Leaseholders are increasingly seeking to reduce their service charge liability by ‘setting it off’ against monies that they believe are owed to them by their landlord or management company. Sam Andrews of Brady Solicitors explains ‘set off’ and the value of a well-drafted lease.
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 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.
This is useful for leaseholders because they will want to set off their liability for rent or service charge, but it can cause problems for landlords and managing agents if there is a shortfall in service charge revenue.
How does set off work?
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 will then have to take legal action to recover the sums in full and the tenant will then need to take steps to prove their claim for the sums they have set off – all of which leads to a delay in the recovery of service charges and, of course, considerable time and effort.
For these reasons, leases often seek to exclude the right for a leaseholder to set off payments against other monies.
The wording must be precise
As you might expect a lawyer to say, the wording of the lease must 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 Restaurants case, the lease stated that the tenant would pay the rent ‘without any deduction’. The court decided that this wording was too ambiguous and not sufficient to exclude the leaseholder from the right to set off.
Conversely, in Altonwood Limited, the Court decided that the phrase ‘without deduction or set off’ was sufficient to exclude the tenant’s right to set off
So what should the lease say?
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.
Landlords and leaseholders alike should check their leases carefully if they are seeking to exclude (or rely on) a right to set-off.
A word of caution..
If 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 probably more likely there will be sufficient funds from the paying leaseholders, which would make it difficult for the landlord to argue the insufficient funds point. With a smaller block however, with just a handful of leaseholders, it is much more likely that one defaulting leaseholder will mean there is not enough 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).