To Pay or Not to Pay – that is the question? (For agricultural tenants under a 1986 tenancy)

Peter Bourke takes a look at the latest High Court decision in the (very) long series of battles between the Secretary of State for Defence (landlord) and Mr Spencer (tenant).  This case is another interesting and important Agricultural Holdings Act 1986 case for practitioners.

In essence the tenant failed to pay rent and the landlord served a Notice to Pay which did not result in payment of rent.  Accordingly the landlord served a Notice to Quit at which point the tenant sought the intervention of an arbitrator.

The tenant claimed that the Notice to Pay was invalid because the tenant had an equitable set-off claim against the landlord and therefore the amount claimed in the Notice to Pay was incorrect.  Practitioners will be aware of the very strict interpretation applied to Notices to Pay (Mason v Boscawen [2009] 1 WLR 2139) and that a contingent future right of set off will not be sufficient (Sloan Stanley Trustees v Barribal [1994] 2 EGLR 8).  Until last week there was no High Court case in which the tenant has been allowed the defence of set-off, whether equitable or otherwise, so as to defeat a landlord's Case D notice to pay.

Case D of the Third Schedule permits a landlord to serve a Case D notice to quit provided:

"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 –

1. 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, or

2. …

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

The arbitrator referred to the matter to the County Court under the Case Stated procedure.  It was the County Court's decision by Recorder Norman in November 2016 that was the subject to HHJ Birss's determination in June 2019.

Recorder Norman held that if, before the date of the Notice to Pay:

1. the claim to be set-off in equity has been asserted expressly in reduction or extinction of the rent claimed by the landlord in the Notice to Pay be due, and

2. the claim has been quantified, and

3. both the assertion and the quantification of the claim were bona fide and on reasonable grounds,
   
   then, provided these requirements are met, the equitable set-off can be relied upon in reduction of the rent due as at the date of the Notice to Pay to the extent of the quantification of the claim and Case D paragraph (a) of the Third Schedule to the Agricultural Holdings Act 1986 is to be so interpreted.

HHJ Birss agreed with Recorder Norman:

"I agree with the Recorder's decision that, provided the criteria are satisfied, the tenant can rely upon equitable set-off or unliquidated damages in order to invalidate the Notice to Pay, because it overstates the rent due, and so invalidates the Notice to Quit."

We learn two important things from this judgment.  Firstly, a tenant can rely on equitable set-off or an unliquidated damages claim. However, the second point is that such claim must now pass the tests set out set out by Recorder Norman (see above) otherwise the claim for set-off will fail.

Therefore, if the tenant fails to do follow the Recorder Norman procedure prior to service of the Notice to Pay it means that the Notice to Pay is valid and, if the rent is not paid, it enables the landlord to serve a valid Notice to Quit.  In other words the tenant must:

1. asset the equitable set-off assertion prior to the service of a Notice to Pay, and

2. quantify it, and

3. the assertion and quantification must be bona fide and reasonable.

At present raising a claim after service of the Notice to Pay has been served will not protect the tenant, as the Notice to Quit relies on the validity of the Notice to Pay.

There is still time for both parties to appeal, but now there is a reported case practitioners can now make handwritten amendments to the first sentence of the second paragraph of 15.117 in Muir Watt & Moss Agricultural Holdings (15^th Ed).

Agricultural law contains several traps for the unwary and if you would like expert advice do contact our team of experts.