Landlord and tenant — Landlords’ consent sought by tenants to a proposal to assign the lease of an hotel — Tenants’ action for a declaration that consent to the assignment was being unreasonably withheld by landlords — Landlords had not actually refused consent, but after lengthy correspondence, in the course of which the tenants had replied to detailed questions by the landlords, the latter were still expressing dissatisfaction with the extent of the information given and were pressing for further facts about the proposed assignees — Landlords were particularly concerned to establish whether the proposed assignees would be likely to maintain the standard of management of the hotel in view of the effect of management on the value of the reversion and the level of future rent reviews — The judge accepted the proposition that hotels were in a somewhat different category from other commercial properties, so that information as to a proposed assignee’s trading accounts could legitimately be requested — Nevertheless, having regard to the way in which the tenants had responded to requests for information, which never seemed to satisfy the landlords, over a long period, the judge decided that by the time the tenants’ writ was issued it was too late for the landlords to be raising further inquiries — Held that in the circumstances the landlords were unreasonably withholding their consent and that the tenants were entitled to proceed with the assignment without such consent
In this action
the plaintiff tenants, City Hotels Group Ltd, sought a declaration that the
defendant landlords, Total Property Investments Ltd, were unreasonably
withholding consent to an assignment of the lease of the Rathbone Hotel, 30
Rathbone Street, London W1, to a company called Discolodge Ltd. The plaintiffs
also asked for a declaration that in the circumstances they could assign the
hotel to the proposed assignees without consent.
J H Hames QC
(instructed by Cohen & Naicker) appeared on behalf of the plaintiffs; David
Neuberger (instructed by Payne Hicks Beach & Co) represented the
defendants.
Giving
judgment, JUDGE PAUL BAKER QC said: In this action the plaintiff tenants are
claiming a declaration that the defendant landlords upon a true construction of
the lease in question and in the circumstances are unreasonably withholding
their consent to an assignment of it, and a consequential direction, if the
first is made, that the plaintiffs are entitled to assign the premises to
Discolodge Ltd without any or any further consent of the defendants.
The
subject-matter is an hotel in the West End of London, Rathbone Street, which
from a brochure I see is just off Goodge Street, near Oxford Street in London
W1. I do not think that I have been told exactly how large it is, how many
bedrooms and so forth, but it is obviously a substantial, well-equipped and
well-run place.
The hotel was
let by a lease dated June 13 1977 and made between the defendants, Total
Property Investments Ltd, as landlords and City Hotels Ltd (who now call
themselves City Hotels Group Ltd but nothing seems to turn on that) as tenants.
The hotel was let to the plaintiff tenants for a long term, being 90 years from
September 29 1975. It thus expires on September 28 2065. That is expressed in
the lease.
The provisions
as to rent are as follows. During the first periods, which I need not refer to
in detail, there was a fixed rent rising in steps, and that took one up to
December 24 1981, when certain review provisions in the first Schedule came
into force. In view of certain points taken in the argument I must refer to
some of that Schedule. The rent was reviewed, as provided in the lease, as from
Christmas 1981. The annual rent was determined at that time at £101,750, so
that was a very substantial increase over the previous rent of £48,000 pa
current at that time.
In passing I
should refer to the user clause, which in clause 2(8)(B) restricts the use for
the purpose: ‘Of an hotel including restaurants, coffee shops, discotheque and
licensed premises and other ancillary shops and purposes and such further or
other purpose or purposes as may be permitted by the lessor.’ So it is
exclusively an hotel.
Going back to
the first Schedule, the review period is a five-yearly period, the first one
being in Christmas 1981. I should read the definition of the open market rent
to which the expert surveyor, later provided for in the lease, has to address
his mind.
Open market
rent shall mean the yearly rent for which the demised premises could reasonably
be expected to be let as an unfurnished hotel by a willing landlord to a
willing tenant with vacant possession on the relevant review date in the open
market for a term equal to the unexpired residue on the relevant review date of
the term hereby granted upon the terms and conditions (save as to rent) herein
contained on the assumption (if not the fact) that all the Lessee’s covenants
shall have been complied with but there being disregarded (i) any effect on
rent of the fact that the Lessee or an undertenant may have been in occupation
of the demised premises; (ii) any goodwill attached to the demised premises by
reason of any trade or business carried on therein by the Lessee or any
undertenant; (iii) any works or improvements carried out by the Lessee
otherwise than in pursuance of any obligation to the Lessor; (iv) any value
attributable to any licences relating to the demised premises if the benefit
belongs to the Lessee or any underlessee.
