Letting standards slip - hotel owners cannot enforce brand standards

An appeal judge refused to grant a hotel owner an order for specific performance requiring the tenant to maintain active trade and keep and run premises in accordance with brand standards.

In Zinc Cobham 1 Ltd and others v Adda Hotels, Zinc Hotels failed in its attempt to force Adda Hotels and two other Hilton companies to bring all of the hotels up to the Hilton brand standards. The judge ruled that, if the terms were breached, the hotel owner would have a claim to damages only.

Background

The facts were that Zinc Hotels, a group of companies, owned 10 hotels (in Cobham, Croydon, East Midlands Airport, Kensington, Leeds, Northampton. Nottingham, Tewkesbury, Watford and York). Each was leased to, and operated by, a Hilton company (Hilton) under the Hilton Hotels brand. The Hilton Group formerly owned them, but in 2002 had sold them to investors under a sale-and-leaseback arrangement.

In brief terms, each of the leases required Hilton to:

• operate and actively trade the hotel in accordance with Hilton Hotels Brand Standards; and
• keep the hotel to a proper and reasonable standard consistent with its use as a first class hotel.

Zinc Hotels' claim, which was issued in May 2016, included a detailed schedule of Hilton's alleged breaches of the brand standards and sought:

• an order for specific performance of Hilton's obligations under the Leases to trade, operate and maintain each of the ten hotels consistent with the Hilton Standards (which the court found would cost c. £100m); and/or
• damages for breach of the lease.

Almost two years later, the hotel owners, which were insolvent and had gone into administration shortly before the hearing, failed to convince a High judge that they were entitled to enforce the covenants in that way. The case came before a High Court Master, who on 27 March 2017 struck out Zinc Hotel's claim to specific performance of the brand standards, as hopeless. That view was upheld on appeal by a High Court Judge on 3 May 2018.

High Court decision

The High Court judge commented that Zinc Hotels' claim "lacked reality" because:

• they lacked a legitimate interest beyond money which was required for a court to award specific performance (instead of damages);
• the carrying out of the works would make no difference in terms of the rent to be received from their investment in the hotels;
• any reduction in value of Zinc Hotels' interest could not possibly be anywhere near £100m -which would mean that making an order which required Hilton to carry out works estimated at a cost of £100 million would be utterly disproportionate;
• the court was unable to grant specific performance of the principal trading obligations so ordering specific performance of brand standard obligations associated with trading was likewise unavailable; and
• even if specific performance were available, it would be nigh-on impossible for Hilton to comply completely - and it would be oppressive to put the operator under threat of contempt of court if it failed to comply with any of the standards.

Comment

With each of the leases not expiring until 31 December 2029, the judge's ruling must also make the prospect of the remainder of the claim - damages for breach of covenant- unattractive. Added to the insolvency of Zinc Hotels and the risk of an application by Hilton for security for its costs of those proceedings, the claim for damages may struggle to proceed.

This is a cautionary tale on the enforcement of terms in leases generally, and particularly so for hotels. Landlords cannot require a hotel leaseholder to stay open and trade. The remedy for disrepair of premises is generally damages and is limited to the reduction in value of the landlord's interest - and the same is true of a breach of brand standards.

A possible area to explore for landlords is to use so-called Jervis v Harris self-help remedy clauses (which are generally used in relation to disrepair) to put the tenant on notice to bring the premises up to brand standards, failing which the landlord can undertake the works itself and recover the costs from the operator as a debt.

It is also worth noting that the wheels of justice can grind slowly. This claim took almost two years even to get to a preliminary hearing.

Zinc Cobham 1 Ltd and others v Adda Hotels [2018] EWHC 1025 (Ch)