Setting off damages claims against the rent

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At common law a tenant may not set-off a damages claim against a landlord’s claim for rent (Meagher, Gummow & Lenane’s Equity Doctrines and Remedies, 4^th ed, para [37,045], p1056).

However, a tenant may claim an equitable set-off provided that the tenant’s equity “impeaches” the landlord’s title to the demand for rent. See: British Anzani (Felixstowe) Ltd v International Management (UK) Ltd [1980] QB 137; Walker v Department of Social Security (1995) 56 FCR 356; Forsyth v Gibbs [2009] 1 Qd R 403.

The case of MEK Nominees Pty Ltd v Billboard Entertainment Pty Ltd (1993) V ConvR 54-468 is a classic example of the application of the principle. In MEK the tenant was in arrears of rent.

The tenant alleged that the landlord had breached the covenant of quiet enjoyment with the consequence that its business had fallen away to the extent that it had a damages claim that  exceeded the arrears of rent.

The tenant successfully resisted an application for summary judgment for possession on the ground that it had an equitable set-off; that is its damages claim had such a nexus to landlord’s claim as to impeach the landlord’s claim.

A tenant’s right of equitable set-off against rent may be excluded by clear words. See: Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689.

Victorian courts have generally held that a lease that requires the payment of rent “without deduction” precludes a tenant from claiming an equitable set-off. See: Beach J’s decision in Citibank Savings Pty Ltd v Simon Fredericks Pty Ltd [1993] 2 VR 168 (‘without any deduction whatsoever’); see also MEK Nominees v Secure Parking [2000] VSC 406; Novawest Constructions Pty Ltd v Taras Nominees Pty Ltd [1998] VSC 205.

There are decisions to the contrary in other jurisdictions: See: Connaught Restaurants Limited v Indoor Leisure Limited [1994] 1 WLR 501; Re Partnership Pacific Securities Limited [1994] 1 Qd R 410.  This week the Full Court of the Federal Court held obiter that a rent covenant requiring the payment of rent “without any deductions whatsoever” precluded the availability of equitable set-off. See: Norman; in the matter of Forest Enterprises Limited v FEA Plantation Limited [2011] FCAFC 99 at [180] – [202]. Norman contains a comprehensive discussion concerning the principles governing equitable set-off.

In VCAT, Beach J's decision in Simon Fredericks has been followed. See: Wytell Pty Ltd v Glowinski [2006] VCAT 454.

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