Mortgagee in possession and tenant’s right of set-off

A mortgagee in possession receives rent in its own name. The tenant cannot set off against rent due to the mortgagee any claim that the tenant had against the mortgagor before the mortgagee went into possession. The liability to repay a rent deposit is a purely personal contractual arrangement; a mortgagee who goes into possession has no liability to repay the tenant’s deposit.

In Bank of China (Hong Kong) Ltd v Creative Far East Ltd ([2005] HKEC 403, CA) L granted a lease to T and a mortgage to M. M went into possession and later brought proceedings against T in respect of rent arrears and dishonoured cheques. T sought to set off an amount it claimed was due to it because of overpayments of management charge made to L; it claimed an equitable right to recover the overpayments based on mistake and misrepresentation. Relying on section 9 of the Law Amendment and Reform (Consolidation) Ordinance Cap. 23 and  Young v Kitchen ((1878) 3 Ex D 127) it claimed that there had been an assignment to M that was subject to its equitable right to recover the overpayments. The claim failed since M did not rely on any assignment by L but its own title to the rents as mortgagee in possession. There was no link between the sums due to M and the amounts claimed by T.

T also sought to enforce its right to recover the rental deposit against M. This failed too. The liability to repay the rent deposit was a purely personal contractual arrangement between L and T.

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