hotel room
LegalJanuary 13, 2022

Sale of hotel business was not frustrated by COVID-19

This was held by the New South Wales Court of Appeal in Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd.

The case arose from the sale and purchase of a hotel property and the associated business, known as the Quarrymans Hotel in Pyrmont, as a going concern. Clause 51(1) of the contract required that “the vendor must carry on the business in the usual and ordinary course as regards its nature, scope and manner” until completion. However, after signing the contract but before the date set for completion, the government issued a series of public health orders in response to the COVID-19 pandemic. The first of these was the Public Health (COVID-19 Places of Social Gathering) Order 2020, which commenced operation at midday on 23 March 2020, for a period of 90 days. The public health orders made it unlawful to carry on the hotel business in the usual and ordinary course. In practical terms, the hotel was required to close its doors to the public and restrict trading to the sale of food and beverages from a takeaway window for at least 90 days and shedding redundant staff. These unforeseen events caused a collapse of the earnings of the hotel business. The purchaser refused to complete the sale and pay the balance of the contract price, claiming that the contract was frustrated by the public health orders. However, the primary judge rejected the claim because reasonable businesspersons in the position of the parties would have understood that the obligation to carry on the business did not extend to trading unlawfully. Rather, the vendor was obliged to carry on the business in the usual and ordinary course, as far as it remained lawful to do so, which the vendor had done in performance of the contract. On this construction of the contract, the vendor was ready, willing and able to complete, but the purchaser was not.

The Court of Appeal allowed the purchaser’s appeal by a majority. Contrary to the purchaser’s argument, the full bench accepted that the contract was not frustrated by supervening illegality because the sale and purchase of the hotel business remained lawful, and the business continued to trade. While Basten JA supported the reasoning of the primary judge, Bathurst CJ and Brereton JA considered that such restricted trading did not amount to carrying on the hotel business “in the usual and ordinary course”. At the same time, there was the implied term that the vendor was not obliged to trade unlawfully. The resolution was in the contract. The relevant cl 51(1) of the contract obliged the vendor to carry on and maintain the business until completion. If the vendor could not do so because of the public health orders, it was the vendor’s risk. In these circumstances, the vendor could not complete the sale of the business as a going concern, which placed the vendor in breach of the contract. In fact, the vendor was not ready willing and able to complete. Essentially, this “modified, reduced and scaled down version” of the business was not what the purchaser had bargained for, so it was entitled to terminate the contract for breach and recover the deposit.

Source: Dyco Hotels Pty Ltd v Laundy Hotels (Quarry) Pty Ltd [2021] NSWCA 332, 21 December 2021.

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