Sale of hotel business not hampered by COVID-19

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

The deal arose from the sale and purchase of a hotel property and associated business, known as Quarrymans Hotel in Pyrmont, as a going concern. Clause 51(1) of the contract required that “the seller carry on its business in the usual and ordinary course with respect to its nature, extent and terms” until its completion. However, after the contract was signed 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 (Places of Social Gathering COVID-19) Ordinance 2020, which came into force at noon on March 23, 2020, for a period of 90 days. Public health decrees prohibit the exercise of hotel activity in the usual and ordinary course. Specifically, the hotel was required to close its doors to the public and restrict trade to selling food and drink from a take-out window for at least 90 days and get rid of redundant staff. These unforeseen events caused a collapse in hotel revenues. The buyer refused to complete the sale and pay the balance of the contract price, saying the contract was frustrated by public health orders. However, the trial judge dismissed the application because reasonable businessmen in the position of the parties would have understood that the obligation to operate the business did not extend to illegal trade. On the contrary, the seller was obligated to carry on the business in the usual and ordinary course, insofar as it remained legal to do so, which the seller had done in execution of the contract. On this construction of the contract, the seller was ready, willing and able to complete, but the buyer was not. A majority of the Court of Appeal allowed the buyer’s appeal. Contrary to the acquirer’s argument, the plenary meeting accepted that the contract was not frustrated by the occurrence of illegality because the sale and purchase of the hotel business remained lawful and the company continued to trade. While Justice Basten supported the reasoning of the senior judge, Chief Justice Bathurst and Justice Brereton held that such a restricted trade did not amount to carrying on a hotel business “in the usual and ordinary course “. At the same time, there was the implied condition that the seller was not obligated to trade illegally. The resolution was in the contract. The relevant clause 51(1) of the contract required the seller to continue and maintain the business until its completion. If the seller couldn’t because of public health orders, that was the seller’s risk. Under these circumstances, the seller was unable to complete the sale of the business as a going concern, which placed the seller in breach of contract. In fact, the seller was not ready, willing and able to complete. Essentially, this “modified, scaled-down, scaled-down version” of the business was not what the buyer bargained for, so he was entitled to terminate the contract for breach of contract and recover the deposit. Source: Dyco Hotels Pty Ltd v Laundy Hotels (Career) Pty Ltd [2021] NSWCA 332, December 21, 2021.

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