Adam Corbin FAAV
Posted on 5 Jul 2019

Case D: Certainty!

Secretary of State v Spencer

We recently reported on the case of Secretary of State v Spencer, having sent trainee solicitor, Hannah Drew, to watch the arguments being presented to Mr Justice Birss. Amongst other issues, the Court considered whether a tenant could set off against unpaid rent, monies due to him by way of damages for breach by the landlord of repairing obligations.

The High Court Judge has now handed down Judgment, dismissing both the appeal and cross appeal of the decision of Recorder Norman.

This means that we can now be clear on the principles which apply to determining the validity of a notices to pay served pursuant to Case D of Schedule 3 to the Agricultural Holdings Act 1986, where the tenant asserts that the amount stated is incorrect, because they have an equitable set off against the rent, say for landlord disrepair.

Case D

Case D, Schedule 3 of the Agricultural Holdings Act 1986 provides that an Arbitrator will uphold a notice to quit where:

At the date of the giving of the notice to quit the tenant had failed to comply with a notice in writing served on him by the landlord, being either—

(a) a notice requiring him within two months from the service of the notice to pay any rent due in respect of the agricultural holding to which the notice to quit relates,

[..]

and it is stated in the notice to quit that it is given by reason of the said matter.

The statute does not provide for any defences to such a notice to pay, or to quit; and so, in theory, if the notices were served correctly in the correct form, and the rent was not paid within the two months allowed, the Arbitrator is bound to uphold the notice to quit and grant possession to the landlord.

Secretary of State v Spencer [2019] – the appeal

In the appeal of the decision of Recorder Norman, heard by Mr Justice Birss in the High Court Secretary of State v Spencer [2019] EWHC 1526 (Ch) the Court upheld the Recorder's decision that a tenant could rely on equitable set-off for unliquidated damages (that is, damages which are to be quantified by the Court) to invalidate a notice to pay, which in turn could invalidate the notice to quit under the Case D procedure. He also confirmed that the criteria applied by the Recorder were correct.

The Secretary of State had appealed on the basis of principle, submitting in particular that whilst the Scottish case of Alexander v Royal Hotel (Caithness) Ltd [2001] EGLR 6 applied the principle of equitable set off to analogous Scottish statutory provisions, there were differences in the law of England and Wales, which meant the principle had not crossed the border. Mr Justice Briss was of the view that the principles were transferrable.

The Secretary of State also argued that if equitable set-off did apply to Case D notices, this could effectively render them useless. Muir Watt & Moss on Agricultural Holdings was referenced in relation to this, which noted that:

"if any element of over-demand in the Case D notice to pay rent is sufficient to vitiate it and unliquidated damages can be set-off the availability of Case D may be restricted almost to vanishing point…".

The Secretary of State's concerns, echoing the commentary above, were founded on the view that most agricultural holdings have some form of landlord disrepair and therefore a Case D notice to quit could be invalidated in most cases by a tenant relying on equitable set-off. Mr Justice Birss disagreed, noting that the concerns of the Secretary of State would be addressed as the tenant would have to satisfy the qualifications that Recorder Norman set out (see below).

Practicalities – what does the tenant have to show?

So much for principle, but what about the practicalities (which was effectively the nature of the Spencer cross appeal)? Can the tenant just say that there is landlord's disrepair, and that this must mean that they have a claim to at least some money as against the landlord?

The answer is no. The High Court approved the Recorder's adoption of the principles of equitable set-off set out in Fearns v Anglo-Dutch Paint and Chemical Co Ltd [2010] EWHC 2366 (Ch):

i) the set-off must be properly asserted;

ii) it must be quantified; and

iii) the assertion and quantification must be made reasonably and in good faith.

Equitable set off claims have always been of concern to landlords serving notices to quit under Case D, and have always been a life raft for tenants who have not managed to pay the rent due in time.

For better or for worse, gone are the days of afterthought wild assertions of disrepair, with unquantified assertions of damages. We are now in a position where landlords and tenants at least have an idea of what is expected in order for the tenant to successfully defend a notice on that basis.

Scammell, Densham and Williams Law of Agricultural Holdings

Keen followers of Agricultural Holdings Law textbooks will have noted that the treatment of this topic in the 10th Edition (incorporating the first supplement) of Scammell, Densham and Williams Law of Agricultural Holdings at 38.38 onwards approaches the matter on the basis that equitable set off probably does apply, but that tenants are usually better advised to pay rent under protest, and seek redress for other matters, such as disrepair, by other means. That former advice is now confirmed, and the latter still stands.