England and Wales High Court (Queen's Bench Division) Decisions

Queen's Bench Division

		19 December 1978

1. Giving judgment, FORBES J said: In 1972 the plaintiffs, in another name, became tenants of a plot of land of about 53 acres at Walton Avenue, Felixstowe, Suffolk. The landlords are the Master, Fellows and Scholars of Trinity College, Cambridge, and the lease was a building lease for 99 years on terms that the plaintiffs redevelop the land by constructing a number of warehouse and/or factory units thereon in accordance with certain approved plans, specifications and drawings.
2. On June 7 1973 the plaintiffs entered into an agreement in writing with the defendants under which the plaintiffs agreed to construct a warehouse, Warehouse No 1, on part of the land, and thereafter to grant an underlease thereof to the defendants. In fact the defendants had gone into possession of the warehouse on September 1 1972 and practical completion of that building was on December 31 1972. The underlease to the defendants was dated April 24 1974 and was for a term of 21 years from December 25 1971 at the initial annual rent of £ 109,020 payable quarterly in arrear on the usual quarter days.
3. There was a supplemental agreement between the parties, dated May 13 1975, relating to the construction of a second warehouse, Warehouse No 2, on an adjacent part of the land. Practical completion of this warehouse took place in December 1973. The defendants went into occupation in March 1974, and the supplemental underlease was made on May 22 1975. The rent reserved by the underlease was £ 92,500 a year, payable quarterly in arrear. The term granted was the same as in the underlease in respect of Warehouse No 1.
4. The writ in the present action was served some few days after it was issued on September 30 1977. The claim by the plaintiffs is for possession, for unpaid rent, for mesne profits and interest thereon. At the date on which the parties first appeared before me the total arrears including mesne profits and interest amounted to over £ 570,000. A small proportion, under £ 30,000, of this amount was disputed as arrears by the defendants, the balance being admitted subject to set-off and counterclaim.
5. The defendants' counterclaim is for damages for alleged breach of express or implied obligation said to be contained in the two agreements and underleases. The breaches alleged are concerned with the floors of both warehouses. The defendants maintain that in about April 1973 serious defects appeared in the concrete floor of Warehouse No 1, consisting of cracking, differential settlement and deflection of the ground beams. These defects, they say, are or were due to inadequate foundation design, the building having been erected on reclaimed land. As a result, they say, they had to evacuate the warehouse from June 1975 to December 1976 and after that were only able to make use of part of the floor area of the demised building. In August 1974, they say, similar defects appeared in Warehouse No 2.
6. By an action started in 1975, the defendants in the present action claimed against their landlords, the present plaintiffs, damages amounting to £ 315,000 in respect of the alleged breaches of the agreement and underlease relating to Warehouse No 1. By further action started in 1978, they claim further damages in respect of Warehouse No 1 which they say arose after the issue of the writ in the first action and also claim damages in respect of the defects which they say occurred in Warehouse No 2. The amount claimed in the second action is £ 707,000. The first action is due to be heard before an Official Referee beginning on January 11 1979. There is a summons for directions in the second action, heard, as I understand, on December 12. In that the defendants were asking for the second action also to be transferred to the Official Referee.
7. The plaintiffs are denying liability in both these actions, but it is accepted and agreed between the parties that, so far as liability is concerned, the defendants have a genuine and bona fide cause of action. The matters to be investigated include the contentions put forward by the parties through their respective solicitors in correspondence, and the trial of these actions will involve a substantial and detailed investigation of many issues.
8. The plaintiffs are now insolvent and on December 16 1977, pursuant to its powers under a debenture of April 28 1972 and a mortgage of March 31 1977, Bankers Trust International Ltd appointed one, Andrew Homan, as receiver of certain property and income of the plaintiff company including Warehouses Nos 1 and 2. The receiver duly gave notice to the defendants of his appointment on December 16 1977. On January 10 1978 the plaintiff company changed its name to Field Cross Ltd and on March 23 1978 its members passed an extraordinary resolution for the voluntary winding-up of the plaintiff company.
9. In the present case there were Order 14 proceedings which resulted in an order that the defendants should have leave to defend, that there should be tried as a preliminary issue the question whether the defendants are in the circumstances of the case entitled to set off the sums counterclaimed against the plaintiffs' claims for rent and/or mesne profits. By agreement between the parties the preliminary issues with which I have to deal have been widened slightly and these issues are as follows.