That has come
into the case in a roundabout way. The way it bears on the question which I
have to resolve is that it is said in valuing this one looks into the accounts
for the way that the hotel has traded prior to the review period, and based on
those accounts the surveyors assess the rent. Therefore, the way the hotel is
run is of great importance in obtaining the full value of the rent, and that of
course is one of the factors that a landlord, when applied to for an
assignment, is concerned with.
A frontal
attack was made on that position by Mr Hames for the plaintiff tenants on the
ground that it is not legitimate for the purposes of this clause to look at the
accounts. One confines one’s attention, as in all valuations, with very limited
exceptions, to comparables. One looks at the comparables, and that concludes
it. Apart from the general reliance on comparables by the valuation profession,
Mr Hames also points to the fact that it is to be let as an unfurnished
hotel with vacant possession, and one has to ignore the effect on rent that the
lessee may have been in occupation of the premises. He prays in aid the judgment
of Oliver LJ in the case of W J Barton Ltd v Longacre Securities Ltd
[1982] 1 WLR 398. That was a case where discovery was sought of the tenant’s
accounts and in the circumstances of that case was refused. The case concerned
a smallish retail shop, of which there were many comparables readily available,
as the learned lord justice points out on p 402 of his judgment, and therefore
it would be oppressive and quite improper to look into the tenant’s accounts,
there being that method of valuation. He was giving the judgment of the court,
and he said:
We confess
that, for our part, we are entirely unable to follow this in the case
of a property such as this where there are, as it is conceded that there are,
plenty of comparable premises in the vicinity from which the open market value
of the premises of this type can be deduced. No doubt evidence of the tenant’s
trading would indicate whether his business had been successful or unsuccessful
and so might be a pointer to the rent which this particular individual tenant
might be prepared to pay in order to spare himself the disruption of moving to
other similar premises in the area, but that has nothing to do with the open
market rent which the court is directed by the Act
that is to
say, the Landlord and Tenant Act 1954
to ascertain.
I do not
accept those submissions in their entirety. It does seem to me, and in this
respect I accept Mr Neuberger’s submission, that hotels are in a different
category, and my attention was called to the fact that in that very case there
was discussion of Harewood Hotels Ltd v Harris [1958] 1 WLR 108,
where the tenant, unusually, was seeking to put his accounts in in order to
show from his point of view how difficult it was to make a living out of the
particular premises in question. I do not think that it can really turn on
which party it is who is seeking to put the accounts in for the purposes of
valuation, but that was the fact in that case.
It seems to me
that hotels are different, but I would not go so far as to say that accounts
are the only way of doing it. As it seems to me, one looks at comparables if
they are available. This is supported by the experts whom I have heard here and
who gave their evidence very frankly and clearly. I found the evidence of both
of them quite acceptable. Available comparables assist the valuation process,
but also in evaluating an hotel of this sort one does look at the accounts. Mr
A Young [ARICS], who was the tenants’ expert in the matter, said that it is an
unusual provision, he thought, but he would look at comparables and also take
into account the accounts. He told me that in cross-examination, and that it
was a factor in the general situation. Both turnover and profitability are
relevant.
Mr R J Elphick
[BSc ARICS], the landlords’ surveyor and expert, said and it was the burden of
his case:
Hotels vary
considerably in terms of location, size, type and standard, and direct
comparison for the purposes of valuation is largely impracticable. The rental
values and hence capital values are generally arrived at by accountancy
methods, that is, by reference to the trading accounts, turnover and
profitability of the hotel in question.
But I think he
also conceded in his evidence that one would also look at comparables where
they were available to assist in the valuation. It is also clear that at the
particular review in 1981 the accounts were looked at without any objection on
the part of the tenant, and their experts considered them.
As to the
point about its being unfurnished, I think that the answer to that was given by
Mr Elphick. If in fact in a valuation exercise of this sort one is to evaluate
it as an unfurnished hotel, the tenants having provided the furniture, or if
the tenants’ capital is invested in it, then it is a simple exercise to make
allowances for the tenants’ capital, and no doubt reduce the valuation
accordingly, and so for the other matters which are expressed in the Schedule.
So I reach the conclusion on this aspect of the matter that accounts can be
looked at in arriving at the rental valuation, but so also, as I find from the
evidence, can comparables when they are available.
