Chamberlain Early Learning Centre Pty Limited v Precious 1 Pty Limited in its own right and as trustee for The 4 Chamberlain Holdings Family Trust

Changes in Ownership of the Property and the Earlier Litigation

1. After becoming the registered proprietor of an estate in fee simple in the Property in 2009, Chamberlain granted a lease of the Property (the Earlier Lease) to Kids for Life Academy Pty Ltd (Kids for Life). The Earlier Lease was for a term of five years commencing on 1 January 2010 and contained an option to renew for a further term of five years. Provision was made for three further options to renew at the expiration of each lease.
2. From February 2010, the Tenant has conducted a childcare business on the Property under arrangements between it and Kids for Life. Those arrangements included an agreement for the assignment of the Earlier Lease by Kids for Life to the Tenant. However, while a transfer of the Earlier Lease was executed by those parties and stamped, it was never registered.
3. On 13 May 2014, the Tenant sent to Chamberlain a signed instrument entitled "Notice of Exercise of Option", by which the Tenant purported to give formal notice of exercise of the first option to renew under the Earlier Lease. On 23 May 2014, the Tenant lodged a caveat in respect of the Property, claiming an equitable interest pursuant to that purported exercise of the option to renew.
4. By deed dated 26 July 2014, the 4 Chamberlain Unit Trust (the Unit Trust) was established. The trustee of the Unit Trust was the Assignor, which was incorporated on 23 July 2014. On 30 July 2014, Chamberlain and the Assignor entered into a contract for the sale of the Property by Chamberlain to the Assignor for a price of $1,900,000 (the 2014 Sale Contract). The 2014 Sale Contract named the Assignor as purchaser in its capacity as trustee of the Unit Trust.
5. On 17 September 2014, a lapsing notice in respect of the Tenant's caveat was served on the Tenant and, on 1 October 2014, Kids for Life and the Tenant commenced proceedings in the Equity Division against Chamberlain and the Assignor, seeking declarations that Kids for Life had validly assigned the Earlier Lease to the Tenant and that the option to renew had been validly exercised. On 8 December 2014, a judge of the Equity Division made orders determining that the Earlier Lease had been assigned to the Tenant, such that the Tenant could exercise the option for the grant of a further lease of the Property. [1] Chamberlain and the Assignor appealed to the Court of Appeal from the orders made by the Equity Division. That appeal was dismissed. [2]
6. In circumstances that were not fully explained in the evidence in these proceedings, the 2014 Sale Contract was subsequently rescinded and, at some time in 2015, Chamberlain and the Assignor entered into a further contract for the sale of the Property by Chamberlain to the Assignor for the purchase price $1,900,000 (the 2015 Sale Contract). According to an affidavit sworn by Mr Fred David, of David Legal (the solicitors for the Landlord and the Assignor), the 2015 Sale Contract was executed on 21 September 2015.
7. In the 2015 Sale Contract, the Assignor was named as purchaser in its capacity as trustee of a trust now known as 4 Chamberlain Holdings Family Trust (the Family Trust). The Family Trust had been established by deed of settlement of discretionary trust dated 24 July 2013. When the Family Trust was established, the trustee was 4 Chamberlain Holdings Limited (Chamberlain Holdings). On 29 October 2015, Chamberlain Holdings was removed as trustee of the Family Trust and the Assignor was appointed as trustee of the Family Trust. It is somewhat curious, therefore, that the Assignor purported to enter into the 2015 Contract as trustee of the Family Trust in circumstances where, as at 21 September 2015, when the 2015 Contract was executed, Chamberlain Holdings was the trustee of the Family Trust.
8. According to Mr David, the 2015 Sale Contract was completed on 16 December 2015. At some stage, a transfer of the Property, showing consideration of $1,900,000, was executed on behalf of Chamberlain, as transferor, and the Assignor, as transferee. There was no evidence as to the payment by the Assignor of any consideration for the transfer of the Property or as to the source of any such consideration that may have been paid. At some time after 16 December 2015, the Assignor became registered as the proprietor of an estate in fee simple in the Property. At that stage, notwithstanding the orders of the Equity Division and the Court of Appeal, no further lease of the Property had been granted to the Tenant. Nevertheless, the Tenant had remained in possession of the Property and had paid the Rent that would have been reserved under the lease that would have been granted pursuant to the exercise of the option under the Earlier Lease, if the purported exercise were valid.
9. According to the documents in evidence, on 4 January 2016, the Assignor was removed as trustee of the Family Trust and the Landlord was appointed as trustee of the Family Trust. The Tenant was not informed of that removal and appointment. At some stage, the Assignor executed a transfer of the Property in favour of the Landlord, showing a consideration of $1. The transfer bears the date 4 January 2016 but, for reasons that were not explained in the evidence, it was not registered until 23 June 2016. The Tenant was not informed of the transfer until it had been registered, in the circumstances outlined below.
10. There is some evidence to suggest that the Lease was executed by the Assignor on 15 January 2016, notwithstanding the purported removal of the Assignor as trustee of the Family Trust on 4 January 2016. However, the Lease was not registered until April 2016. As I have said, the transfer from the Assignor to the Landlord was not registered until 23 June 2016, when the Landlord became the registered proprietor of an estate in fee simple in the Property, subject to the Lease.

