13 reasons why … certain lease clauses cannot be enforced

8 June, 2018

The recent case of Zinc Cobham 1 Ltd and others v Adda Hotels considered whether or not a tenant’s obligation in hotel leases to trade in accordance with certain (Hilton) brand standards could be enforced by the landlord; the remedy applied for by the hotel landlord being “specific performance”, a remedy which the courts can choose to award or not based on the facts of any particular case.

If enforced in this case, the tenant would have had to carry out over £100m of works to the hotels in question.

A mainstay of the landlord’s argument was that the loss it was now (and had been) suffering on account of the tenant’s breaches of lease was a fall in the value of the landlord’s reversionary interest and that it would be too difficult to ascertain that loss, so as to obtain adequate compensation, through an award of damages alone.

However, the court considered the commercial realities (which were that the landlord’s rent roll from the hotels was £26m pa and that that rental income was not going to increase even if the £100m works were done).  The court accepted the tenant’s arguments that the valuation of the reversion was not overly difficult to do, could be done adequately, and that the likely true loss to the landlord (ie the diminution in value of its reversion) was likely to be far less than £100m.

The initial decision was that – for 13 reasons given in that judgment – specific performance was not appropriate and damages were an adequate remedy instead.  That decision was upheld by the Court of Appeal.

Is this outcome surprising?

We have been here before, of course, with “keep open” covenants in leases – notably the House of Lords case of Co-Operative Insurance v Argyll Stores Holdings (1998).  In that case, an order for specific performance of a “keep open” covenant in a lease was refused.  Hoffman LJ stated “Specific performance is traditionally regarded in English law as an exceptional remedy, as opposed to the common law damages to which a successful plaintiff is entitled as of right … the general principle [is] that specific performance will not be ordered when damages are an adequate remedy”.  In that case, there was also the issue that the “keep open” covenant applied to a loss-making business and so the court could not see that it would be equitable to impose an order to carry on a loss-making business resulting in an unquantifiable loss.

What else can a landlord investor do to enforce brand standards?

Other remedies are usually available to landlords depending on the wording of the relevant lease, for example entering to carry out repair works to premises where the tenant is in breach and recovering the cost, but ultimately this is likely to result in a damages claim anyway if the costs are not paid.  Equally, such action would not assist in keeping the premises open for trade in accordance with those brand standards.

However, brand standards are important, particularly in the hospitality sector and so too is proactive management of an investment portfolio.  It is surprising that a situation could arise whereby works to the value of anything like £100m were needed.  Perhaps it could have been possible for the tenant’s breach to have been nipped in the bud at an earlier stage using other remedies as suggested above?

As for keep open covenants themselves, they are commonly avoided in lease drafting these days precisely because of the difficulty in enforcing them, as the above cases demonstrate.