Having dealt
with that subsidiary matter, I must now come to the main issues. The particular
clause which I have to apply, on which the application is based, is clause 2,
subclause (16), in the tenants’ covenants.
Subclause
(16)(D) reads:
Without
prejudice to the foregoing provisions of this subclause not to assign charge or
underlet the whole of the demised premises without the previous written consent
of the Lessor (such consent not to be unreasonably withheld)
Subclause
(16)(E) reads:
If so
required by the Lessor on any assignment of the demised premises to procure
that the assignee enter into a covenant with the Lessor to pay the rents . . .
Clause 2(17)
reads:
To pay to the
Lessor all costs charges and expenses (including solicitors’ counsel’s and
surveyors’ and other professional costs and fees) incurred by the Lessor
and then in
(D):
In respect of
any application for consent required by this lease whether or not such consent
be granted.
I do not think
that I need refer to any further provisions of the lease.
I have had
certain submissions as to what is the proper test to apply to that. Mr
Neuberger referred me to the case of Secretary of State for Education and
Science v Tameside Metropolition Borough Council [1977] AC 1014. As
he frankly said, and as indeed is obvious, this is a case a long away on its
facts, but I think the relevant section so far as it bears on this point is
whether the Secretary of State could intervene, or at what stage he could
intervene, in a local authority’s decision. The relevant provision was if he
‘is satisfied either on complaint by any person or otherwise that any local or
education authority have acted or are proposing to act unreasonably with
respect to any power conferred on the performance of any duty imposed by or
under this Act’, then he may give directions. Thus he can act if the authority
is proposing to act unreasonably. In the Court of Appeal and the House of Lords
there were some observations made as to this. I was referred to the judgment of
Lord Denning MR in the Court of Appeal at p 1024, at which the point is made:
Now I turn to
the other important words in this section:– that he is satisfied that the local
education authority have acted or are proposing to act ‘unreasonably.’ The
question often arises whether someone has acted or is acting or is proposing to
act ‘unreasonably.? To decide this question, as Lord Hailsham said in In re
W, ‘two reasonable parents can perfectly reasonably come to opposite
conclusions on the same set of facts without forfeiting their title to be
regarded as reasonable.’ It is one thing to say to a person: ‘I think you are
wrong, I do not agree with you.’ It is quite another thing to say to him: ‘You
are being quite unreasonable about it.’ I know it is often done.
Then he ends
that
Such
hyperbole is excusable in ordinary mortals, but not in those who have to
consider and apply Acts of Parliament. No one could properly be labelled as
being unreasonable unless he is not only wrong, but unreasonably wrong, so
wrong that no reasonable person could sensibly take that view.
Mr Hames
called attention to the qualification in Lord Diplock’s speech when the matter
got into the House of Lords at p 1064, where he said at letter E:
My Lords, in
public law ‘unreasonable’ as descriptive of the way in which a public authority
has purported to exercise a discretion vested in it by statute has become a
term of legal art. To fall within this expression it must be conduct which no
sensible authority acting with due appreciation of its responsibilities would
have decided to adopt.
I am bound to
say that I do find it difficult to apply those tests, especially having regard
to that qualification in the speech of Lord Diplock, to the issue of
unreasonable withholding of consent in this contractual document. I think that
one must be careful in applying by analogy those principles which are to
regulate the relationship between two organs of government.
It is more
helpful, I think, in this connection to look at the case of Pimms Ltd v Tallow
Chandlers Company [1964] 2 QB 547 which does in fact deal with this and has
a general review of the covenant against assignment and the qualification of
unreasonably withholding consent. There is a long review of all the cases. The
actual case that the Court of Appeal was concerned with, and a number of cases
which were cited were concerned with, was a problem which does not face me,
which is where the proposed assignee is going to do something on the premises,
something different from what has been done, and whether that is going to
impinge on the landlord’s interests. It is that sort of area, so that one can
only get some general statement out of it to assist in the case before me, but
one does see this at p 564 in the judgment of Danckwerts LJ, who was giving the
judgment of the court:
There is no
doubt that the onus of proving that consent has been unreasonably withheld is
on the tenant: See Shanley v Ward (1913) 29 TLR 714, a decision
of this court, and Re Town Investments Ltd’s Underlease [1954] Ch 301 at
314. Further, it is not necessary for the landlord to prove that the
conclusions which led them to refuse consent were justified, if they were
conclusions which might be reached by a reasonable man in the circumstances.