The Set-off Claim

1. On 25 January 2016, Mr Joe Nasr, purporting to be "in-house legal counsel" for the Assignor, wrote to Messrs Norris Somers Maait, the solicitors then acting for the Tenant. Mr Nasr said "we will be dealing directly with you" in relation to the execution, registration and administration of the Lease, and that the Assignor was the registered proprietor of the Property, having settled the purchase on 16 December 2015. He said that the Tenant had paid rent to the previous landlord up to 31 December 2015 and that rent was payable "to us" commencing with the January 2016 instalment. Mr Nasr said that, to avoid any further uncertainty "we confirm that we are now the owners of the [Property] and that your client is directed to pay the ongoing monthly rental" to a specified account with National Australia Bank Limited (NAB) (the Top Class Account) in the name of "Top Class Management & Bookkeeping Pty Limited" (Top Class).
2. On a fair reading of the letter, by referring to "we", Mr Nasr was referring to the Assignor. However, Mr Nasr did not say anything more as to the capacity in which Top Class was to receive payment of the Rent. Specifically, no mention was made of any transfer of the fee simple in the Property from the Assignor to the Landlord on 4 January 2016.
3. Norris Somers Maait responded to Mr Nasr's letter on 28 January 2016, confirming that they acted for the Tenant. They said that they had difficulty in accepting Mr Nasr's authority to give a direction to the Tenant to pay the Rent to Top Class, which had no apparent connection with the Assignor. Norris Somers Maait said that the Tenant was willing and able to pay the Rent for the month of January and the month of February and that the Rent would be paid within 48 hours of its being furnished with a satisfactory method of payment. They said that, failing a satisfactory response by 3.00 pm on 28 January 2016, the Rent for January and February 2016 would be remitted by a bank cheque to the offices of Mr Peter Zada of Messrs Novado Legal, solicitors. Novado Legal had apparently previously acted for the Assignor in some capacity.
4. Later on 28 January 2016, Norris Somers Maait sent a letter of that date to Novado Legal, in which they referred to the correspondence with Mr Nasr. Two bank cheques in favour of the Assignor, representing the Rent payable for January and February 2016, were enclosed with the letter.
5. By notice dated 28 January 2016, signed by Ms Angela Michael on behalf of the Assignor, the Tenant was directed and authorised to pay the Rent and other moneys owing under the Lease into the Top Class Account. Again, there was no indication in the notice of the relationship between Top Class and the Assignor. There was no indication that the fee simple in the Property had been transferred by the Assignor to the Landlord. At that stage, neither the transfer to the Landlord nor the Lease had been registered.
6. On 27 February 2016, Norris Somers Maait wrote to the Assignor, demanding registration of the Lease no later than 4 March 2016. They referred to communications received by the Tenant purporting to give directions about the payment of the Rent under the Lease to third parties. The letter said that, whilst ever proper identification for purported authority was not provided, the Tenant would ignore all future communications from anyone purporting to represent the Assignor "except under the hand of its officers, accompanied by satisfactory original certified identification of such officers or by way of any properly instructed legal representative".
7. Relevantly for present purposes, the letter of 27 February 2016 from Norris Somers Maait went on to refer to "the debt" due by the Assignor to the Tenant for costs totalling $93,860.24 and enclosed copies of the Costs Certificates. The letter then said: "Until that debt is paid to our client in full, it and all interest due on the outstanding balance from time to time will be offset against all rent and other moneys payable by our client under the [Lease]."
8. Thereafter, tax invoice/statements for the months of March, April, May, June and July 2016 were received by the Tenant from Top Class (the Invoices). The Invoice for July 2016 stated that the total balance then due, including arrears, was $80,208.81. Each of the Invoices required payment of the Rent, and other outgoings under the Lease, to the Top Class Account. However, the name of the Lessor was not specified in any of the Invoices. Nothing in any of the Invoices indicated that there had been an assignment by the Assignor to the Landlord of the fee simple in the Property.
9. The Tenant did not pay any of the amounts for the Rent set out in the Invoices. By notice dated 4 July 2016 (the Default Notice), the Landlord gave notice to the Tenant that it was in breach of the Lease by reason of non-payment of the Rent in the sum of $82,754.07. That amount consisted of the Rent for the months of March, April, May, June and July, together with additional interest. By the Default Notice, the Landlord said that, unless the breach was remedied and interest and legal costs paid within 14 days, the Lease would be terminated.
10. On 7 July 2016, Messrs Etheringtons, the solicitors then acting for the Tenant, wrote to David Legal, the solicitors then acting for the Landlord, seeking information concerning the circumstances and arrangements under which the Landlord became the registered proprietor of the Property and asking whether any notice had ever been given on behalf of the Landlord to the Tenant. The letter also sought particulars of the trust for whose benefit the Landlord was said to hold the Property.
11. On 8 July 2016, Etheringtons wrote to David Legal again, asserting that the core element of the dispute between the Landlord and the Tenant revolved around whether or not the Tenant was entitled to set off, against its liability for the Rent under the Lease, the amounts that were owing by the Assignor under the Costs Certificates. Etheringtons said that the Tenant was willing to pay into Etheringtons' trust account the amount of money sought by the Landlord under the Default Notice, on the basis that the Default Notice would be withdrawn. They said that proceedings would be commenced if no arrangement could be reached.
12. David Legal replied on 8 July 2016, asserting that nothing in the letters from Etheringtons disclosed any basis upon which the Tenant was entitled to default in the payment of the Rent to the Landlord, as the current registered proprietor of the Property. David Legal noted that the set-off upon which the Tenant sought to rely was not alleged to be a set-off against any liability of the Landlord and rejected the proposal set out in Etheringtons' letter. David Legal asserted that the Landlord would take such steps as it may be advised to obtain possession in the event that the Tenant failed to remedy its default. David Legal declined to answer the request for information contained in the earlier letter from Etheringtons.

