right for a leaseholder to set off payments against other monies. The wording of the lease must, however, be precise. This was confirmed in the cases of Connaught Restaurants v Indoor Leisure and Altonwood Ltd v Crystal Palace FC Ltd.
In the Connaught case, the lease stated that the tenant would pay the rent ‘without any deduction’. The court decided that this was too ambiguous and not sufficient to exclude the leaseholder from the right to set off. Meanwhile, in the lease in the Altonwood case, the Court decided that the phrase ‘without deduction or set off’ was sufficient to exclude the tenant’s right to set off.
If drafting a lease from scratch or varying an existing lease, we would recommend using the phrase ‘without deduction or set off’. This will provide the necessary clarity and prevent a leaseholder from being able to set off damages against their service charge liability.
If, however, the landlord’s inability to perform its obligations under the lease is caused by non-payment of service charges, a further set off then operates in favour of the landlord, which cancels out the leaseholder’s right to set off.
In larger blocks it is more likely there will be sufficient funds from the paying leaseholders, making it difficult for the landlord to argue the insufficient funds point. In smaller blocks though, with just a handful of leaseholders, it is more likely that one defaulting leaseholder will mean there is insufficient money for the landlord to do the work.
This would then mean that the leaseholder in question would be unlikely to be able to ‘set off’ their service charge liability against any damage caused by the landlord’s actions (or lack of action).
Jonathan Watts is operations director at Brady Solicitors