That is the
test, as it seems to me. Are they conclusions that might be reached by a
reasonable man in the circumstances? A somewhat more liberal test, as I would
see it, than the one we looked at in Secretary of State for Education and
Science v Tameside. The learned lord justice comes round to that
again in a reference to the judgment of Cozens-Hardy MR in Shanley v Ward
on p 570, to the effect that it was not for the defendants to prove that they
were justified in withholding their consent, but for the plaintiff to prove
that it was unreasonably withheld.
What did
unreasonableness mean?
said Cozens-Hardy
MR
It is not
enough to show that other Lessors might have accepted the proposed
assignees; the lessors are not to be held to have withheld the licence
unreasonably if in the action they took they acted as a reasonable man might
have done in the circumstances.
That seems to
be the test.
The matter has
been rather bedevilled by two extraneous factors which in the end did not prove
to be of great importance. The first one was this, that there has been a past
application for a licence to assign during 1982, the year before the events
with which I am concerned. It is referred to in the counterclaim, para 9: ‘In
September 1982 the plaintiff applied to the defendant for consent to assign the
said lease to Ferrolodge Ltd.’ For one reason or another, and it certainly was
not that the consent was refused, that transaction did not proceed. In
considering the abortive application certain costs were incurred by the
landlords, and the burden of the counterclaim is to claim those costs. When
this matter was first adumbrated in September of this year there was a holding
letter of September 4 but on October 19 1983 the claim for those fees is put
forward and the letter ended up with this paragraph: ‘Our clients do not wish
to put up obstacles in the way of your present application but cannot
reasonably be expected to consider it until these matters (that is to say, the
payment of their fees) are dealt with.’ That position has not been persisted
with. The landlords have gone on to consider the present application on its merits,
while still maintaining their claim for the past fees. That no doubt caused
some delay in the matter, but in my judgment that position has rightly been
abandoned. If, for example, there was a bona fide dispute as to the fees of a
previous abortive application, then the landlords have their rights under the
relevant covenant and the lease, and the grant or refusal of a licence cannot
be made dependent upon a satisfactory outcome in the landlords’ eyes of their
claim for those fees. It has been agreed between counsel that there should be
some assessment of those fees, and I would be perfectly prepared to order an
inquiry under the counterclaim into the fees payable under the relevant clause,
that is clause 2(17)(D), in relation to the application in September 1982, but
I will later discuss the actual terms of it with counsel.
That was one
thing that somewhat bedevilled the smooth conduct of the application. The other
was that the plaintiffs started off by misdescribing the proposed assignee or
its holding company. The original application was for an assignment to a
company called Discolodge Ltd, which is a newly incorporated company and a
member of the Gomba Group, so it was said, and that Gomba UK Group Ltd were
willing to act as guarantors. That was because Discolodge was a shell company
and quite plainly could not have put forward itself as a financially
responsible company, and it was conceded from the outset that some guarantor in
the shape of a substantial company would be necessary, but as it happened there
had been some reorganisation of the Gomba Group, and the company that should
have been put forward at that stage was a company called Gomba Holdings (UK)
Ltd, which is a substantial company, and its name became evident as the company
by latest the following January in terms which I will describe.
For the moment
I think it is sufficient for me to say that it is not sought to say that on
financial grounds Gomba Holdings (UK) Ltd are objectionable as guarantors and
at the Bar an offer was made that they would join in the lease in terms of the
existing sureties, that is to say, in terms of clause 5, which I understand
would be satisfactory. So the point about financial responsibility of the
guarantor company did not remain a live one.
Having cleared
the ground of those preliminary matters, I must now come to the details of the
application itself. It was put forward in the first instance on September 26
1983 in a letter to which I have already alluded, but which I should look at
again. It was sent to the landlords’ solicitors and stated:
We hereby
apply on behalf of City Hotels Group Ltd for licence to assign the above
property to a company called Discolodge Ltd, which is a newly incorporated
company and a member of the Gomba Group. Gomba (UK) Group Ltd are willing to
act as guarantors. With this letter we enclose the following references . . .
and then two
references were enclosed
We should be
grateful if you would take the instructions of your clients Total Property
Investments Ltd as soon as possible on this application and if there is any
further information required we shall refer you direct . . .
and then there
is an address. In support of that they enclosed a sheet of information relating
to the Gomba Hotel interests. To see what that was one turns back to p 2 of the
bundle, and the Group Hotel interests are set out on that page. I do not
propose to read it all through, but it listed five hotels, three of them in
this country, that is to say, the Wembley International Hotel, giving some
fairly detailed particulars as to that, including that it was wholly owned and
managed by the Gomba Group; the Birmingham International Hotel; and the
Leicester International Hotel; and then there were two abroad, one in Dallas,
Texas, and the other in Katmandu, Nepal.