The Proceedings

1. On 12 July 2016, the Tenant commenced these proceedings in the Real Property List of the Equity Division. The Landlord and the Assignor are both defendants. By the proceedings, the Tenant claims, inter alia, a declaration that the Default Notice was not valid or effective and is not capable of being relied upon by the Landlord for the purpose of triggering any rights to terminate the Lease. The Tenant also seeks a declaration that it was entitled to set off, against rent that would otherwise have been payable pursuant to the Lease, the debts owing by the Assignor under the Costs Certificates and that such set-off operated so as to satisfy the Tenant's obligations to pay the Rent under the Lease for the months of March 2016 and subsequent months or part thereof until such time as the full value of the debts under the Costs Certificates, including any interest as may have accrued thereon, had been utilised. In addition, the Tenant seeks a declaration that such costs as may be ordered in the proceedings to be paid by either the Landlord or the Assignor to the Tenant should be able to be set off by the Tenant against part of the Rent otherwise due by the Tenant to the Landlord pursuant to the Lease.
2. On the day of commencement of these proceedings, the Tenant paid into Court the sum of $85,748.37. On 29 July 2016 the Tenant paid into Court a further sum of $10,993.89.
3. On 25 August 2016, the solicitors then acting for the Tenant wrote to the solicitors then acting for the Landlord and the Assignor. The Tenant's solicitors set out the amount of the Rent reserved in the Lease and a calculation of increases in the Rent under cl 3.2. The letter then went on to say that, in the Default Notice, the Landlord demanded that the Tenant pay an increase in the Rent and said that the total amount referred to in the Default Notice, which included five months' rent, had been paid into court on 12 July 2016. The solicitors also said that the Rent for August had been paid direct to the Landlord. They said that, if they did not hear to the contrary prior to 5.00 pm on 29 August 2016, they would assume there was no issue with the calculations set out. There was no evidence of any indication to the contrary. The letter of 25 August 2016 also sought confirmation that the Tenant should pay the Rent into the bank account notified by an earlier letter from the Landlord's solicitors dated 29 July 2016.
4. By cross-claim filed on 31 August 2016, the Landlord sought judgment for possession of the Property. In addition, the Landlord sought judgment for unpaid rent of $93,860.24, plus interest. The Assignor is not a party to the cross claim. In its defence to the cross claim, the Tenant relies on a right to set-off.
5. The Landlord resists the Tenant's claim to be entitled to set off the debts owing by the Assignor under the Costs Certificates against the debts owing in respect of the Rent on the basis that the Landlord has no indebtedness to the Tenant. The Landlord also resists the Tenant's claim to a set-off on the basis that, as between the Assignor and the Tenant, the liability of the Assignor in respect of the debts under the Costs Certificates was incurred in a different capacity from that in which it was a party to the Lease. That is to say, the Assignor and the Landlord contend that, while the debts in respect of costs are owing by the Assignor to the Tenant in the Assignor's capacity as trustee of the Unit Trust, the debts owing by the Tenant in respect of the Rent are owed to the Assignor and the Landlord in their capacity as trustee of the Family Trust.
6. There is no dispute that the Assignor owes to the Tenant the amounts specified in the Costs Certificates. Further, there is no dispute that the Tenant has not paid the Rent that accrued due under the Lease in respect of the months of March, April, May, June and July 2016. Thus, the only question is whether the Tenant is entitled to set off, against the liability that it has to pay the Rent under the Lease, the amounts of the debts owing to it by the Assignor under the Costs Certificates. If the Tenant is not entitled to set off those debts against the Rent, the Landlord would be entitled to judgment for the Rent outstanding in respect of the months of March, April, May, June and July, and the moneys paid into Court would be paid out in satisfaction of that judgment.
7. To the extent that the Tenant is not able to set off its liability for the Rent against the liability of the Assignor under the Costs Certificates, it would be left to enforce its rights against the Assignor and Chamberlain under the Costs Certificates. However, Chamberlain has been ordered to be wound up in insolvency, and the inference might be drawn that the Assignor is unable to meet its liabilities. No question arises in these proceedings as to whether the relevant liabilities that are owed by the Assignor to the Tenant were incurred in circumstances where the director or directors of the Assignor had reason for believing that the Assignor would not be able to meet the liabilities.
8. While the Default Notice threatened termination of the Lease, any such forfeiture has been enjoined pending the determination of the question of set off that is raised in these proceedings. While the Landlord seeks an order for possession of the Property, it is now common ground that the only remedy to which it would be entitled is judgment for the outstanding balance of the Rent, to be satisfied from the money in Court. Even if there had been a forfeiture of the Lease for non-payment of rent, it is common ground that, in the circumstances, relief against that forfeiture would have been granted.
9. The Tenant relies on set-off at law, as well as equitable set-off. As matter of defence, set-off of mutual debts may be established under the Statutes of Set-off, enacted in 1729 and 1735 and re-enacted in New South Wales in the guise of s 21 of the Civil Procedure Act 2005 (NSW). Alternatively, substantive set-off may be established in accordance with the principles of equity. I shall deal with each separately. Before doing so, however, it is necessary to deal with the effect of the transfer of the fee simple of the Property on the entitlement to the Rent.