(1) Are the defendants in the events which have happened entitled in law and/or in equity to deduct and/or to set-off against the admitted liability for rent and/or mesne profits, the sums claimed against the plaintiffs for breaches of the said agreements and underleases in the actions referred to?

(2) Further or alternatively are the defendants entitled to a stay of execution of any judgment for rent, mesne profits or other moneys due and/or possession?

(3) If the answer to both of the above questions is 'no' upon what terms should the defendants be granted relief from forfeiture?

10. The arguments ranged over a great variety of precedents from Taylor v Beal (1591) Cro Eliz 222 to Federal Commerce and Navigation Co Ltd v Molena Alpha Incorporated [1978] QB 927 decided in the House of Lords on the day this hearing began. In any question involving set-off today the starting point, it seems to me, must be the judgment of Morris LJ, as he then was, in Hanak v Green [1958] 2 QB 9. It is unnecessary to rehearse at length what Lord Diplock called 'a masterly account' of the subject: Modern Engineering (Bristol) Ltd v Gilbert Ash (Northern) Ltd [1974] AC 689. It is clear from this judgment that there are in general three occasions on which set-off is permissible: (1) set-off under the rule replacing the statutes of set-off (2 Geo 2 c 22 and 8 Geo 2 c 24); (2) what might be called abatement in certain cases at common law; and (3) equitable set-off. The first requires that, and I quote, 'The claims on both sides had to be liquidated debts or money demands which could be ascertained with certainty at the time of the pleading': Morris LJ at p 17. The second are cases within the principle of Mondel v Steel (1841) 8 M & W 858. 'Such cases are confined to those concerned with goods sold and delivered with a warranty, goods agreed to be supplied according to a contract and actions for work and labour done': per Parke B at p 871. The principle only operates in such cases if the defendant can show that, by reason of the breach of contract by the plaintiff, the goods or the work are diminished in value. To that extent the defendant can obtain 'an abatement of the price': Parke B at p 872, as a form of defence. The third occasion on which set-off is permissible arises 'where a court of equity would have regarded the cross-claims entitling the defendant to be protected in one way or another against the plaintiff's claim': Morris LJ in Hanak v Green at p 23.
11. It is thus necessary to consider in what circumstances a court of equity before the Judicature Act would have afforded such protection to a defendant. The locus classicus for the principle involved is the judgment of Cottenham LC in Rawson v Samuel (1841) 1 Cr & Ph 161 at p 178.

We speak familiarly of equitable set-off as distinguished from set-off at law, but it will be found that this equitable set-off exists in cases where the party seeking the benefit of it can show some equitable ground for being protected against his adversary's demands. The mere existence of cross demands is not sufficient.

And then at p 179:

Several cases were cited in support of the injunction but in every one of them except Williams v Davies (1829) 2 Sim 461 it will be found that the equity of the bill impeached the title to the legal demand.

It is this feature that the equity must go to the very root of the plaintiff's claim that is the essential attribute of a valid equitable set-off. An obvious example, as was emphasised in later cases, was Pigott v Williams (1821) 6 Madd 95, where the fees which the solicitor claimed were in relation to a suit which would never have been necessary but for the solicitor's own negligence. The principle is clear though there may have been difficulty in applying it correctly to different sets of circumstances. A felicitously expressed statement of the principle occurs in the judgment of Parker J in The Teno [1977] 2 Lloyd's Rep 289 at p 297:

Where the cross-claim not only arises out of the same contract as the claim, but is so directly connected with it that it would be manifestly unjust to allow the claimant to recover without taking into account the cross-claim, there is a right of set-off in equity of an unliquidated claim.

This statement was expressly approved by Goff LJ in the Federal Commerce case in the Court of Appeal [1978] 3 WLR 309 at p 350 D.

12. Now originally Mr Harman argued that the principle of equitable set-off did not apply where what was sought to be set off was an unliquidated demand, but Bankes v Jarvis [1903] 1 KB 549 is a distinct authority for the proposition that unliquidated damages may be set off against a claim for debt. There is this passage in the judgment of Channell J at p 553:

The Judicature Act and more especially the Rules distinctly put an unliquidated claim on the same footing as a liquidated claim for the purpose of set-off and consequently the defendant's claim against the plaintiff's son, which, if liquidated, could have been pleaded before the Judicature Act as a set-off to the plaintiff's claim can now, although unliquidated be relied on as a defence to the extent of the claim.

