UK: Damages Awarded In Lieu Of Specific Performance For Breach Of Tenant's Covenants

Last Updated: 1 October 2018
Article by Clyde & Co LLP

Most Read Contributor in UK, November 2018

In Zinc Cobham 1 Ltd and others v Adda Hotels and others [2018] EWHC 1025 (Ch), the High Court considered whether specific performance should be ordered requiring a tenant of hotel premises to trade, operate and maintain their hotels in accordance with specific brand standards.

Background

The appellants, which were part of the Zinc Hotels Group ("Zinc"), owned ten hotels which were each leased to the Respondents ("Adda") and operated under the 'Hilton Hotels' brand.

Each of the leases contained express covenants which essentially required Adda to maintain active trade in the hotels in accordance with the Hilton Hotels Brand Standards and to keep the hotels in the standard of repair and decoration consistent with their use as first class hotels and as required by the Hilton Hotels Brand Standards.

Following their inspection of the hotels in 2015, Zinc served various schedules upon Adda setting out their alleged breaches of the Hilton Hotels Brand Standards. The schedules identified specific remedial works which were said to be required to each of the hotels.

Adda failed to undertake the remedial works (which would have cost over £100 million) and so Zinc issued a claim for an order requiring specific performance of Adda's obligations under the leases to trade operate and maintain each of the hotels in a manner consistent with the Hilton Hotels Brand Standards, by remedying the various breaches. In the alternative, they sought damages for breach of covenant.

Upon Adda's application, the Deputy Master struck out Zinc's claim insofar as it sought the remedy of specific performance.

The decision

Zinc appealed the Deputy Master's decision. The High Court Judge concluded that the Deputy Master's reasoning was correct and dismissed the appeal for the following reasons:

1. The Deputy Master was right to conclude that Zinc had no real prospects of obtaining an order for specific performance at trial and the Particulars of Claim disclosed no reasonable grounds for seeking such relief.

2. Zinc's claim for specific performance had an "air of unreality and fictionality about it" because:

a. they had not established that they had any legitimate interest which went beyond monetary compensation and so specific performance should not, in principle, be granted;

b. the difficulties which Zinc alleged it would have in valuing its loss were "more imagined than real" particularly where Zinc accepted that the performance of the works would make no difference to the rent they would receive from their investment in the hotels. Seeking an order requiring Adda to carry out £100 million worth of works, which cost would far exceed the likely loss Zinc would suffer, would be inequitable;

c. the necessary valuation exercise was not overly complicated and, even if it were, this would not satisfy the necessary condition of having a legitimate interest extending beyond monetary compensation;

d. the Court could not grant specific performance of the principal trading obligations — i.e. it could not order Adda to actively trade from the premises — and so, by the same reasoning, it was not able to order specific performance of the ancillary parts of the obligation relating to the mode of trading;

e. even if an order for specific performance were available, such an order would create difficulties in terms of supervision and the only available enforcement mechanism would be contempt of Court "creating oppression caused by [Adda] having to do things under threat of proceedings for contempt".

3. In the circumstances, the Judge held that Zinc had no real prospect of successfully persuading a Judge at trial that it would be appropriate to make an order for specific performance and there was no other compelling reason why the issue should not be disposed of at that stage. Damages would be an adequate remedy.

Comment

This case illustrates the potential difficulties landlords may face when seeking an order for specific performance of tenant covenants under a lease. Landlords may wish to consider alternative enforcement options, such as forfeiture or, if the lease contains a Jervis v Harris type clause, whether it would be preferable to undertake the works themselves and subsequently seek to recover the costs from the tenant as a debt.

The article first appeared in our Real Estate Bulletin - September 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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