Entitlement to the Rent

1. Section 46 of the Real Property Act 1900 (NSW) relevantly provides that, where land under the provisions of that Act is intended to be transferred, the proprietor must execute a transfer in the approved form. Section 51 relevantly provides that, upon the registration of any transfer, the estate or interest of the transferor, as set forth in such instrument, with all rights, powers and privileges thereto belonging or appertaining, are to pass to the transferee. Section 52 relevantly provides that, by virtue of having such transfer, the right to sue upon any mortgage or other instrument and to recover any debt, sum of money thereunder, notwithstanding that the same may be deemed or held to constitute a chose in action, and all interest in any such debt, sum of money, annuity are to be transferred so as to vest the same at law as well as in equity in the transferee.
2. However, those provisions do not appear to have the consequence that a right to sue for the recovery of rent passes with the transfer of the reversion. Rather, the assignment of rights under a lease upon the transfer or assignment of the reversion is regulated by s 117 of the Conveyancing Act 1919 (NSW). [3]
3. Under s 117(1) of the Conveyancing Act 1919, rent reserved by a lease is annexed to and goes with the reversionary estate in the land immediately expectant on the term granted by the lease, notwithstanding severance of the reversionary estate. Further, the rent is capable of being recovered by the person from time to time entitled to the income of the land leased. Accordingly, the Landlord is clearly entitled to sue for the rent payable in respect of the month of July in its own right, as an incident of the Lease. [4] The Rent that had accrued due before the transfer was registered, however, is in a different category.
4. As between the Assignor and the Landlord, the Landlord, in its capacity as trustee of the Family Trust, had the benefit of a transfer of the reversion in the Property, apparently with effect from 4 January 2016. However, no legal transfer of the reversion, consisting of the legal fee simple, took effect until 23 June 2016. The Tenant was made aware of the transfer of the reversion to the Assignor, and had received directions from the Assignor to pay the Rent into the Top Class Account. However, there was no notification to the Tenant of the transfer of the reversion from the Assignor to the Landlord until after it was registered, and there was no indication that the Rent was being paid for the benefit of any person other than the Assignor.
5. There is no doubt that an assignee of the reversion can sue for breaches of covenants contained in a lease that occur after the registration of the transfer. However, the position is more complicated in relation to breaches that occur prior to the registration of the transfer of the reversion. [5]
6. Where a breach of a covenant contained in a lease occurs before transfer of the reversion, a distinction can be drawn between a breach that causes damage continuing to depreciate the property after transfer, on the one hand, and a breach that causes damage to the transferor once for all. If a breach causes continuing damage, which continues to depreciate the demised premises after the transfer so that the transferee receives the demised premises in a damaged state, the transferee would normally be entitled to sue for breach of that covenant. For example, if a tenant were liable for repairs that had not been carried out prior to the transfer or had occasioned damage to the demised premises in some way, the transferee would be entitled to sue the tenant for breach of that covenant. That, of course, is not the present case.
7. On the other hand, if a breach prior to transfer causes damage to the transferor once for all, being damage that affects the position of the transferor and does not affect the demised premises, the transferor can sue for that breach, and the transferee cannot sue. [6] Failure to pay rent that accrues before the transfer of the reversion and remains unpaid at that time is a breach that causes damage once for all and such damage is caused exclusively to the transferor. Therefore, the transferor is ordinarily the only person who can sue for such rent. [7] Rent that falls due before a transfer of the reversion becomes severed from the reversion and is a chose in action belonging to the transferor, [8] unless there is an assignment of the chose in action to the transferee.
8. The transferor might have assigned such a chose in action under s 12 of the Conveyancing Act. Section 12 relevantly provides that any absolute assignment, by writing under the hand of the assignor of any debt or other legal chose in action, of which express notice in writing has been given to the debtor from the whom the assignor would have been entitled to receive or claim such debt, shall be effectual in law, subject to all equities that would have been entitled to priority over the right of the assignee, to pass and transfer the legal right to such debt, from the date of such notice, and all legal and other remedies for the same, and the power to give a good discharge for the debt without the concurrence of the assignor. When s 12 of the Conveyancing Act is complied with, the assignee obtains the legal title to the debt assigned and may sue in the assignee's name without joining the assignor. The section enables an assignee to acquire a title that has all the procedural advantages of the legal title.
9. Clearly enough, before the transfer of the reversion in the Property, the Assignor had the right to sue the Tenant in respect of the Rent that had accrued due and remained owing in respect of the months of March, April, May and June 2016. The Landlord contended that the Assignor's rights to sue for that Rent did not require formal or separate assignment to the Landlord. Rather, the Landlord said, the right to sue for rent accrued was annexed to the reversion and passed to the Landlord pursuant to s 117(1) of the Conveyancing Act, on the basis that s 117(1) of the Conveyancing Act 1919 operates to bar any action on the part of an assignor of the reversion to sue for rent, and effects a statutory vesting of that cause of action in an assignee of the reversion. [9]
10. There has been no express assignment by the Assignor to the Landlord of the legal choses in action consisting of the debts due in respect of the Rent for the months of March, April, May and June 2016. Nevertheless, the Tenant accepts that the choses in action, consisting of the rights to sue for Rent that had accrued due before transfer of the reversion, passed to the Landlord, presumably by the operation of s 117 of the Converyancing Act, such that the Landlord can sue for payment of the Rent in its own name in a common law suit. I understand that concession to mean that it accepts that the choses in action consisting of the debts due for Rent for the months of March, April, May and June passed to the Landlord, such that the Landlord has title to sue the Tenant at law for the unpaid Rent in respect of those months. Accordingly, it is unnecessary for me to consider whether those choses in action passed pursuant to the operation of s 117 of the Conveyancing Act, or whether it required separate and formal assignment pursuant to s 12 of the Conveyancing Act. Nevertheless, the question remains as to whether the assignment of the choses in action, however effected, was "subject to the equities", such that any right of set-off available as against the Assignor survived the transfer, so as to be available as against the Landlord's claim for the unpaid Rent.
11. A right of set-off under the Statutes of Set-off or s 21 of the Civil Procedure Act is a personal defence. In other words, it is a personal equity. [10] However, so far as priorities are concerned, the assignee's position is no better than if the assignment had been effected in equity. Section 12 preserves the equitable principle that an assignee takes subject to equities, so that a debtor can rely, as against a statutory assignee, on a right of set-off that would have prevailed against an equitable assignee before the passing of s 12. That includes a set-off at common law under the Statutes of Set-off or s 21 of the Civil Procedure Act. [11] I consider that the same principle would apply in relation to the assignment of the choses in action by the operation of s 117 of the Conveyancing Act.
12. Had the Assignor agreed with the Tenant that the Tenant could set off its liability for the Rent against the liability of the Assignor under the Costs Certificates, such an agreement would have been effective and would have constituted payment, to the extent of the set-off, of both the Rent and the liability under the Costs Certificates. However, as at 23 June 2016, there was certainly no consensual set-off as between the Tenant and the Assignor in relation to their respective debts. While the Tenant asserted an entitlement to set off the liability, that assertion had no effect on the legal liability of each of the parties to pay the respective debts owing by them. Had the Assignor sued the Tenant for the payment of the Rent, the question raised would be whether, pursuant to s 21 of the Civil Procedure Act, the Tenant would be entitled to set off the liability under the Costs Certificates. That is the question that must now be addressed.
13. The Assignor is not a cross-claimant and makes no claim in these proceedings for payment of the Rent that fell due prior to the registration of the transfer of the Lease and notification to the Tenant of the transfer. However, as I have said above, the Tenant accepts that the Landlord is entitled to sue at law for the unpaid Rent for the months of March, April, May and June. That is to say, it accepts that there has been an assignment of the choses in action in question. The question is whether the assignment was "subject to the equities", such that the Tenant continued to be entitled to any defence of set off that was available as against the Assignor. I consider that the better view is that, whether the choses in action passed by the operation of s 117 or had been assigned under s 12, the personal equity to set off remained, subject, of course, to possible loss of the right by reason of lack of notice to the assignee. The Landlord has not contended that it took without notice of any entitlement to set-off on the part of the Tenant.

