This isn't unsual - the hotel which I regularly use does a similar thing as availability dries up, as does the nearby alternative hotel (both Holiday Inns).

In the first case it goes to a non-refundable rate, whereas the backup hotel still allows a flexible booking.

I'm guessing it's just a way of generating extra revenue over and above what would otherwise be the case - as in if someone is desperate enough to need the room, we may as well get a breakfast sale out of it too, regardless of whether they actually want to order one!

(As it happens, this has happened to me - tomorrow I'm staying at the HI Reading West on a room-and-breakfast rate, as it was the only room left in the hotel. I won't be using the breakfast portion.)