This proposition is recognised in the sentence from the judgment of Parker J in The Teno to which I have just referred. But Mr Harman, driven from that point, still argues that at any rate the sum must not be so vague as to be unquantifiable at the time of the claim. He cited no authority for this proposition and I can find no warrant for it in any broad legal principle. It is of the nature of unliquidated damages that they may remain unquantified until an award is made. A set-off of unliquidated damages is a defence to so much of the claim as is represented by the eventual amount of the award made. If the defendant in some way limits his damages to a sum less than that claimed, then it is obvious that there is no defence to the balance over and above the sum so limited and, no doubt, summary judgment could be obtained for this balance. But where the damages claimed to be set-off are at large and it is claimed bona fide, as is here admitted, that they over-top the claim, then even though not precisely quantified, it seems to me that the set-off amounts to a complete defence to the whole claim.

13. Mr Harman's next point, and it is an important one, is that there can be no set-off, equitable or otherwise, against rent. He starts by asserting that there is in landlord and tenant law a settled principle that a tenant may claim an abatement of rent similar to the abatement in certain other cases as explained in Mondel v Steel, where he has either been dispossessed by his landlord or he has paid money for which his landlord was certainly liable. This principle he says is not one of equitable set-off at all but is rather a common law principle similar to that in Mondel v Steel. He relies on Taylor v Beal (1591) Cro Eliz 222 and Waters v Weigall (1795) 2 Anst 575. Now, Taylor v Beal was a case in the Queen's Bench in which two of the judges held that where a landlord had broken his covenant to repair a house and the tenant had expended money on the repairs, the tenant was entitled to set-off against a claim for rent the money so expended. One of the two, however, held that as the matter had not been properly pleaded the tenant failed. The remaining judge thought there was no set-off and would have left the tenant to a separate action for breach of covenant. On another point, however, they were all three agreed that discharge by the tenant of the landlord's obligation to pay a rent charge issuing out of the land where this had been requested by the landlord was a good defence to a claim for rent. Waters v Weigall was a case in the Court of Exchequer. The tenant was seeking to excuse himself from paying rent because the premises had been damaged by tempest and his covenant to repair the premises excluded damage by tempest. The report of the argument on demurrer shows that the tenant was suggesting that, because there was no express covenant by the landlord in those circumstances to repair, he could not bring a cross-action and so would be without a remedy at law. Accordingly, so it was argued, it was a case for equitable relief. The court refused equitable relief and the judgment is short and to the point. Macdonald CB said:

I do not see how you entitle yourself to the interposition of this court. If the landlord is bound in law or equity to repair in consequence of the accident that has happened, and you were right in expending this sum in repairs for him, it is money paid to his use and may be set off against the demand for rent. If you fail in making out these points your ground of relief is destroyed in equity, as well as at law.

The other Barons being of the same opinion the demurrer was allowed. The Chief Baron had no doubt that in circumstances which made expenditure by the tenant money paid to the landlord's use, a set-off was available both at law and in equity. It is interesting that when the case came before the King's Bench on the landlord's claim for rent, the tenant was unsuccessful, Lord Kenyon CJ holding that there was no obligation on the landlord to repair and even if there had been there could be no set-off because the damages claimed were uncertain, which in the context must mean unliquidated.

One objection to the plea is that it does not set off any certain debt for uncertain damages. I do not indeed see by what covenant the landlord is bound to repair damages occasioned by fire or tempest. The exception was introduced in the lessee's covenant for his benefit and to exempt him from particular repairs, but if the defendant can maintain any action against the plaintiff, his landlord, the sum to be recovered is uncertain. It must be assessed by a jury and there is no pretence to say that those uncertain damages may be set-off to the present action. If the plaintiff has fairly laid out money on repairing what he was not bound to repair, perhaps a court of equity will grant him relief: Weigall v Waters (1795) 6 TR 488.

