Brinphar Ltd & Ors v Ever Bright Inn Ltd & Ors

A disclaimer of a hotel sub-lease does not, without clear language, defease or convert the investor’s registered long lease into a licence. A schedule requiring vacant possession may regulate occupation while preserving the tenant’s legal exclusive possession and estate in land.

Multiple leases and related management provisions may constitute a collective investment scheme under Financial Services and Markets Act 2000, even where returns are not pooled, if the hotel property is managed as a whole. Operating a scheme requires active operation of all material arrangements enabling participation in income, not merely acquiring the property, succeeding to leases, managing buildings, or enforcing ordinary lease rights.

The claimants had acquired long leases of hotel rooms under an investment model involving sub-leases to hotel companies and promised returns. The hotel companies later entered administration. Their sub-leases were disclaimed, and the defendants acquired the hotels subject to the registered room leases.

The claimants sought declarations and remedies concerning the effect of disclaimer, succession to the leases, collective investment schemes under Financial Services and Markets Act 2000, and the consequences of unauthorised operation. The court determined 16 preliminary issues concerning four hotels and related annex accommodation.

1. Leases and disclaimer. The sub-lease disclaimers triggered Schedule 5, but did not defease, end, or convert the registered 125-year leases into licences. “Vacant possession” in Schedule 5 concerned abandonment of factual occupation so that guests could use the rooms. It did not require abandonment of legal exclusive possession. Schedule 5 operated as an agency and profit-sharing arrangement within the leases.
2. Interpretation. Lease interpretation follows ordinary contractual principles, considering text, the agreement as a whole, the transaction documents and relevant commercial background. Clear words would be required to deprive investors of registered proprietary rights. The result sought by the defendants would also allow insolvency disclaimer to produce an unintended windfall.
3. Successors in title. The defendants acquired the hotels subject to the registered leases, which were legal estates binding successors under the Land Registration Act 2002. The defendants were not entitled to remove the registered titles. Alternatively, the leases had been novated as contracts in relation to the relevant hotels, except that no novation was found for the unbuilt Caer Rhun Annex.
4. Collective investment schemes. The original hotel schemes were unauthorised collective investment schemes. The collective Schedule 5 arrangements for each hotel also constituted a CIS because investors participated in income arising from the whole hotel, lacked day-to-day control, and the hotel was managed as a whole. Pooling was unnecessary because management as a whole was an alternative under section 235(3)(b).
5. Operation. “Operating” a CIS under article 51ZE of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 requires active operation of all the arrangements constituting the scheme, including arrangements enabling participation in income. Mere succession to leases, ownership or stewardship of property, and ordinary enforcement of lease rights were insufficient. Aloe Vera operated the Llandudno Bay scheme and Ever Bright operated the Belmont scheme, thereby breaching the general prohibition. EBI in relation to the Queens Hotel, H&M Llandudno and Tokyo did not operate a CIS.
6. Remedies. The claimants could enforce the leases, subject to the statutory framework, but had no personal section 26 remedies against the defendants as successors rather than original counterparties. Tokyo remained liable under the leases to account for unpaid room income. The defendants’ counterclaims were dismissed, and declarations were made in accordance with the preliminary-issue answers.

First-instance decision determining preliminary issues. No prior appellate decision was stated in the judgment.