In a recent decision, the owners of a hotel were awarded several million dollars in damages after the prospective purchasers failed to complete the deal.
Owners Try to Sell Hotel
The two owners purchased a British Columbia hotel in 1979 when it was a small six-room bed and breakfast. The hotel underwent several significant renovations between 1979 and 1997. In 1986, the owners built a separate building with 10 additional guestrooms. In 1988, they renovated the original six guestrooms and added private bathrooms. In 1997, the owners completed a substantial renovation that joined the two existing buildings and added 13 guestrooms.
Prior to 2008, the hotel was generating substantial revenues. It was particularly profitable between 2001 and 2008. The global financial crisis in 2008 caused a significant decline in the hotel’s revenues, largely due to the significant reduction in American clients who previously accounted for a considerable proportion of the hotel’s business. These financial difficulties were compounded by a series of personal tragedies suffered by the owners.
In 2012, the owners decided to sell the hotel and transition into retirement.
In 2013, three separate deals to sell the hotel to two different purchasers failed to complete.
By 2014, the owners were both anxious and eager to find a purchaser for the hotel. In March 2014, they met two prospective purchasers. In their letter of intent, the prospective purchasers affirmed their intention to purchase 100% of the shares of the hotel for consideration of $6 million.
The owners thought they had found honest and reputable business people who would comply with their contractual obligations and pay for the hotel.
However, the prospective purchasers had neither the means nor the intention of paying them for their valuable asset. Instead, the owners suffered a six-year odyssey of lies, excuses, threats, intimidation and bullying by both individuals. In the end, the owners’ substantial equity in the hotel was entirely dissipated because of the actions of prospective purchasers.
The prospective purchasers had failed to perform any of the obligations detailed in the agreements with the owners. They asserted that they had reasonable explanations for failing to comply with the terms of these agreements; these explanations largely consisted of blaming the owners.
By April 2016, 18 months had passed since the closing date agreed to by the parties in their agreement and the prospective purchasers had reneged on no fewer than eight amended closing dates.
After the prospective purchasers had failed to meet their obligations, the ownersregained control of the hotel in August 2017. In their letter to the prospective purchasers, they advised that all agreements between the parties were formally terminated because of repudiation of the agreements.
On August 31, 2017, in a bid to reassert control of the hotel, the prospective purchasers, filed a notice of civil claim application seeking an interim injunction to remove the owners from the hotel. In their notice of civil claim, the prospective purchasers sought two equitable remedies: specific performance of the share purchase agreement and restitution of $1,344,328 based on unjust enrichment.
Court Finds in Favour of the Hotel Owners
After reviewing the conduct of all parties, the court concluded:
“In my view, the [prospective purchasers’] considerable misconduct and bad faith in respect of its non-performance of the [agreements] over the past six years establishes a clear basis for a finding that they failed to act honestly or in good faith in their contractual performance. Specifically, the evidence shows that [they] never intended to perform their fundamental obligations under these agreements and they knowingly misled the [the owners] into believing that they would. […]
I also conclude that [the prospective purchasers] deliberately misrepresented their intention to pay the purchase price to the [the owners]. This was their primary contractual obligation but they did not have the intent or the financial capacity to pay this amount at any time during the past six years. […]
In my view, the extensive record of lies and fraudulent misrepresentations deployed by [prospective purchasers] throughout the history of their dealings with the [owners] illustrates considerable bad-faith that is more than sufficient to preclude [them] from obtaining an equitable remedy.”
As a result, the court awarded the hotel owners $2,645,229 in compensatory damages for the prospective purchasers’ breach of the share purchase agreement and an additional $1,359,544 in damages for the filing of a false affidavit in the injunction hearing.
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Due to the very specific nature of the hotel industry and the day-to-day realities of running a hotel, financing a hotel purchase or project can be complicated. If you are building, buying or selling a hotel, it is important to retain a team of lawyers who are familiar with the hospitality industry and who are tuned in to the unique requirements of hotel owner-operators.
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At Baker & Company, our highly skilled Toronto hotel lawyers have been advising clients on hotel financing for more than 30 years. We have helped prospective buyers and current owners of hotels of all sizes.
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