14. On a consideration of these cases it seems to me that Taylor v Beal is authority for the proposition that there are at least two sets of circumstances in which at common law there can be a set-off against rent, one where the tenant expends money on repairs to the demised premises which the landlord has covenanted to carry out, but in breach has failed to do so (at any rate where the breach significantly affects the use of the premises) and the other where the tenant has paid money at the request of the landlord in respect of some obligation of the landlord connected with the land demised. To this proposition there must be added two riders. First, that as the landlord's obligation to repair premises demised does not arise until the tenant has notified him of want of repair, such notification must have been given before the set-off can arise; and secondly that the set-off must be for a sum which is not to be regarded as unliquidated damages, that is, it is a sum certain which has actually been paid and in addition its quantum has either been acknowledged by the landlord or in some other way can no longer be disputed by him, as for instance, if it is the subject of an award on a submission to arbitration. The latest expression of opinion about this matter is in Lee-Parker v Izzet [1971] 3 All ER 1099. In that case Goff J, as he then was, was dealing among other things with a claim to a lien, the basis of which was laid on an argument that the tenants were entitled to treat a payment of the cost of repairs, for which the landlord was liable, as a payment of rent and reliance was placed on Taylor v Beal. Goff J discussed the principle of Taylor v Beal and at p 1107 G he said this:

I do not think this is bound up with technical rules of set-off. It is an ancient common-law right. I therefore declare that so far as the repairs are within the express or implied covenants of the lessor the third and fourth defendants are entitled to recoup themselves out of future rents and defend any action for payment thereof. It does not follow however that the full amount expended by the third and fourth defendants on such repairs can properly be treated as payment of rent. It is a question of fact in every case whether and to what extent the expenditure was proper.

15. I do not think there is any difference between the principle as seen by Goff J and that which I have set out above save for this. Goff J took the view that it was money properly expended which could form a subject of this right. My view is that the right was slightly more restricted, namely, that it could only be exercised when the sum was certain and its amount could not really be disputed by the landlord. This restriction which I think should be made arises from a consideration of the judgment of Lord Kenyon in Waters v Weigall, which was not quoted to Goff J. In that case the tenant had in fact paid £ 30 but Lord Kenyon still regarded the cross-claim as one for uncertain damages. It seems the quantum of the sum must have been either unchallenged or unchallengeable before it could be regarded as deductible.
16. Mr Harman's argument is that these cases are similar to the abatement case exemplified in Mondel v Steel and that what the tenant must prove is that the premises are worth less to him than they should have been, such diminution in value being the measure of the amount which can be deducted. I can find no trace of such a principle. Rather the principle appears to be that the money paid is regarded either as paid at the request of the landlord or to his use, but in either case can be treated as a defence. I agree with Goff J that this is strictly not a set-off as such, since set-off is a creature of statute and the principle appears to ante-date the reign of George II, but rather a case where at law the payment was regarded as payment pro tanto of the rent. Nevertheless, it is clearly a defence to claim for rent. In this case such a defence is not open to the defendants as they had not in fact paid anything. Their cross-claim is for damages. In so far as Mr Harman seeks to argue that the existence of this ancient common-law right is in some way inimical to the co-existence of any equitable principle of set-off, I cannot accept such an argument. Of course, if the facts were such that this defence was available to a tenant equity would not assist him, because he had a perfectly good defence at law which was the ratio of Waters v Weigall, but in other circumstances, where as here, the common-law defence is not available because the defendant's cross-claim is not founded on payment, but on unliquidated damages, one still has to consider whether or not equity would intervene.
17. Then Mr Harman argues that rent is something special, that it is invested with something almost in the nature of an aura. He says rent issues out of the land. It is a debt due which has attached to it many special rights such as the right to distrain and the right of forfeiture, without previously serving a notice under section 146 of the Law of Property Act 1925. These two rights, he argues, are unique examples of self-help remedies which it is not surprising ought not to be interfered with by any set-off, and he claims that there can be no set-off against distress, relying on Bullers Nisi Prius 7th ed p 1816 and Townrow v Benson (1818) 3 Madd 203. But the ratio ascribed by Buller to the decision of Absolon v Knight and Barber (1743) Barnes 450 is that the debt could not be set off against distress, not because rent is something special, but because distress is something special--not an action, but a remedy without action. Townrow v Benson recognises that there can be no set-off against distress and also asserts that equity will follow the law in this. Neither of these cases goes to the extent of saying that there can be no set-off in actions for rent. It is interesting, however, that the paragraph in Buller immediately following that relied on by Mr Harman is a reference to Gower and Wife v Hunt (1734) Barnes 290 and 291. At p 290 of Barnes is also reported Brown v Holyoak. The latter case was an action of debt for rents upon a parol lease. The defendant had by his plea set off a debt by simple contract. On demurrer it was held that a debt of an inferior nature cannot be set off against a superior demand. The reason given was that debt for rent is equal to an action upon a bond. In other words, although the lease was a parole lease it was still equivalent to a specialty when suing for debt and the debt under a simple contract was not of equal degree and for that reason could not be set off.
18. Gower v Hunt itself provides another pointer. In that case the landlord brought an action of covenant upon a lease under seal for non-payment of rent. The tenant wished inter alia to raise a set-off under the statutes of set-off for sums due under other covenants in the same deed relating to 'spurring up land at a certain sum per acre.' At the Suffolk Assizes Denton J refused to allow the tenant to give evidence about this, but the Court of Common Pleas held that the evidence should have been received as it was to set off a certain debt of equal degree with the plaintiff's demand. There appears to be no trace in these old cases of any special treatment of rent as such, and indeed, as I understand the decision in Gower v Hunt, it appears to allow a set-off against rent under the statutes so long as the debt set up by the tenant is a sum certain and arises out of a covenant in the lease which itself is under seal.
19. The only other case of antiquity which requires consideration is Beasley v D'Arcy (1800) 2 Sch & Lef 403. This case in the House of Lords was, as Mr Harman pointed out, a case about relief from forfeiture and the House upheld the Lord Chancellor of Ireland's decision to grant relief. But the important part of the case arose in the earlier stages. The facts and ratio are succinctly set out by Lord Redesdale LC in O'Mahoney v Dickson loc cit at p 408:

