What happens when an operator won’t comply with branding requirements?

18 July 2018

I don’t want to and you can’t make me!

For once, not the refrain of a (small) child, but rather the stance of the tenants of a chain of hotels operating under the ‘Hilton’ brand. The dispute in this case centred on certain provisions in leases, but the essence of the issues is potentially applicable to other contractual situations. Here, the landlord was seeking to enforce to specific obligations in the leases as follows:

  • to operate and actively trade the hotel in accordance with Hilton hotel brand standards (set out in a separate document)
  • to keep the hotel to a proper and reasonable standard consistent with its use as a first class hotel.

The landlord alleged that its tenants were failing to comply with these obligations and that this, in turn, affected the investment value of the leases they owned. The landlord had served various notices on the tenants to carry out works and take steps to bring the properties up to par. The cost of this was put at something in the region of £100m.

Remedies for breach of contract

Generally there are two possible remedies which a wronged party can seek from the court as a result of a breach by the other contracting party (and for the purpose of this case the tenants acknowledged that they had breached it). Briefly these are:

  • a court order to compel the offending party to comply with the contract terms (known as specific performance), or
  • where it is not feasible or practical to do so, then damages to compensate the party for the loss of the bargain they would otherwise have had.

The court’s discretion

The power to make an order for specific performance is a matter for the court’s discretion (hence it is described as an ‘equitable’ rather than a ‘legal’ remedy). The courts will have to take into consideration all relevant factors (as well as the parties’ actions in the lead up to the litigation) before it will effectively force a party to undertake something against its will. Where damages would provide an adequate (but not necessarily desirable) outcome, it is more likely that the court will effectively ‘buy off ’ the non-performance in an award of damages instead.

The decision

In this case the landlords sought an order for specific performance. It argued that it would be impossible to calculate a sum to represent the compensation it would need to reflect the loss of value it would suffer on its investment in these high-class hotels if the tenants did not comply. The tenants, unsurprisingly, argued the opposite. They said that the reason the landlords could not prove loss was because, by and large, they were not suffering one. The rents under these leases (some £26m per annum) continue to be paid on time. Further, to the extent that works of repair were needed to bring the properties up to the acknowledged brand standard, then this would add little capital value to the properties, nor would they secure a higher rent than the landlord was currently receiving. Finally, they argued that it would be impractical for the court to monitor the tenants’ continuing compliance with the obligations, as it would involve constant monitoring of the operation of the various properties, not to mention the risk of satellite litigation about whether or not there was strict compliance with the letter of the leases.

Ultimately the court agreed with the tenants; it had been established in previous cases that the courts would not make an order for specific performance to require a party to continue to trade, especially where it was no longer in its commercial interest to do so. By analogy, if the court could not enforce a ‘keep open’ type obligation, still less would it enforce one to do so in a particular way, or in compliance with a particular trading style or branding. Instead, the judge decided that this was a breach capable of being compensated by an award of damages. So, having refused specific performance, he ordered that the case proceed to trial, with the amount of the damages award to be determined by a judge based upon expert evidence provided to him by the parties’ expert witnesses.

Next steps

One can imagine that with the sums of money alleged to be at stake, that the landlord may yet take the matter to a higher court on appeal. However, in the meantime, the decision remains the law and parties to contractual arrangements such as these should carefully consider the extent to which such obligations are enforceable and, what commercial benefit there may be in pursuing litigation to enforce them. For a hard pressed operator (especially under a franchise type model) there may well be increasing commercial temptation to avoid having to strictly comply with strict branding requirements imposed by franchise owners. By the same token, landlords seeking to make strategic investments in particular branded operations where the perception is that the brand name is an intrinsic part of the value of the property, may need to take note of this decision, its impact on their ability to enforce those obligations, and any consequent actual or perceived impact on value of their reversionary interests. No doubt this decision will be keenly followed by all sides going forwards.

The content of this article is for general information only. For further advice, please contact Marcos Toffanello.

This article is from the summer 2018 issue of Room with a View, our newsletter for professionals within the property industry. To download the latest issue, please visit the newsletter section of our website. Law covered as at July 2018.

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Marcos Toffanello

Head of Knowledge Management

+44 (0)1473 299142

+44 (0)7917 777671


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