A decision regarding the sale and purchase of a hotel in Pyrmont that has impacts on many current transactions has recently been handed down from the High Court of Australia. The primary question in the case revolved around “carrying on” provisions, a standard contract provision included in almost all Hotel (and sale of business) transactions. The interpretative scope of what that phrase actually means has now been determined.

The Facts

In January 2020, Laundy Hotels (Quarry) Pty Ltd (the vendor) and Dyco Hotels Pty Ltd (the purchaser) entered into an agreement to purchase the Quarryman’s Hotel and associated business (the Hotel) in Pyrmont for $11.25 million. Completion of the land and business contracts were initially contracted to occur on the 30th and 31st of March 2020 respectively.

During the period post-exchange and pre-completion the COVID-19 pandemic occurred – bringing with it, mandatory public health orders. During that time, the Hotel was not providing dine in services and was instead operating as a takeaway food and beverage business. On 25 March 2020, the purchaser informed the vendor that it would not complete the contract because the vendor was not ready, willing and able to complete due to its breach of clause 50.1 which required the vendor to “carry on the Business in the usual and ordinary course as regards its nature, scope and manner …”. The vendor disagreed, subsequently served a notice to complete, and terminated the contract once completion did not occur at the expiry of the notice to complete.

“Usual and ordinary course…”

Clause 50.1 of the contract provided that “from the date of the contract up until Completion, the vendor must carry on the Business in the usual and ordinary course as regards its nature, scope and manner.” This type of clause is generally accepted and included in contracts involving the simultaneous sale of land and its associated business, as is usual in hotel transactions. The key question was whether the vendor’s operation of the Hotel which was limited by public health orders, and not operating with the full scope at the time the contract had been entered into constituted a breach of clause 50.1.

The Findings

The High Court found that the vendor did comply with the obligation as the proper construction of the clause implied that “the vendor’s obligation…. is moulded by, and subject to, the law as in force from time to time”. It was also further reasoned that because the Hotel operates pursuant to its liquor and gaming licence, contravention of public health orders could place that licence at risk and thus actually cause a breach of the clause.

The High Court also investigated several other provisions in the contract including the vendor’s warranties and excluded warranties and found that the requirement for the carrying on of the Hotel to be lawful was not required to be stated in the contract, as the nature of the Hotel required specific legal authority to continue to operate.

What does this case mean for hotel transactions?

The case puts beyond doubt that the a vendor’s ability to continue to operate the business in the “usual and ordinary course” is subject to what is actually permissible at law, which may change from exchange to completion. A vendor cannot be compelled to continue to operate a business contrary to law or regulations to fulfil a contractual promise to a purchaser.

For vendors, it is important to ensure that your warranties, excluded warranties and “carrying on” provisions are flexible enough such that sudden changes in the broader regulatory landscape can be accommodated for, and amendments are made to sale and purchase agreements to follow this decision to put purchasers on notice of what may be deemed to be a somewhat obvious interpretation. Purchasers will need to understand that “carrying on” and other similar clauses do not mean that on completion a purchaser will receive the identical business that has initially been contracted for, as the business may be subject to change depending on unforeseen legal and regulatory impositions.

However, should the legal and regulatory framework remain constant, “carrying on” provisions will continue to provide the requisite protection for purchasers as vendors will be obligated to adhere to these contractual provisions.