Set-off of the Rent for March, April, May and June 2016

1. In the circumstances, I consider that the Landlord acquired the legal title to the arrears of rent for the first four months in question subject to any right of set-off to which the Tenant was entitled, as against the Assignor, as at the date of registration of the transfer of the reversion under the Lease. That is to say, the Landlord acquired the legal choses in action subject to any right of set-off to which the Tenant was entitled. I shall deal with statutory and equitable set-off separately.

Statutory Set-off

1. The Landlord contends that the requirement of mutuality under s 21 of the Civil Procedure Act is not satisfied as between the Assignor and the Tenant in relation to the months of March, April, May and June, because the Assignor incurred its debts under the Costs Certificates in its capacity as trustee of the Unit Trust, whereas the liability of the Tenant under the Lease for the Rent is owed to the Assignor in its capacity as trustee of the Family Trust. Therefore, the Landlord says, the debts are not mutual for the purposes of s 21 of the Civil Procedure Act.
2. However, as between the Assignor and the Tenant, there is requisite mutuality at law. The orders made in the Equity Division and the Court of Appeal that the Assignor pay the Tenant's costs created a legal obligation on the part of the Assignor. The Tenant would be entitled to sue at law for the debts arising under the Costs Certificates against the Assignor. The Costs Certificates arose out of those orders and give rise to a liability that can be enforced as a judgment by registration. Similarly, the Assignor would have been entitled to sue at law for the Rent for the four months in question. Set-off would therefore have been available if the Assignor had sued the Tenant for the arrears of the Rent.
3. There is a general equitable principle that, in some circumstances, an assignee takes subject to equities (including rights of set-off) that are available to the debtor as against the assignor. [12] Where the assignee sues the debtor for payment of the assigned debt and the debt owing by the debtor arose after the debtor had notice of the assignment, the debtor cannot set it off as against the assignee. However, if the debtor's debt claim against the assignor arose before the debtor had notice of the assignment, set-off is available. [13]
4. It would have been a matter for the Assignor to establish, in Equity, that it would be unconscionable for the Tenant to set off the liability under the Costs Certificates against its liability for the Rent. It is by no means clear that it would be unconscionable for the Tenant to assert a set-off in the present circumstances. It would have been for the Assignor to demonstrate that it would be unconscionable to do so. That is to say, the Assignor would need the intervention of equity to resist the statutory right to set-off conferred by s 21 of the Civil Procedure Act. The Landlord must therefore demonstrate that it would be unconscionable for the Tenant to rely on set-off as against the Assignor.
5. There is no evidence that the Tenant was aware that, in the litigation in the Equity Division and the Court of Appeal, the Assignor was acting in the capacity of trustee of the Unit Trust and that, in granting the Lease, as the registered proprietor of an estate in fee simple in the Property, it was acting as trustee of the Family Trust. Indeed, as I have indicated above, it appears that, when the Assignor entered into the 2015 Sale Contract, it was not trustee of the Family Trust and there is no evidence as to the source of any consideration paid pursuant to the 2015 Sale Contract.
6. I am not persuaded that it would have been unconscionable for the Tenant to rely on its statutory right of set-off as against the Assignor. Accordingly, the Tenant is entitled to set off the liability of the Assignor under the Costs Certificates against its liability to the Landlord for the Rent for the four months in question. In the light of that conclusion, it is not necessary to decide whether equitable set-off would have been available. However, since the question was argued, I shall say something about it.

