Damage caused to a hotel business due to unperformed landlord's works

In brief - a recent decision of the NSW Supreme Court in Ryals Hotel Pty Ltd v Zhaos Pty Ltd [2020] NSWSC 719, sheds light on how the courts may calculate damages where a lessee hotel operator is unable to use a significant service asset of the premises due to a breach of lease by the lessor property owner.

Background

The plaintiff leased a building from which it operated the Ryals Hotel Broadway in Glebe. At the time that the lease was entered into there was no operational lift in the building but the lease provided that the lessor was "in the process of" installing a new lift. The lift was eventually installed six months later, but in the interim period without an operational lift, guests staying on the top floor had to walk up four flights of stairs, the construction work caused a disruption for guests, and the basement level (the main hub of the works) could only be used for storage.
 
Previous declarations made by the Court confirmed that the defendant landlord had breached the lease by taking six months to install an operational lift. The question now before the Court was how to quantify the damages of the breach and also whether the plaintiff was entitled to an abatement of rent for the relevant period.

The claim for an abatement of rent

The abatement claim required the plaintiff to show that, as per the abatement clause in the lease, the building was damaged and either could not be used or had diminished useability. The plaintiff argued both that the lift works physically damaged the building and that the works damaged useability of the building by significantly impairing the ability of the plaintiff to make full use of the building for the purpose of operating its hotel business.
 
The Court rejected that the lift works constituted "damage" for the purpose of the abatement clause, noting that "the very nature of the obligation [to install the lift] is such that occasioning at least some damage to the fabric of the building would be expected to occur in the process of removal of the existing lift and installation of a new lift". The Court held that reading the abatement clause in the context of the lease as a whole, reasonable business persons in the position of the parties would have understood "damage" as meaning "physical damage arising from events of an unexpected or unintended nature, whether occurring externally to the lease or in the course of its performance", for example - damage arising from an earthquake or from an accidental explosion or fire in the course of carrying out works required under the lease.

The claim for damages

To assist the Court in quantifying damages, both parties supplied expert evidence from valuers, which the judgment canvassed at some length. The valuers considered customer reviews (with a particular focus on reviews mentioning the lift) and industry benchmark data obtained through STR Global Ltd. The valuers used different methodologies to calculate the loss and disagreed about whether it was appropriate to compare the hotel to other hotels in STR's Upper Midscale to Upscale category or Midscale to Upper Midscale category, whether the quality of the hotel was at a 3.5 to 4 star standard or a 3 to 3.5 star standard, and whether a "ramp up period" should be factored in to the assessment of what occupancy rates would have been were it not for the broken lift, or whether any such "ramp up" period would have been mitigated by the "honeymoon period" of a newly rebranded hotel.
 
Ultimately, the plaintiff's valuer concluded that the absence of an operational lift was a "major factor" that prevented the hotel from operating at optimal levels and fulfilling guest expectations and calculated damages as $413,500 (including $125,000 accounting for lost rental income relating to the basement area). The defendant's valuer considered that the damages were $112,142 (and did not include any amount relating to the basement, on the basis that the plaintiff would not have been able to obtain rent for the basement in the relevant period because it did not have development approval and therefore no earnings were lost).
 
The Court noted, as a starting point, that the general principle to apply in assessing damages for breach of contract is that the plaintiff should be placed in the same situation as if the contract had been performed (as stated in Robinson v Harman (1848)), and that the burden is on the plaintiff to prove the extent of its loss. The Court described the difficulties with calculating damages as follows:
 

The present case is an example of one where it is not possible to adduce precise evidence of loss. The absence of a working lift, and the carrying out of the lift works during the relevant period, was capable of causing loss by detracting from the quality of the experience enjoyed by hotel guests, and hence the overall reputation of the hotel. The manner in which particular losses arose, and the extent to which an overall loss was sustained, are matters which are not able to be directly observed, or measured with exactitude. It is thus a case where estimation, if not guess work, is required in order to assess loss.

 
The Court accepted that both valuers had "faithfully attempted to assess the likely affect upon the hotel business of the lack of an operational lift, and the carrying out of the lift works" and that "the assessments involve a significant degree of subjective judgment on matters about which minds may reasonably differ".
 
Using the calculations of the defendant's valuer as a base and making adjustments where necessary (for example, an adjustment was made where the defendant's valuer had overstated the relevance of factors other than the broken lift in explaining negative reviews), the Court concluded that the plaintiff suffered a loss of about $190,000. The Court did not accept that the plaintiff had suffered a loss due to the works occurring in the building's basement.
 
This is an interesting case where the courts have provided some commentary on hotel valuers' opinions and the weight that is given to these opinions in determining the relief that will be awarded to a hotel operator lessee where the lessor's default has arguably had an impact on the average daily rate (ADR), revenue per available room (RevPAR) and overall performance of a hotel. The decision demonstrates that assessing damages in such a circumstance is a difficult and imprecise task and certain subjective assessments have to be made to assess the adequate amount of damages due.