There was a question between the parties what damage should be allowed in consequence of the landlord's cutting down timber from the land. The tenant came into Chancery to restrain the landlord's proceeding for non-payment of rent, and insisted that damages demandable in this collateral way ought to be applied to discharge the rent. There had been an award ascertaining the damage; but it had been made after the time limited for making the award and therefore the matter still rested in damages. At a time when the ejectment was brought, this was the demand which the tenant had against the landlord, an unascertained, unliquidated demand arising from the act of the landlord, affecting the land in the occupation of the tenant. The tenant gave a consent to judgment, that is, he admitted the rent demanded to be due; but he insisted that he was entitled to a certain sum for damages for cutting the timber. On the answer there was an injunction until the hearing, on the terms of lodging the rent in court, which terms were not complied with: The habere was executed in 1797; the cause was heard in 1798, and an issue directed to try whether the tenant had sustained any and what damage from cutting the timber. The jury found damage in the amount of £ 103 6s. A supplemental bill was then filed praying that the tenant might be restored to possession, and the value accounted for in the usual way. The answer insisted on the statute Geo. I stating that the ejectment was brought for non-payment of rent. The cause came on again in 1799, when the plaintiff was declared entitled to restitution, on paying what was due for rent after deducting the damages. That was a case in which the court proceeded, not on a question whether so much was due for rent or not; but there being a collateral demand on the person to whom the rent was to be paid, and the amount of that demand appearing to have been nearly equal to the rent, but the subject of the cross-action, and which could not by any possibility be set-off by way of defence in the ejectment whether this afforded a distinct ground for equitable relief.

20. It seems clear from this passage that in a case of ejectment for non-payment of rent equity was prepared to grant relief by way of injunction, where there was a claim for unliquidated damages against the landlord for breach of covenant in the lease. The damages were unliquidated because the arbitrator's award was out of time and therefore void. The Lord Chancellor referred to the ratio of Beasley v D'Arcy again, at p 412 in these terms:

In a case in the House of Lords (that is Beasley v D'Arcy) there was no question whether so much rent was due or not. There was no doubt on that subject, and therefore the case there must have been decided on a distinct ground, namely that although the rent was due, yet the money that was due to the other party for an unliquidated demand ought in point of conscience under the circumstances to have been paid by the landlord in order to enable the tenant to pay his rent, the nature of the demand for damages supposing a loss by the tenant of the produce of the land arising from the act of the landlord. I must presume that that decision was right.