Equitable Set-off

1. The Tenant contends that there is sufficient connection, between the liability of the Assignor under the Costs Certificates and its own liability for the Rent under the Lease, to satisfy the requirement for substantive equitable set-off. The Tenant points out that the Assignor incurred its liability under the Costs Certificates because of its attempts, as prospective purchaser of the Property, to defeat the Tenant's claim to have taken an assignment of the Earlier Lease and to have exercised the option to renew under the Earlier Lease. Had the Assignor succeeded in the litigation, it would have been in a position to acquire the reversion in the Property free of any interest on the part of the Tenant to have a further lease granted. It would have taken such an unencumbered title as a consequence of the litigation. Having failed, the Tenant contends, it would be unconscionable and inequitable for the Assignor to enforce any claim for the Rent without allowing a set-off for the costs incurred in endeavouring to defeat the Tenant's right to have the Lease granted.
2. I do not consider that the Assignor's liability under the Costs Certificates arises under the Lease or out of the relationship of landlord and tenant. At the time of the litigation that gave rise to the orders for costs, the Assignor was no more than a prospective purchaser of the Property, in its capacity as trustee of the Unit Trust. The 2015 Sale Contract, pursuant to which the Assignor acquired the reversion, was not made until after the completion of the litigation. I do not consider that the Tenant's demand for costs would go to the very root of any demand by the Assignor for payment of the arrears in the Rent, or would call in question, impugn, disparage or impede, the Assignor's title to make such a demand, such that the demand for costs is essentially bound up with such a demand for the arrears of the Rent that might be made by the Assignor. There would be no equitable set-off as between the Tenant and the Assignor. Accordingly, there would be no equitable set-off as between the Landlord and the Tenant. However, in the light of my conclusion as to statutory set-off, the question does not arise.

Set-off for the Rent for July

1. The question of set-off in relation to the Rent for July is a different question. I shall deal separately with statutory set-off and equitable set-off.

Statutes of Set-off

1. The right of set-off under the Statutes of Set-off and s 21 of the Civil Procedure Act is procedural in its operation, in that it provides a defence to an action for payment. The debts remain separate and distinct until there is judgment taking into account the set-off.
2. Thus, s 21(1) of the Civil Procedure Act provides that, if, in any proceedings, there are mutual debts between a plaintiff or cross-claimant (claimant), on the one hand, and a defendant or cross-defendant (defendant), on the other, the defendant may, by way of defence, set off, against the debt owed to the claimant, any debt that is owed by the claimant to the defendant that was due and payable at the time the defence was filed. In s 21(1), debt means any liquidated claim [14] and it does not matter that the debts are different in nature. [15]
3. The Statutes of Set-off and s 21 permit a set-off in an action if there is mutuality by reference to legal titles. However, if there is mutuality at law by reference to the legal titles but one of the debts is held on trust for a third party, a court of equity may regard it as unconscionable for a set-off at law to occur and, accordingly, may not permit the set-off. Subject to such intervention, the Statues of Set-off, and hence s 21 of the Civil Procedure Act, are limited to debts at law between the parties to a common law action. [16]
4. Clearly, the liability of the Assignor under the Costs Certificates constitutes a liquidated claim. Similarly, any liability of the Tenant for the Rent under the Lease is a liquidated claim. The Landlord is clearly entitled to the Rent in respect of the month of July. The question is whether, as between the Landlord and the Tenant, the liquidated claim for the Rent for July and the liability of the Assignor for costs can be properly characterised as "mutual" for the purposes of s 21.
5. There is no mutuality as between the Tenant and the Landlord in relation to the liability of the Tenant for the Rent for July and the liability of the Assignor under the Costs Certificates. The Landlord has no liability under the Costs Certificates. The liability for the Rent for the month of July is an incident of the Lease and arose after the registration of the transfer to the Landlord. That is to say, the right to recover rent accruing after the transfer is not a chose in action but an incident of the reversion, such that the right to recover would not be subject to any set-off in relation to prior breaches by the original landlord. [17] Accordingly, the Tenant has no right of set-off under s 21 of the Civil Procedure Act in relation to the Rent for the month of July.