Perhaps of
even greater interest is one of the references which one sees on p 6. This is a
reference from an affidavit of Mr Cohen, which it seems was provided by some
merchant bankers. It was in response to a letter from Johnson Matthey & Co,
but that fact was not known at any material time, as I understand it, to the
defendants, but it purports to emanate from National Westminster Bank, one of
the leading clearing banks. It is just headed:
G (UK) Ltd.
Respectably constituted private limited company. The principals are experienced
in the hotel business and we would consider them to be entirely respectable and
responsible tenants with the expertise to operate the venture successfully. We
consider the company trustworthy for their business commitments including an
annual rental of £101,750.
Well that was
the application that first went in, as I understand it, and on October 21 there
was a response requiring further information:
We are now
enclosing a note of this firm’s charges.
that is in
connection with the other matter
At the same
time on considering your clients’ present application for licence to assign the
lease on the Rathbone Hotel we should be grateful if you could now supply us
with the following information in respect of the proposed assignee so that our
clients are fully apprised of all the details and consider in the light of that
information whether or not to grant a licence:– 1. Details of all other hotels
within the Gomba (UK) Group Ltd including names, locations, size and existing
rental liability. 2. Particulars of the company or companies operating such
hotels, together with copies of their latest audited balance sheets and
accounts. 3. Details of any other hotels which the Gomba (UK) Group Ltd is
proposing to acquire in the immediate future, including names, locations, size
and rental liability. 4. References from the landlords of the other hotels
referred to above referring to the respective records of the operating
companies in paying rent and meeting the other tenants’ liabilities. 5. The
names and relevant experience of the proposed managers of the Rathbone Hotel
together with details of staff training methods within the Gomba (UK) Group
Ltd, particularly having regard to the present standard of the Rathbone Hotel
and whether those training methods are appropriate to hotels of such standards.
6. Particulars of the operations contemplated at the Rathbone Hotel, together
with details of the proposed clientele, room charging rates and promotional
objectives and methods. 7. Details of any proposed alterations to the physical
layout of the hotel premises. We look forward to receiving the above
information, following its receipt we will refer to our clients and their
surveyors on your clients’ application. As you will no doubt appreciate our
clients will not be in a position properly and reasonably to consider the
application without such information.
That was
replied to over a month later in a letter which seems to be dated December 14,
in which there was a reply dealing with those numbered points. That says:
(1) The
directors of Discolodge, as will be shown by a company search are A J Shamji,
the Chairman of Gomba Holdings (UK) Ltd, and Mr F A Khundkar, being the Company
Secretary. The shareholders on a company search will indicate that the
subscribers are still the holders but in actual fact there has been a share
transfer to both Gomba Holdings (UK) Ltd and A J Shamji. We believe the first
annual return will of course indicate the above.
Then it sets
out
At present
the Gomba Group own 5 hotels.
I do not think
that I need read out in detail what that says, because it is what is in the
list but there are further particulars given about those hotels. Then
(3) We
enclose herewith draft accounts for Gomba Holdings (UK) Ltd and we will of
course forward the final accounts as soon as they are to hand.
Then it deals
with Discolodge, disclosing that it was just a shell company
(4) There are
no proposals at this stage to acquire any further hotels. (5) Our clients are
prepared to provide a further reference if you should so require.
(6) Our
clients intend to retain the existing management after the assignment and it is
possible that the Comfort International Hotels Group Ltd will assist in that
management.
That, I should
interpose here, is the holding company of the present lessees.
The staff
training programme will therefore be run on the same basis as the Comfort
Hotels carry out theirs. (7) It is intended to attract the same clientele as at
present and if possible to upgrade the hotel at a later stage. The hotel will
be promoted in a responsible and respectable manner appropriate to the type
of hotel which it is at present. (8) Our clients will not carry out any alterations
to the premises except as permitted by the lease. They have no intentions at
this stage of carrying out any alterations. We trust that the above
sufficiently clarifies the matters raised in the letter of Payne Hicks Beach
and Co of October 21 but of course if we can be of any further assistance then
they should not hesitate to get in contact with us.
