We knew Basil wanted to escape from the hotel and have a different life, and the documentary showed various scenes when he was up to something as yet unseen, being crafty etc. Some of these scenes in the dream from the show were actually real and well known, others were made up for the dream, but in the dream they were familiar and real.
We are also shown at various points Basil switching off TV sets in the hotel lounge and reception, or changing channels with a 'We won't watch that!' kind of flippancy.
As explained in this last unbroadcast episode, it turns out Basil was a writer and he was writing scripts for a BBC comedy. His experiences day to day running a hotel in Torquay as seen in the series are actually what he wrote about.
Indeed, the whole thing came complete circle when, in the very last shot of the episode, Basil's wife looks in a Radio Times saying.. "oh I haven't seen this for years! I wonder what is on telly tonight..." and opens it up as the camera slowly reveals she sees a comedy called Fawlty Towers set in a hotel in Torquay.
So what we were seeing was the series that Basil had been writing. Art imitating life dressed up as art. The ultimate clever clever artifice.
John Cleese says he decided to remove this episode from the series as to retain the mystery.