Court allowed council to offset legal costs from tenant’s rent arrears

Case background

The tenant (T) brought a disrepair claim against the London Borough of Newham (LBN) which was settled in late 2022, on the basis that the LBN would pay compensation and legal costs, and complete the agreed works within 120 days.

The LBN paid the damages and legal costs, but was unable to complete the repairs in time.

The parties therefore agreed an additional settlement on the basis that the LBN would pay £250 in additional damages and £2,300 in additional legal costs.

Upon settlement, the LBN checked the T’s rent account and found that the arrears on the account were £1,448.17 of rent and £71in Court fees.

The total debt was therefore £1,519.17.

Following advice from Sharpe Pritchard, LBN exercised its right to set off the sums it was owed by T against the sums that it owed to T, and therefore applied the agreed £250 in damages to the debt on T’s rent account, and then applied £1,269.17 of the agreed £2,300 of legal costs against the remaining debt on the rent account, and then paid the balance of £1,030.83 to T’s legal representatives.

T’s legal representatives issued Part 8 proceedings claiming that the amount of £1,269.17 remained outstanding.

LBN then made an application to strike out T’s claim.

Application to strike out

LBN made an application to strike out T’s claim on the following grounds:

• No reasonable grounds for bringing the claim under CPR 3.4(2)(a)

T was seeking to enforce a debt which had already been paid. LBN had credited T’s rent account with £1,519.17, and then paid the balance of £1,030.83 to their legal representatives.

• Abuse of process under CPR 3.4(2)(b)

T was seeking to recover the debt twice, which would be manifestly unfair and an abuse of process.

LBN rightfully set off both the agreed damages and legal costs against the rent arrears in accordance with the tenancy terms and conditions, which provided that:

You must also pay the Council any rent, water service charges or any other charges you owe for any previous homes where you had a council tenancy or licence.  

You must pay any debts you owe the Council as soon as the Council tell you about them, but the Council will enter into reasonable negotiations about repaying debts in line with the following understanding:

• The Council will negotiate repayments with people who owe the Council money.
• The Council will consider recommendations from money advisers when setting
• repayment amounts.
• The Council will change the standard repayment levels from time to time.

The Council may use any money the Council owe you to repay rent or other debts you owe the Council, as long as the Council has recorded the debt on your rent account or on any sub-accounts. (These are accounts linked to the main rent account which gives details of associated debts, such as court costs, debts from other tenancies and so on).

As such, it was a specific term of the tenancy agreement that LBN could use any money LBN owed T to repay rent or other debts that T owed LBN, as long as LBN recorded the debt on T’s rent account (or any sub-accounts).

LBN asserted that the debt therefore arose between T and their solicitors: LBN had no legal relationship with T’s solicitors and had no obligations towards them.

The Judgment

The Judge held that: “It is trite law that costs are part of T’s claim subject to any deductions or difficulties, as are [their] damages.

“It is also trite law that there is set-off in relation to rent arrears in any disrepair claim; tenants up and down the country will frequently seek to introduce disrepair specifically to offset rent arrears and reduce the arrears below the mandatory level or on any possession order granted.

“In this case it appears that the tenancy agreement specifically provides contractual set-off, which just adds to D’s position.”

The Judge decided that the Part 8 claim was “wholly misconceived” and there could be no recovery and therefore D’s application was allowed. The Judge further ordered T to pay LBN’s costs of the application.

Conclusion

This is an important case as it shows the possibility of deducting not only any agreed damages but also legal costs against tenants’ rent arrears, thereby mitigating the financial impact on landlords of disrepair settlements involving tenants who are in substantial rent arrears.

Key takeaways

• Ensure that tenancy agreements include a contractual set off clause as this will strengthen the landlord’s position.
• Inform the other side that compensation and legal costs will be offset against rent arrears prior to settlement.

Angelica Botta is a Junior Associate and Simon Kiely is a Partner at Sharpe Pritchard LLP.

Contact us today at enquiries@sharpepritchard.co.uk for expert advice and support with any area of tenancy agreements.

This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published. If you would like further advice and assistance in relation to any issue raised in this article, please contact us by telephone or email enquiries@sharpepritchard.co.uk.