To complete
this, it seems that the copy accounts which were supplied were illegible. In
the meantime, fully audited accounts became available in place of the draft
accounts, and on January 9 1984 those accounts were sent. Those accounts
supplement the information provided in the letter to which I have just
referred. They are the accounts of Gomba Holdings (UK) Ltd. There is quite an
impressive list of bankers and solicitors on the first page of it, and then in
the chairman’s statement there is a description of the company reorganisation
during 1982. The chairman, Mr Shamji, said:
An important
stage in this development of the Gomba Group of Companies took place during
1982 when Gomba Holdings (UK) Ltd was formed as part of a reorganisation of our
international interests and investments. To assist in the reorganisation and
future developments of the Gomba Group we appointed Touche Ross and Co as
auditors. Gomba Holdings (UK) Ltd acquired on December 31 1982 the whole of the
issued share capital of the active UK based Gomba Companies . . .
Then in the
next paragraph it says:
The attached
financial statements cover the period from incorporation of Gomba Holdings (UK)
Ltd on May 7 1982 to December 31 1982.
Then he refers
to the consolidated balance sheet. He goes on:
The expansion
of the Gomba Group has continued during 1983. We have extended our property and
leisure interests by the purchase of two major hotels in Birmingham and
Leicester and the Garrick, Duchess and Mermaid Theatres in London. We opened
our Safe Deposit Centre in Aldford House, Park Lane, in March and added to this
activity by the purchase of two further centres at Knightsbridge and St John’s
Wood in September. We have rationalised and modernised our heavy duty truck
manufacturing operations . . .
I do not think
that I need read any further on that.
It further
discloses that the whole of the share capital of Gomba Holdings is owned by
Gomba Holdings Ltd, a Jersey company, and Mr Shamji has a significant interest
in that company. Then the balance sheet, just confining one’s attention to the
balance sheet of Gomba Holdings (UK) Ltd, which I think one ought to in these
circumstances, rather than the consolidated balance sheet, one finds at p 77
what I think can only be described as a reassuring situation there. The company
does have very substantial assets and by referring to the notes one sees that
the great bulk of the creditors are deferred. The total assets less current
liabilities are in excess of £16m. In the Schedules one sees those assets
consist among other things of a very considerable number of long leaseholds.
The company is very much into the holding of long leaseholds.
That was the
material that was provided in support of the application for a licence to
assign in January of this year. The material was complete with the sending of
that statement and accounts and those seem to me to be the material parts of
it.
The defence
says at para 3:
On 21st
October 1983 the defendant requested the provision of information relating to
the experience of the Gomba Group in hotel management in order to satisfy
itself that the proposed assignee would continue to manage the Rathbone Hotel
to the same high standard as that to which it is currently operated. (4) The
information supplied to the defendant has been insufficient to demonstrate that
Discolodge Ltd (or Gomba Holdings (UK) Ltd) would be able to manage the hotel
as aforesaid.
Then it goes
into particulars in what way it is insufficient. I propose to examine the state
of affairs as it existed when the company completed its reply to the requests
for information.
On being
referred to that para 3 that I have just read out of the defence, Mr Elphick,
the surveyor for the landlords, said that that was the matter that concerned
him most. He was retained to advise on this. He said: ‘That was the principal
matter, whether it was going to be managed to the present standard. Provided
that we were assured that it would continue to be so managed we would have not
had any grounds for objection.’ On being referred to the letter that I have
mentioned in December and already read out, especially to paragraphs 6, 7 and
8, he said of those that at the time that he received and saw that letter he
had no reason to disbelieve the statements set out there as to the clients’,
that is to say, the proposed assignees’, intentions, and he had no reason to
take the view that the hotel would not be managed by a competent operator. The
criticisms that have been made are both of the insufficiency of the information
and also the fluid nature of the intentions as disclosed. I think one has got
to bear in mind in a case of this sort that this is not a case of a small
company taking this on as a sole enterprise, as was clearly the position in a
case that I was referred to, Re Tydeman’s lease (1961) 177 EG 259 before
Cross J as he was then. I do not derive any real assistance from that case.
Here we have a company of substantial resources and widespread interests in a
similar field.