21. The footnote in the report at this point refers to another case of which there seems to be no other report.

In the case of Hamilton v Johnson (Exchequer 1808) O'Grady CB said that the case of Beasley v D'Arcy authorised a bill by a tenant against his landlord for an equitable set-off of unliquidated damages, arising out of the relation of landlord and tenant; and the subject matter of the contract subsisting between them as such--but only such damages.

22. Although there was an injunction in Beasley's case and not a set-off Cohen LJ, as he then was, in Morgan & Son Ltd v S Martin Johnson & Co Ltd [1949] 1 KB 107 at p 114 pointed out that set-off was now the appropriate way of dealing with such a situation:

Before the Judicature Act, such claims were very often enforced by injunction, but it is plain from section 41 that an injunction would not be the appropriate way of giving effect to a set-off now and that effect should be given to it, under Section 38, as an equitable defence if so pleaded.

23. It is instructive to compare and contrast Waters v Weigall with Beasley v D'Arcy. In Waters the tenant had paid a sum certain for the repairs or so it was said. As there was on that premise a remedy at law equity refused to interfere. In Beasley the cross-claim was for unliquidated damages and therefore not available as a set-off at law; equity granted relief.
24. A consideration of all these cases leads me to the conclusion that except in cases of distress or replevin equity has never refused to interfere to protect a tenant whose landlord was bringing proceedings based on non-payment of rent, if the tenant had a bona fide cross-claim for unliquidated damages against the landlord, provided that he was not covered by an existing common law remedy and that the ordinary rules pertaining to equitable set-off were obeyed. I referred to these earlier in this judgment and they are as succinctly put by Parker J in The Teno at p 297:

Where the cross-claim not only arises out of the same contract as the claim, but is so directly connected with it that it would be manifestly unjust to allow the claimants to recover without taking into account the cross-claim, there is a right of set-off in equity of an unliquidated claim.

25. It may well be that today, even in replevin cases, the anachronism of the special remedy of distress would or should not inhibit a court from applying equitable principles in the way suggested by Lord Denning MR in the Federal Commerce case at p 338B:

It is now far too late to search through the old books and dig them out. Over 100 years have passed since the Judicature Act 1873. During that time the streams of common law and equity have flown together and combined so as to be indistinguishable the one from the other. We have no longer to ask ourselves what would the courts of common law or courts of equity have done before the Judicature Act? We have to ask ourselves: what should we do now so as to ensure fair dealing between the parties?

26. Fortunately, I have not in this case to accept Lord Denning's invitation any further than this: it must, I think, be one more refutation of Mr Harman's contention that the ancient common law remedies attached to rent should govern in the fourth quarter of the 20th century one's approach to a tenant's claim to equitable relief.
27. The last case to which I should refer is Hart v Rogers [1916] 1 KB 646. In that case the landlord claimed for unpaid rent and the tenant counterclaimed for damages for breach by the landlord of the implied covenant to repair the roof of the premises demised. Scrutton J, as he then was, held on the authority of Surplice v Farnsworth (1844) 7 Man & G 576 that this cross-claim was no defence to an action for rent. Although it requires a certain amount of hardihood to differ from so great a judge, I feel I must do so in this case. Surplice v Farnsworth was the only case in point to which Scrutton J was referred. It was, of course, a case at law and not anything to do with equitable set-off, and it seems to me that the decision in Hart v Rogers must be taken as one reached without the benefit of the very full argument on equitable set-off which has been put before me and therefore per incuriam.
28. While I am satisfied that it is proper in principle to allow that a cross-claim could be effective as an equitable set-off against a claim for rent, it by no means follows that such a defence is available in all circumstances. The important qualification is that the equity must impeach the title to the legal demand, or in other words go to the very foundation of the landlord's claim. This seems to me to involve consideration of the proposition that the tenant's cross-claim must at least arise under the lease itself, or directly from the relationship of landlord and tenant created by the lease. The landlord's covenant to repair contained in the lease, if broken, might found, as has been seen earlier, the ancient common law defence to a claim for rent if the tenant had been forced to pay for repairs to maintain the premises in a state fit for the purpose for which they were let. If instead of paying for the repairs the tenant cross-claims for damages for breach of the covenant, there is no common law defence, but there must, in my view, be an equitable right to set off the unliquidated damages. But in this case, there is no covenant by the landlord to repair contained in the lease, and it is necessary to see how the defendants put their case on this aspect. This can be exemplified by considering the position in relation to Warehouse No 1. The same case arises mutatis mutandis in relation to Warehouse No 2.
29. The underlease of April 24 1974, contains, as I have said, no covenant by the landlord to repair. It does, however, contain the following among the landlord's covenants. Clause 4(3):

That in the event of the floor of the demised premises suffering damage other than superficial damage, by reason of the weight of articles placed thereon being less than 1,120 lb per square foot, the landlord will pay the cost of repairs and reinstatement to the floor subject to the landlord first approving an estimate for the work.

