A hotel purchase is fraught with complex issues which include, amongst other due diligence items, financing, employment, third party contracts, retention or termination of franchise affiliation or hotel management agreements and ability to obtain requisite licences or permits.
This note is a brief summary of the key property elements of a hotel transaction which, quite often, need to be resolved in a relatively short due diligence period.
Type of transaction
There are many different hotel transactions which a Property Solicitor may be involved in. The 3 main examples are as follows:
- The purchase of an existing building or site for use or development as a hotel.
As with any other type of development transaction acting for the purchaser, this type of transaction involves buying and assembling the site (an Option being the preferred method), assisting with obtaining the planning permission (including negotiation and approval of any Section 106 planning obligation), dealing with the construction documentation, pre-letting the hotel to an Operator and selling the complete packaged investment.
- The purchase of an existing hotel as an investment.
In this scenario the purchaser is buying an income stream and, as with any other property investment, will be keen to ensure that the income is secure. This will entail checking the title to the building and surrounding land, reviewing the terms any Lease (together with the standing of the Tenant) and any management and/or franchise arrangement.
- The purchase of a building currently used as a hotel with the intention to continue the same use.
This type of transaction is essentially an existing business asset purchase in which the building forms a major part of the business. The purchase also extends to the goodwill of the business and all the rights and liabilities that come with it.
The building may be freehold or long leasehold and, in the case of the latter, the existing Lease would need to be checked to ascertain whether any Landlord (or Mortgagee) consent is required for the assignment of the Lease to the purchaser.
Both parties would need to take proper steps to ensure that the Business Purchase Agreement provides a sufficient roadmap through the acquisition and disposal process that takes into account all stakeholders and meets the parties’ reasonable expectations.
A hotel Lease will almost certainly contain a Tenant covenant to do all acts and things as are requisite to obtain and preserve Licences and is likely to also contain an obligation for the tenant to indemnify the Landlord against any liability suffered as a result of the commission of any offences under licensing legislation.
A hotel may need Licences for all or any of the following:
- Food and beverage (including late night refreshment).
- Gambling and betting.
- Marriages and Civil Partnerships.
It is usual for hotel Leases to contain provision prohibiting the Tenant from surrendering any Licences and requiring the Tenant to obtain the Landlord’s prior consent for any application to vary the Premises Licence.
A hotel Lease may include the following additional Tenant covenants:
- Not to use the building other than as a hotel with ancillary facilities such as reception, offices, meeting, laundry rooms, breakfast bar, cafe, kitchen, ATM or cash machine or such other use previously approved by the Landlord.
- To keep the building open for business for a specified number of months in each year and, whilst open, to offer sleeping accommodation consisting wholly or mainly of bedrooms available to the public generally.
- Not to permit any person to occupy any bedroom for more than a specified period.
- To cultivate and maintain the gardens and grounds forming part of the premises and keep the car park area adequately surfaced.
- To provide services for guests including breakfast and evening meals, cleaning rooms and making beds.
- To display and maintain a sign showing the name of the hotel at a point approved by the Landlord and not to change the name of the hotel without the Landlord’s approval.
Should you be considering the sale or purchase of a hotel (single asset or portfolio) or the development of a new build hotel, our experienced Commercial Property, Corporate, Commercial & Technology and Employment teams are here to help and able to combine their broad commercial expertise and industry knowledge to provide a quality service and deliver your desired outcome.
For more information about the issues in this article or to find out more about how the Leisure and Hospitality sector can help you please contact the team on 0118 952 7711 or email leisure&[email protected].
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.