Permission to appeal refused in Milestar Ltd v Gandesha
Edwin Johnson J has refused permission to appeal the decision of HHJ Monty KC in Milestar Ltd v Gandesha a case which considers, amongst other things, whether a landlord can successfully oppose a 1954 Act lease on Ground (b) (persistent delay in paying rent) if the tenant has a cross-claim or a right of equitable set off for an amount that exceeds the arrears of rent. As Nat Duckworth, who appeared for the successful landlord, explains below, the two judges differed on the question of the relevance of cross-claims and set-offs under Ground (b).
The Facts
The tenant company, Milestar Ltd, had individual tenancies of the commercial parts of Nos 139, 143 and 145 Homerton High Street in Hackney; it also occupied the commercial parts of No. 141, not as tenant, but as beneficial owner of that building. Milestar used Nos 139, 141, 143 and 145 for the purposes of its pharmacy and retail perfume business and had knocked through, at ground floor level, to provide connectivity between the commercial parts of the four properties.
In August 2019, the tenant stopped paying rent for Nos 139, 143 and 145 and, in due course, the landlord served hostile notices under s.25 of the 1954 Act, relying on Ground (b).
The Tenant’s arguments
The tenant accepted that there had been persistent delay in paying rent for Nos 139, 143 and 145, but argued that Ground (b) was nevertheless not made out because the tenant had various crossclaims against the landlord, including, most notably, a claim by Milestar, as beneficial owner of No. 141, for an account of rent received by the landlords for the residential upper parts of No. 141 over many years.
The tenant’s reasoning was as follows:
- The tenant’s cross-claim for an account of rent received in respect of No. 141 conferred on the tenant a right of equitable set off in an amount that exceeded the rent arrears. That right of equitable set off meant that the rent upon which the landlords’ intended Ground (b) opposition was based was not “due” for the purposes of section 30(1)(b) of the 1954 Act. The tenant relied, by analogy, on the decision in Secretary of State for Defence v Spencer [2019] EWHC 1526 (Ch), a case under Agricultural Holdings Act 1986 in support of that contention.
- Even if the cross-claim for an account of the rent received for No. 141 could not function as an equitable set off, the existence of that claim was a matter that the Court could take into account, at the discretionary stage of the analysis under Ground (b), and the tenant argued that, in the circumstances of this case, the Court should not decline to order new tenancies because of the tenant’s history of late payment of rent.
HHJ Monty KC’s decision on Ground (b)
HHJ Monty QC decided that Ground (b) was made out. The trial judge said that the tenant’s cross-claims lacked the required ‘close connection’ with the landlord’s claim for rent under the lease and that they could not therefore give rise to a right of equitable set off. He further concluded that, even if there had been a right of equitable set off, Ground (b) would still have been made out. That was because the focus of Ground (b) was on the accrual of the liability (delay in “paying rent which has become due”), not whether the landlord could have obtained a judgment for the arrears. Rent would still become “due” under the lease even if the tenant might, in due course, be able to avoid a judgment by raising the defence of equitable set off when responding to the landlord’s proceedings, once issued. The decision in Secretary of State for Defence v Spencer, which concerned a different statute, did not affect the trial judge’s conclusions about the meaning of section 30(1)(b) of the 1954 Act: see [50] and [105-110]. The trial judge also said that the tenant’s fallback argument – that the tenant’s cross-claims were relevant at the discretionary stage of the analysis under Ground (b) and ought to have been determinative in this case – had not been properly argued and, even if it had, a cross-claim that could not function as an equitable set off could not derail an otherwise good landlord’s Ground (b) opposition: [111-112].
Edwin Johnson J’s decision on the application for permission to appeal
Milestar applied for permission to appeal on the grounds that (i) their cross-claim did give rise to a right of equitable set off, (ii) HHJ Monty KC had been wrong to conclude that Ground (b) would still be made out even if the tenant could extinguish the rent arrears in the exercise of a right of equitable set off and (iii) even if its cross-claim did not function as a set off, HHJ Monty KC had been wrong to conclude that it was not a relevant consideration under Ground (b).
Permission to appeal was refused on paper by Trower J, but Milestar renewed its application at a half day hearing before Edwin Johnson J on 24 November 2022. Edwin Johnson J gave a detailed judgment which addresses the tenant’s arguments on the intended appeal, albeit in the context of determining whether those arguments had a real prospect of success.
Interestingly, Edwin Johnson J considered that there were real prospects of the tenant successfully arguing that HHJ Monty had been wrong to conclude that Ground (b) would still be made out even if the tenant could extinguish the arrears of rent in the exercise of a right of equitable set off: [50].
However, the Judge accepted that that would only get the tenant somewhere if (i) its cross-claim did indeed give rise to a right of equitable set-off or (ii) HHJ Monty KC had been wrong to ignore the existence of a mere cross-claim.
As to the first of those alternatives, Edwin Johnson J held that the trial judge had not made any error of law and had applied the correct legal test when considering whether the tenant’s cross-claim could function as a set off: [38-47]. HHJ Monty KC’s decision that the tenant’s cross-claim lacked the required close connection with the landlord’s claim for rent was an evaluative exercise and the trial judge had been well within his rights (and was probably right) to conclude that no such connection existed: [48-50].
As to the second of those alternatives, Edwin Johnson J concluded that, if HHJ Monty KC had held that, as a rule of law, the existence of a (mere) cross-claim could never be relevant to the exercise of the Court’s discretion under Ground (b), it was at least arguable that he had been wrong to do so: [64]. However, on closer analysis of the judgment, HHJ Monty KC was not making any general statement of law; he was simply saying that the cross-claim relied upon in this case (which did not function as an equitable set off) would not defeat another otherwise good Ground (b) opposition: [64-66]. That decision was the exercise of a judicial discretion and HHJ Monty KC had not exceeded the legitimate boundaries of the exercise of that discretion: [67-72].
The net result of the decisions at first instance and on the application for permission to appeal is that whether a cross-claim that functions as an equitable set off or a mere cross-claim is a relevant consideration under Ground (b) remains open and a tenant in another case might yet successfully derail a landlord’s Ground (b) opposition on that basis. However, where, as is common, the lease contains an ‘anti-set off’ provision, that would preclude the tenant from relying on a right of equitable set off in the context of Ground (b). Although that would be an unpromising start, it is at least possible that even a cross-claim that does not function as a set off could be relied upon at the discretionary stage of the analysis.
HHJ Monty’s decision at first instance is here. Edwin Johnson’s judgment is here.
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