Compensation offsetting

The Housing Ombudsman has recently reissued guidance on compensation offsetting. Melanie Dirom looks at the approach to be taken.

As the cost of living crisis continues, we are receiving an increasing number of queries from housing providers regarding whether compensation payments ordered by the Housing Ombudsman Service can be offset against sums owed by tenants, such as rent or service charge arrears.

In a timely update, the Ombudsman recently reissued its guidance on the subject (available here), clearly stating that any compensation ordered by the Housing Ombudsman should not be offset.

What is offsetting?

In its simplest form, the right of set-off is a legal mechanism which provides that where one party (the debtor) is required to make a payment (such as damages or compensation) to another party (the creditor) the amount owed is reduced or extinguished to take account of any amounts owed to the debtor by the creditor.

Although commonly applied in other contexts, tenancy agreements and landlord’s compensation policies often seek to limit or extinguish this right, providing that where compensation is to be paid to a tenant, the sum payable will be set off against any amounts that the landlord deems are owed by the tenant (often rent arrears). Provisions are also commonly included in tenancy agreements to prevent tenants deducting any sums they deem their landlord owes to them from rent payments due.

The Ombudsman’s Position

In the past, the Ombudsman has taken a more permissive approach to offsetting. Guidance released in 2019 recognised an entitlement for landlords to offset compensation against rent or service charge arrears in some circumstances, for example where the compensation is payable in recognition of distress and inconvenience caused to the tenant, as opposed to where the tenant has incurred additional ‘out of pocket’ expenses or the payment is a statutory Home Loss or Disturbance payment.

However, as stated above, more recent guidance issued by the Ombudsman (in September 2022 and March 2023) has taken a much harder line against offsetting. The guidance emphasises the Ombudsman’s absolute discretion under the Housing Act 1996 to determine not only the amount of compensation payable, but also how such compensation should be paid and states that the Ombudsman’s position is that compensation awarded “should be treated separately from any existing financial arrangements between the landlord and resident and should not be offset against arrears.”

The Ombudsman clarifies that this principle applies regardless of whether offsetting is permitted by a landlord’s compensation policy, and is particularly the case in the following situations:

• The arrears are in dispute
• The arrears are the subject of the complaint
• The landlord is legally obliged to make the payment, such as a statutory Home Loss or Disturbance payment
• It would not be fair to offset the compensation – for example where a landlord’s maladministration resulted in the arrears in the first place
• The tenant has incurred additional ‘out of pocket’ expenses as a direct result of the landlord’s actions or inactions (such having to pay for alternative accommodation).

While we expect that the Ombudsman’s position against offsetting is at odds with the standard practice and policy of many social housing providers (particularly when faced with increasing rent and service charge arrears) it may be time for these practices and policies to be revisited in light of the Ombudsman having reaffirmed its position.

Melanie Dirom is a Director at Ward Hadaway.