Mr Neuberger
in his, as always, very helpful address said this in criticising this aspect of
the matter and making his submissions upon it: ‘we hadn’t got sufficient
information as to the experience and proposals for the hotel, and we relied to
some extent on the facts that came out of the hearing’. As regards the Wembley
Hotel, which Gomba had directly managed for some time, they handed the
management over to the Comfort Group. There is nothing given as to why the decision
was made to hand it over to another company, but that I think was sufficiently
answered by Mr Hames when he said that certainly one is not justified in
inferring from that that they are poor managers of hotels. It just demonstrates
that if things are not going well then they know how to put it right, and that
is what superior management of this sort or a high level of management in a
conglomerate means. Then it was said that the proposals are very fluid, that a
large company can afford to have some disasters, and there was some uncertainty
as to who is going to run it. I am not persuaded at all by the argument that a
large company can afford to have disasters. In a way that must be some comfort
to the landlords, because if a disaster occurs there is a very substantial
guarantor behind it to take the brunt of it. As to the proposals being very
fluid, that again seems, with all respect, to be a misplaced criticism of this,
because Mr R Zatloukal [a director of Gomba Group], for the plaintiffs, explained
that so far from that being a matter where they had not really got their tackle
in order, it was deliberate, that when one is taking over a property it can be
very unsettling if long investigations go on and one gets one’s precise plans
cut and dried beforehand. That is their experience, and I have no reason to
doubt it. They hope the senior management will stay on when the bombshell
arrives, but their experience is that it is best to leave until the last moment
when everything is signed and sealed before they finalise their management
arrangements.
As to the
point that the defendants are entitled to protect their interest on the rent
review and therefore to be assured that good management will be there, I can
see something in that, but it seems to me that not so much has been made of
that, because that must rest on what I was saying earlier as to the valuation.
If poor management came about and the accounts showed a dipping situation, then
comparables would come into play, and the hotel would fall to be valued by
comparables rather than by poor accounts. The conclusion that I have come to on
this part of it is that if they had refused consent on the information provided
as at that time, that is to say when those accounts were sent in, and if they
had said: ‘this is not acceptable, we refuse consent’, a flat refusal, that
would have been wholly unreasonable. Of course, they did not, and I hasten at
once to say that the landlords have not refused consent. They still say that
the matter is open, and that again is a position which I can accept to this
extent, that while it would have been wholly unreasonable to have refused
consent at that stage, it would not have been wholly unreasonable to have
pursued some further inquiries — it depends what they are, of course, but it
would not be wholly unreasonable if they had asked for certain reassurances or
certain further inquiries, as indeed happened. So I must now go on to the later
course of the matter, remembering that the last event to which I alluded was
the provision of the audited accounts of the holding company. I can now go back
to the correspondence.
On January 24
1984 in response to those accounts the landlords’ solicitors wrote as follows:
We thank you
for your letter of 9th January enclosing the audited accounts up to December 31
1982 of Gomba Holdings (UK) Ltd.
At that stage
it was quite clear that that was the company in question. Then they say:
Arising from
these accounts our clients require the following information: (1) Audited
accounts of the last 5 years of the subsidiary companies engaged in hotel
ownership, namely Wembley International Hotel Ltd and Plealodge Ltd. (2)
Audited accounts of Gomba (UK) Group Ltd for the 5 years to December 31 1982.
We refer to our letter of December 7 1983 and subsequent letter of December 22
. . .
That deals
solely with the outstanding fees.
That is taken
up in the particulars of the defence, para 4(2). This is where it is said that
the information is deficient.
(2) On
October 21 1983 the defendant requested copies of the latest audited accounts
for all companies within the Gomba Group alleged to be managing hotels, but the
plaintiff has declined to supply that information.
I think that
the plaintiffs could reasonably take the view that they had answered the letter
of October 21 1983 by their letter of December, and would not be expected to
look back at that letter at that stage, and they could take it that having made
that, as I find it, full statement in answer, if not actually to the letter,
they could take it that when a letter of this sort comes along of January 24
that that is what the landlords are still worried about, and not other things
that may have been raised and not answered in the precise terms of the original
letter. As to this Mr Elphick gave some assistance. Having had his attention
called to that paragraph of the defence which I have read, he cannot remember
whether that was put in on his advice, but he conceded that it was not
particularly interesting to know what happened in Dallas and Katmandu. He said:
‘We were concerned particularly with the management of the hotels in the group.
We wanted information on how they are run by the Gomba Companies. They may be
holders of investment, but not run by the Gomba Group.’ Then he agreed with Mr
Hames that the accounts were not going to answer how well they were run. In the
case of a conglomerate of this sort he had not considered whether it was going
to be run from the head office or by staff selected in the hotel. It seems to
me that this is not going to advance the landlords’ knowledge in any useful
direction.