There is a factual issue between the parties about the loading of the floor, the plaintiffs maintaining that the damage to the floor was caused by loading in excess of 1,120 lb per square foot and the defendants that the loading was less than that figure. The defendants seek to suggest that their claim for damages is related to a breach by the plaintiffs of clause 4(3) of the lease. It is plain to me that there has been no such breach. The plaintiffs' liability is subject to the condition precedent, that they must first approve an estimate and no estimate has even been submitted, and even if it had been submitted and approved, this clause does not oblige the plaintiffs to do anything other than pay for the cost of repairs, a phrase which seems to me to involve discharge of a debt which has in fact already been incurred. In other words, the work of repair having been carried out, the landlord is to pay the cost. No work has in fact been carried out. It follows that the tenant cannot show that there has been any breach of any covenant contained in the lease, which is of course the document on which the landlord founds his claim for rent.

30. The agreement of June 1973 contained this provision:

So far as the floor of the new building is concerned, the lessors will make good at their own expense any defects which may occur within two years of the completion date and which may be caused by inadequate design, or faulty materials or workmanship. Notwithstanding completion of the underlease, this clause to remain in full force and effect.

It is alleged by the defendants that the defects in the floors arose within the two-year period and were due to inadequate design or faulty workmanship. It is further alleged that the defects in the floors resulted in the premises or parts of them becoming unusable as a warehouse, the purpose for which they were let. For the purpose of these preliminary issues I must of course assume that these allegations are made good. There is a further provision of the agreement which obliges the landlords to cause the works to be carried out in a good and workmanlike manner with good and sufficient materials, but this adds nothing to the points at issue.

31. Clause 11 of the agreement is in these terms:

This agreement shall remain in full force and effect after the date of the grant of the underlease in respect of any act, matter, or thing remaining to be performed or effected thereunder after that date and notwithstanding such grant.

For completeness I should add that the agreement required the landlord to grant and the tenant to accept the underlease, a draft of which was annexed to the agreement.

32. In these circumstances, Mr Harman argues that as the cross-claim arises not under the underlease itself but under the agreement, there is no such close connection between the claim for rent and the cross-claim as is required to support an equitable set-off. Mr Myers contends to the contrary, that the agreement and the underlease are so closely interwoven that a cross-claim under the former can be regarded as impeaching the plaintiff's title to his demand under the latter. Now, there is no provision in the underlease for the terms of the agreement to be incorporated in it. If there were it would be plain that the landlord's breach could properly be said to arise out of the same instrument as his claim for rent. In such circumstances I should have no doubt that the requirements for an equitable set-off were fulfilled, for the breach of covenant relied on by the tenant is of the type to which equity has in the past allowed relief. (See, for instance, Beasley v D'Arcy.) But here not only is there no such incorporation of the terms of the agreement but at the end of the special provision in the agreement relating to the floor, there is this sentence, 'Notwithstanding completion of the underlease this clause shall remain in full force and effect.' Clause 11 is to the same general effect. Although these provisions are relied on by Mr Myers as showing the close connection between agreement and underlease, they seem to me rather to insist on the separate nature and existence of the agreement. There is to be no merger or incorporation; there is to be no extinction of the rights and duties arising under the agreement by reason of the grant and acceptance of the underlease; the agreement is to continue as a separate but co-existent entity.
33. This at once raises, in an acute form, the question I posed earlier and in general terms: does the requirement that the equity must impeach the title for the legal demand mean necessarily that the tenant's cross-claim must at least arise under the lease itself or directly from the relationship of landlord and tenant, or is it sufficient that it should arise out of some transaction closely connected with the lease, and if so how closely? The passage I quoted from the judgment of Parker J in The Teno assumes that the claim and cross-claim arise out of the same contract, but that is no doubt because on the facts before him they did so and this question did not arise for consideration. It is clear that in Bankes v Jarvis [1903] 1 KB 549 the claim and cross-claim arose under different contracts. In Hanak v Green at p 24 Morris LJ referring to Bankes v Jarvis averred that there was a close connection between the dealings and transactions which gave rise to the respective claims. In Federal Commerce Lord Denning MR at p 338D said: 'It is only cross-claims that arise out of the same transaction or are closely connected with it.' In The Brede [1974] QB 233 at p 248F he said much the same thing:

It is available whenever the cross-claim arises out of the same transaction as the claim or out of a transaction that is closely related to the claim.

