Rent payable “without deduction”

Hi all, welcome to the first post of my blog.

I am a property and insolvency barrister at the Victorian Bar and I intend to use this site to provide comments on interesting developments in the law that I come across in practice.

To start the ball rolling, I’ll tell you about a case I am involved with that I think will have an impact on Australian leasing practitioners.

A Full Federal Court recently heard an appeal from the decision of Norman; in re Forest Enterprises Australia Ltd v FEA Plantations Ltd [2010] FCA 1444, in which Justice Finkelstein reluctantly found that the words “without deduction” in a rental covenant, without more, were not sufficient to contract out of an equitable set-off. An appeal was heard in early March 2011 and the Full Court has reserved its decision.

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The context of the decision was quite unusual – the landlord and the tenant were related companies and, for reasons not relevant to this post, the landlord promised to pay the tenants debts up to a particular amount. However, the impact of the decision could be significant.

When leases are terminated for non-payment of rent, tenants often bring a damages claim against the landlord. Typical claims are over pre-contractual representations about the quality of the property or traffic flow in a centre, or over a failure to adequately repair and maintain the premises. If the tenant can establish a credible claim for more than the rental arrears, it can usually argue for an equitable set-off and obtain an injunction to secure its possession of the premises until trial. This leaves the tenant in a strong bargaining position (particularly in a no-cost jurisdiction) and often results in the case settling in the tenant’s favour. A failure to secure an injunction often results in the tenant’s insolvency.

However, it is possible to contract out of an ability to claim an equitable set-off. There are conflicting Australian decisions about whether the words “without deduction” are enough, or whether express reference to set-off is required. This case should be the first appeal court decision in Australia on this issue.

There are a lot of leases around, including some of the copyright leases in Victoria, that do not include the magic words ‘set-off‘. Consequently, the decision has the potential to affect a significant number of leases.

I will post a note as soon as the Full Court decision is handed down.

Has anyone had any recent experience of a dispute where this issue arose?