The audited
accounts of the subsidiary companies engaged in hotel ownership, as Mr Elphick
conceded, are not really going to answer how well this group runs hotels. It
would not necessarily appear from them whether they are directly managing those
hotels.
As for the
audited accounts of the Gomba (UK) Group Ltd, it would have been manifest from
the accounts that had been sent in that there had been a substantial
reorganisation of the company and there was nothing that would show in those
accounts how well they ran hotels. They would show how profitable and how
substantial the company was, but there was sufficient information about that,
in my judgment, in the accounts that had been produced, and indeed no serious
point has been taken about the substantiality of the holding company, Gomba
Holdings (UK) Ltd. So I do not regard that letter of January 24 1984 as being a
useful contribution to the legitimate inquiries of the landlords.
The next thing
that really happened was that the tenants got tired of waiting, and on February
14 1984 they said (this is the proposed assignee’s solicitors, but under the
contract they had the right to carry on the proceedings): ‘We act for
Discolodge Ltd part of the Gomba Group’, and they deal with the history of the
matter.
Both the
assignor and proposed assignee are of the firm opinion that the landlords are
unreasonably withholding licence to assign and have decided to apply to the
court for the appropriate declaration . . . Counsel has been instructed to
settle the proceedings.
Then on
February 15 there was a somewhat pained reply, which deals with the history of
the matter, but the important part of the letter is on p 34, and having
retailed the course of the correspondence in the middle of the page there it
says:
Our clients
are therefore still not in possession of all the information on which they can
properly and reasonably consider the tenants’ application for licence to
assign. In view of your attitude to this licence we would stress that our
clients are entitled to be satisfied as to whether or not to licence any
assignment on the identity of the proposed assignee and its effect on the value
of the reversion and on future rent reviews. You can no doubt appreciate that
the identity and credentials of an assignee are vital in such a case as this
where the premises is a hotel. The hotel’s reversionary value and marketability
for rent review purposes is after all, largely dictated by the effectiveness of
the management of the hotel. It is for this reason that this particular
assignment is quite distinguishable from an ordinary assignment and it is
imperative from our clients’ point of view that they are apprised of the full
facts concerning your clients before they can reach a decision on whether or
not to grant a licence to assign and we strongly refute your suggestion that
our clients are unreasonably withholding licence to assign.
I have already
dealt with the position as to the rent review and the necessity for that, but
going back to the paragraph, ‘Our clients are therefore still not in possession
of all the information on which they can properly and reasonably consider the
tenants’ application for licence to assign’, in my judgment that is a
misconception of the situation. They had been provided with the information.
The only thing that they had raised was for further accounts, which as I have
already indicated was not a matter which was going to assist them in dealing
with the points with which they are effectively concerned in those paragraphs,
so that there was no outstanding inquiries at that time, as I find, which would
properly bear on those matters, even accepting that they are entitled to be
reassured on those questions.
It was not
until March 7 that a further requisition of information was sent along. ‘In our
letter to you of February 15 we indicated to you that there remained
information which we had sought from you and/or the tenants’ solicitors . . .’
and then it goes on, ‘The information which we are seeking is as follows . .
.’. It then goes on to deal with matters which have been adumbrated in this
court and which I have commented upon. That was answered on March 30 by which
time the writ had been issued. It was issued the day after the letter of March
7. It had not been served, but I think it was shortly to be served. Further
correspondence follows there. Looking at the matter when the writ was issued on
March 8, it seems to me that the landlords were then far too late to raise
these inquiries. They had had the information from the tenants which was
submitted in December, and completed by January, and this was a substantial
transaction. The tenants were entitled to have the matter dealt with
expeditiously, having made their application, and the landlords were supplied,
as I find, with full information about it. Had this letter of March 7 been sent
within a reasonable time after the letter of December and the accounts in
January, had it been sent, say, in place of the letter that has been sent about
the accounts on January 24, it may well be that one could readily find that the
landlords were not being unreasonable, applying the test in the Pimms
case, in pressing for some further assurances on the lines of this letter. But
to leave it until March 7 before they finally formalised what is worrying them
seems to be far too late. Hence at the time of the writ on March 8 they were
unreasonably withholding the licence to assign, and therefore I propose to make
the declarations that are sought in this case. As to the counterclaim, I have
already indicated that I will direct a suitable inquiry.