In view of these passages and in particular having regard to the facts in Bankes v Jarvis it does not seem possible to conclude that it is in all cases necessary that claim and cross-claim must arise out of the same contract. Where, as in this case, they do not, it still therefore remains for consideration whether in any particular case the two matters are so closely connected that the principles affecting equitable set-off can be said to apply. It is very necessary when seeking to reach a conclusion on this question in a case such as this to drive from one's mind the insidious prompting of generations of common lawyers that there is something special about rent. As I have already indi- cated I can find no trace of such a principle in equity and there is no reason why there should have been or should be now.

34. In this difficulty as with others concerned with set-off, the best guide is, I think, to be found in Hanak v Green. In explaining and approving Bankes v Jarvis, Morris LJ at p 24 had this to say, and I think I may already have quoted it in another context.

The plaintiff, suing as agent or trustee for her son, claimed £ 50 from the defendant. The defendant had a perfectly good claim for £ 51 damages against the plaintiff's son. It was held that the defendant could set up as a defence to the claim against him that the plaintiff's son (the cestui que trust of the plaintiff) was indebted to the defendant in a sum for unliquidated damages exceeding the amount of the claim.

The conclusion seems to me to be clearly correct and obviously fair. It would have been manifestly unjust if the defendant had had to pay £ 50 to the plaintiff (who was an agent or trustee for her son) at a time when the defendant had an unquestioned claim of £ 51 against the plaintiff's son who had left the country. There was a close relationship between the dealings and transactions which gave rise to the respective claims. If the case had been brought before the Judicature Act it would appear that the defendant would have had strong equitable grounds for asking a Court of Chancery to restrain the plaintiff from proceeding with her case. But since the Judicature Act the position is that matters of equity on which such injunctions might formerly have been obtained, may now be relied on by way of defence.

In other words, in considering questions of this kind it is what is obviously fair or manifestly unjust that will determine the solution. This is because today, while it is necessary to look back before the Judicature Act to discover the broad principles upon which equity would grant relief, it may not be helpful to seek to find out from the cases what a court of equity would have done in a similar case. The principle may be derived from the older cases. The application of that principle should be reached by a consideration of what today would be regarded as fair or just. This is but a reflection of the passage I have already quoted from the judgment of Lord Denning MR in Federal Commerce at p 338D.

35. Applying these principles in the light of what is fair dealing between the parties, I have come to the conclusion that despite the insistence on preserving the agreement as an entity separate from the underlease, there is nevertheless here that close connection between claim and cross-claim which equity requires. The agreement was inter alia an agreement to enter into the underlease, the terms of which were set out in the form annexed to the agreement. The special provisions relating to the floor were obviously as much in the minds of the parties when making the agreement as any of the other terms. It would in my view be manifestly unjust to allow the landlord to recover his rent without taking into account the damages which it is alleged the tenant has suffered through failure by the landlord to perform his part of the agreement. Not only is there in my view an adequate connection between the transactions giving rise to claim and cross-claim, there is also the fact that the breach by the landlord is said to render the premises unfit at least in part for the purpose for which they were let. For both these reasons, it seems to me that the defendants' cross-claim can be said to impeach the title to the plaintiffs' legal demand.
36. I therefore answer the first of the preliminary issues, and the only one which so far there has been argument, in this way: the defendants are entitled to defend the plaintiffs' claim for rent and mesne profits by raising as set-off or defence a like sum of the moneys claimed by the defendants against the plaintiffs as damages for breach of the agreements (but not of the underleases) referred to in paragraphs 4, 6 and 8 of the amended defence.

Judgment was given for the defendants on the first preliminary issue with costs. The other preliminary issues did not arise for decision.

The electronic text of this judgment was provided by Estates Gazette, whose assistance is gratefully acknowledged.