Equitable Set-off

1. The Tenant also relies on equitable set-off. Equitable set-off has two aspects. Equity might allow a set-off by analogy with the legal right of set-off conferred by the Statutes of Set-off or s 21 of the Civil Procedure Act. Alternatively, Equity might allow substantive set-off, which goes beyond the statutory provisions in some respects.
2. Equity will allow a set-off, by analogy with the Statutes of Set-off when, having regard to equitable rights, liquidated debts are mutual, for example, where one of the debts itself is a matter of equitable jurisdiction or where a common law debt is held on trust or has been the subject of an equitable assignment. In such cases, the requirement of mutuality is satisfied by reference to the equitable titles. When, having regard to such equitable rights, there are mutual liquidated debts, it is not necessary for the defendant to show any additional equity in order to be entitled to a set-off. [18] Set-off by analogy with the Statutes of Set-off does not arise in the present circumstances. Rather, the Tenant relies on substantive equitable set-off.
3. Substantive set-off in equity is sometimes broader, and is sometimes narrower, than set-off under the Statutes of Set-off. It is broader in that it is not confined to mutual debts, but can arise when one or both of the demands is for damages. [19] Further, whereas set-off under the Statutes is purely procedural, substantive equitable set-off is not merely procedural and operates substantively. On the other hand, substantive equitable set-off is narrower than set-off under the Statutes in that, absent set-off by analogy, there must be a relevant connection between the demands. The Statutes of Set-off and s 21 do not require any such connection. [20]
4. Equitable set-off is available where the party seeking it can show a recognised equitable ground for being, to the relevant extent, protected from its adversary's demand. The mere existence of a cross-claim is not sufficient. There must be some ground for equitable intervention, such that it can be said that the equity of the defendant impeaches the claimant's title to the legal demand being enforced. [21] In general terms, "impeachment" requires, in the absence of some other equitable ground for being protected, such as fraud, that there be a sufficiently close connection between the demands. [22] For there to be an equitable set-off, the set-off must essentially be bound up with and go to the root of, challenge, call in question, or impeach the title of the claimant.
5. The cross-demand will go directly to "impeach" the demand that the claimant is attempting to enforce, if the existence of the claimant's demand would not have come about but for, or was at least contributed to by, the claimant's own conduct. For example, where a mortgage is granted to a solicitor as security for costs and the mortgagor client has a cross-claim against the solicitor asserting that the costs would not have been incurred had the solicitor conducted himself with integrity, skill and attention, there will be a clear case of equitable set-off. Similarly, a court of equity may recognise a set-off of an unliquidated claim for damages for breach of a building contract against claims for money due under the contract. Again, where a lender promises to provide further advances for a development project and the borrower is unable to complete the development project and repay the advances actually made, equity would allow a set-off of the borrower's damages caused by the lender's failure to make the further advances before the lender would be permitted to enforce its security against the borrower. [23]
6. It is not, of itself, an objection to the availability of equitable set-off that either or both of the legal demands is made pursuant to a statute that creates new obligations and rights that give rise to debts or liabilities in unliquidated damages. The question is whether the statute excludes what otherwise would be the operation of equitable set-off upon those statutory debts and liabilities. The claim to set-off must involve an impeachment of the title to the claimant's demand, and not merely the right to obtain judgment on the demand. It is sufficient that the existence of the claimant's demand would not have come about but for the claimant's breaches of duty. It is sufficient if the defendant's set-off complaint against the claimant goes directly to impeach the claimant's demand. [24]
7. The cross-demand must go to the very root of the demand by the claimant, or must call in question, impugn, disparage or impede, the claimant's title to the demand, such that it is essentially bound up with the demand. On one view, the link between the demands must be such that the two are, in a sense, interdependent. It is not sufficient that the demands arise out of the same contract. That is to say, the claimant's demand is not necessarily impeached simply because the cross-demand is in some way related to the transaction that gives rise to the claimant's demand or that the demand and cross-demand turn on similar findings of fact. On the other hand, if cross-demands arise out of separate transactions, they would not usually be regarded as sufficiently closely connected to justify equitable set-off. [25] The requirement of mutuality is not an essential requirement for set-off in Equity. However, lack of mutuality may be an indication of an insufficient connection between the demands in order to satisfy the requirement of impeachment. [26]
8. The requirement for the defendant's demand to go to the root of, or be essentially bound up with, or impeach the title of, the claimant's demand is fulfilled where the claimant's title to its legal demand would not have come about had the claimant not breached some duty owed by the claimant to the defendant. It is not sufficient that there be countervailing demands, nor that those demands be neutral, nor even that they arise out of the same transaction. In order to make out a substantive equitable set-off, the defendant must establish some equitable rights to be protected from the demand made by the claimant. [27]
9. In the context of landlord and tenant, a tenant's equity must impeach the title to the landlord's demand or go to the very foundation of the landlord's demand. That does not require that the cross-claim must arise from the lease itself. [28] However, a cross-demand by a tenant must at least arise directly from the relationship of landlord and tenant created by the lease or out of an agreement to lease. The tenant's cross-claim may give rise to an equitable set-off, even if the cross-claim does not arise from the lease itself, or directly from the relationship of landlord and tenant, provided that the claim for rent and the cross-claim arising from another contract are so closely connected that the principles affecting equitable set-off can be said to apply. [29] Thus, where a tenant is faced with a demand for unpaid rent, the tenant may be entitled to plead an equitable set-off in respect of damages for the landlord's breach of its covenant to repair. [30] However, in general, there is no equitable set-off with respect to demands made under a previous lease, even though the lease is of the same property. [31]
10. Equitable set-off is available where the defendant establishes an equitable ground for being protected from the demand made by the claimant. Thus, equitable set-off will be available if the defendant's demand is so directly connected with the claimant's demand that it would be unjust to allow the claimant to recover without taking into account the demand by the defendant. [32] That is to say, the demands must be shown to be so closely related that it would be unjust that the demand made on one side should proceed without account being taken of the demand made on the other side. One party cannot take the benefit of a transaction without bearing the burden of its own conduct. [33]
11. I do not consider that equitable set-off is available as between the Tenant and the Landlord in relation to the liability of the Assignor under the Costs Certificates, on the one hand, and the liability of the Tenant to the Landlord for the Rent in respect of the month of July, on the other. The orders for costs that gave rise to the Costs Certificates do not go to the root of the Landlord's claim for the Rent in respect of the month of July. I do not consider that the Tenant's demand against the Assignor under the Costs Certificates is sufficiently connected with the Landlord's demand for the Rent in respect of the month of July. It would not be inequitable to permit the Landlord to recover the Rent outstanding in respect of the month of July, leaving the Tenant to its rights of recourse against the Assignor and against Chamberlain.

