What is set-off?

When a debtor has a monetary counterclaim against a creditor, the right of set-off reduces the amount of the creditor’s claim.

For example, a tenant owes rent to her landlord but also has a claim for damages against the landlord for failure to carry out repairs.

The equitable right of set-off allows the tenant to offset the damages claim against the rent. Set-off is essentially a defence, or excuse, for non-payment.

For equitable set-off to take place, the cross-claims must be connected.

Where they both arise from a single contract, such as a tenancy agreement, the right to set-off will arise.

Why is set-off a problem?

Set-off can be a problem for landlords trying to get possession of their properties on grounds of rent arrears because it can reduce the amount due from their tenant.

For example, the landlord might be relying on Ground 8 of Schedule II of the Housing Act 1988 to get a possession order, which relies on at least two months or eight weeks’ rent arrears.

The tenant might come to the possession hearing and raise issues of disrepair. If the damages for the disrepair, when set off against the rent owed to the landlord, potentially bring the rent arrears below the two months/eight weeks required to get a mandatory possession order, the possession claim on Ground 8 would fail.

In practice, the court would probably adjourn the proceedings and invite the parties to return with evidence to prove the validity of the disrepair claim, and its value.

A possession order might be salvaged out of the first hearing if arrears were very high, and it was clear that even with the disrepair damages the arrears were going to be well in excess of two months.

In that scenario, the court might be persuaded to make the possession order there and then, and adjourn only the arrears or disrepair issues.

The value of the claim doesn’t have to be known for the tenant to exercise the right of set-off.

It will be for the court to decide on the level of damages (if any) payable to the tenant on hearing evidence.

The damages will be offset against any rent due. The court would have to:

1. Establish the amount of the arrears
2. Establish the validity of the disrepair claim, and the amount due as damages for disrepair
3. Calculate interest on both
4. Offset one against the other

Deposit protection

Another way a tenant could exercise the right of set-off would be if the landlord hadn’t protected the tenancy deposit in a scheme.

Unlike with a Section 21 Notice, failure to protect the deposit doesn’t stop a valid Section 8 notice being served.

But the tenant could make a claim under the Housing Act 2004 Section 214 for a penalty. The penalty can be up to three times the deposit.

The amount of the penalty can be set-off against the rent arrears, potentially bringing them to less than two months’ arrears and preventing a possession order on Ground 8.

How you can avoid set-off

Add a clause in the tenancy agreement

The most obvious way to avoid set-off is to put a clause in the tenancy agreement excluding this right.

It’s not uncommon to find these clauses. But that’s by no means a failsafe solution.

As a landlord, you’re typically acting in the course of a business. A tenant is typically a consumer.

So an exclusion of set-off in an Assured Shorthold might fall foul of the Consumer Rights Act 2015 and the CMA Guidance on unfair terms in tenancy agreements.

If found to be an unfair term, it will be void.

The CMA Guidance is not binding in court, so it’s up to the judge to decide if the exclusion clause can be relied on.

If you have a clause excluding set-off, just be aware you may not be able to rely on it at court.

Follow CMA guidance

CMA guidance suggests that rather than excluding the right to set-off, you give your tenant a warning of the consequences of relying on the right of set-off to withhold rent for sums that are not properly owing to them.

The main consequence is that you might seek to recover possession of your property on grounds of rent arrears.

If your tenant fails to prove their disrepair claim, they could be forced to give up possession.

Be practical

To help avoid claims to set-off for disrepair, carry out regular inspections, know the repairing obligations and ‘flush out’ any potential repair issues before issuing proceedings on rent arrears grounds.

Know your grounds

When serving a Section 8 notice on rent arrears grounds, always rely on Grounds 10 and 11 (some rent arrears, and a history of persistent arrears) as well as Ground 8.

Grounds 10 and 11 are discretionary grounds, which means the court will only make a possession order on those grounds if reasonable to do so.

Those grounds might be the fall-back position you have to revert to if set-off has reduced the arrears to less than two months.

Section 21 possession claims shouldn’t be affected by set-off.

Because entitlement to possession under this claim is dependent on the correct valid notice being served, and not related to the level of rent arrears.

You can sue your tenant separately for the rent arrears, but you might still be faced with a set-off or counterclaim for disrepair.

Protect the deposit

If your tenant wants to set-off a penalty for failing to protect the deposit, you can do little to avoid that.

Once you’ve failed to protect the deposit within 30 days of receipt, it’s not possible to right that wrong.

You can’t avoid a claim by protecting the deposit later or by repaying it.

But the sooner you protect the deposit on realising the omission, the lower any penalty is likely to be.

If there’s a chance there will be a deposit penalty and you want to get possession on rent arrears grounds, there will be less chance of set-off preventing a possession order on Ground 8 if you wait until the arrears are at least 2 months’ rent in excess of the maximum penalty, which is three times the deposit.

In that scenario, the court would still have to make the possession order. But you might not necessarily get a money judgement for the rent arrears if the penalty was offset.

Need advice? Get in touch today

Please call Rachel Garton on 01482 324252.

Or email Rachel here.

You can find out more about how we can help you here:

• Property Litigation
• Landlord & Tenant services
• Property & Real Estate Law services

Related blogs

• Are you using the correct form of Section 21 Notice?
• What you need to know about the Consumer Rights Act 2015
• How to end an Assured Shorthold Tenancy