Conclusion

1. It follows from the conclusions expressed above, that the Landlord is not entitled to judgment under its cross-claim in respect of the arrears of the Rent accrued in relation to the months of March, April, May and June. However, it is entitled to judgment against the Tenant on the cross-claim for the Rent in respect of the month of July. The amount of the liability of the Tenant for the Rent for July should be paid out of Court in satisfaction of such judgment.
2. The Tenant also seeks a declaration, as against the Assignor, that it is entitled to set off, against the Rent that would otherwise have been payable under the Lease, the debts owing by the Assignor pursuant to the Costs Certificates. For the reasons indicated above, I consider that, under s 21 of the Civil Procedure Act, the Tenant is entitled to set off the liability of the Assignor under the Costs Certificates against its liability to pay the Rent in respect of the months of March, April, May and June.
3. It would follow that the balance of the amount in Court, after payment of the Rent for July, together with interest, should be paid out to the Tenant. I do not propose to make any orders until such time as the parties have had the opportunity of considering my conclusions and making further submissions, if they are so advised, on the question of costs. I propose to direct the parties to bring in short minutes of directions for any further submissions that they wish to make on the question of costs.

Endnotes

1. See Kids for Life v Chamberlain Group [2014] NSWSC 1561
2. See Chamberlain Group Pty Ltd v Kids for Life Academy Pty Ltd [2015] NSWCA 241
3. See Gumland Property Holdings Pty Limited v Duffy Bros Food Market (Campbelltown) Pty Limited (2008) 234 CLR 237 at [66]-[86]
4. See Edlington Properties v JH Fenner [2006] 1 WLR 1583 at [47]
5. See In Re King; Robinson v Gray [1963] Ch 459 at 480-1
6. See Lucy v Levington (1671) 2 Lev 26
7. See Coke on Littleton (2nd ed, London, 1629), 162a
8. See Martyn v Williams (1857) 1 H&N 817, 821, 825
9. See In Re King [1963] Ch 459 (per Upjohn and Diplock LJJ, Lord Denning MR dissenting), Ashmore Developments Pty Ltd v Eaton [1992] 2 Qd R 1 and Tip Fast Pty Ltd v Alexandria Landfill Pty Ltd (2002) 11 BPR 20,121
10. Rory Derham, Derham on The Law of Set-Off (4th ed 2010, Oxford University Press) at par 17.69
11. Rory Derham, Derham on The Law of Set-Off (4th Ed 2010, Oxford University Press) at par 17.04; Roadshow Entertainment Pty Ltd v (CAN 053006269) Pty Ltd Receiver and Manager Appointed (1997) 42 NSWLR 462, 482
12. Rory Derham, Derham on The Law of Set-Off (4th Ed 2010, Oxford University Press) at par 17.02
13. Rory Derham, Derham on The Law of Set-Off (4th Ed 2010, Oxford University Press) at par 17.03
14. See s 21(6) Civil Procedure Act 2005 (NSW)
15. See s 21(1) Civil Procedure Act 2005 (NSW)
16. Rory Derham, Derham on The Law of Set-Off (4th Ed 2010, Oxford University Press) at par 11.18
17. See Edlington Properties Ltd v j H Fenner & Co [2006] 1 WLR 1583
18. Rory Derham, Derham on The Law of Set-Off (4th Ed 2010, Oxford University Press) at par 11.18
19. Rory Derham, Derham on The Law of Set-Off (4th Ed 2010, Oxford University Press) at par 1.11
20. Rory Derham, Derham on The Law of Set-Off (4th Ed 2010, Oxford University Press) at par 3.10
21. James v Commonwealth Bank of Australia (1992) 37 FCR 445 at 457-458; Re Forest Enterprises Ltd v FEA Plantation Ltd (2011) 195 FCR 97; [2011] FCAFC 99 [135]-[163]; Hawes v Dean [2014] NSWCA 380 at [61]-[62].
22. Rory Derham, Derham on The Law of Set-Off (4th Ed 2010, Oxford University Press) at par 4.03
23. See James v Commonwealth Bank of Australia (1992) 37 FCR 445 at 458-459
24. See James v Commonwealth Bank of Australia (1992) 37 FCR 445 at 459
25. Rory Derham, Derham on The Law of Set-Off (4th Ed 2010, Oxford University Press) at par 4.03;
26. See Forsyth v Gibbs [2009] 1 Qd R 403 at [16]
27. See R Meagher, D Heydon, M Leeming, Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (Butterworths LexisNexis 5th ed, 2015) para 39-060(g)
28. British Anzani (Felixstowe) Limited v International Marine Management (UK) Limited [1980] QB 137 at 154-155.
29. See British Anzani (Felixstowe) Limited v International Marine Management (UK) Limited [1980] QB 137 at 152; Roadshow Entertainment v ACN 053 006 269 (1997) 42 NSWLR 462 at 488; Hamilton Ice Arena Ltd v Perry Developments Ltd [2002] 1 NZLR 309 at [36]
30. See Carrathool Hotel Pty Limited v Scutti [2005] NSWSC 401 at [61]
31. See Palermo Seafoods Pty Limited v Lunapas Pty Limited [2014] NSWSC 792 at [164]
32. See Murphy v Zaminex (1993) 31 NSWLR 439 at 465
33. Murphy v Zaminex (1993) 31 NSWLR 439 at 468 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 09 March 2017