In this article we consider how hotel owners can best protect themselves against unforeseen roadblocks impacting the sale.
Different processes for different sale structures
There will be an approval process set out in your hotel franchise or management agreement. Depending on the structure of the sale, the process differs. If you are looking the sell the building or the business by way of an asset sale, the brand will typically expect the buyer to enter into a new franchise or management agreement (unless you have secured a break option on the sale). Unfortunately, in a franchise agreement, termination on sale is the exception. In a management agreement, this remains a possibility, but in all cases a break fee will be payable.
Assuming you don’t have a break option, the agreement will set out the buyer approval process. Typically, this involves the following steps:
1. The owner must give prior notice of the proposed sale and provide the brand with certain information about the buyer.
2. The brand can refuse consent to the transfer unless certain agreed conditions are met. These can include payment of a transfer fee, performance of a property improvement program (PIP) and the provision of security by the new owner.
3. The brand will also require background checks to be carried out at your expense on the buyer and its owners. If the buyer does not pass the background check, consent to transfer will be refused and punitive damages may be payable if the sale proceeds without clearance from the brand.
4. The brand will often require a new hotel agreement to be entered into by the buyer, which may include financial and commercial terms that are more onerous than the terms you have negotiated with the brand in your agreement.
5. Some franchise or management agreements contain a right of first refusal (ROFR) over the hotel for the brand. If your agreement contains a ROFR, this needs to be waived before the sale can proceed. It may at times be possible to invalidate the ROFR, as some countries require notarization of a ROFR document or registration of the same in the land registry, a step that may have been overlooked.
Where the sale is a share sale, the process is similar, but a new franchise agreement or management agreement should not be required (as a matter of law) given that the change of control is at the level above the company that owns and operates the hotel. However, many franchise and management agreements include a contractual right of the franchisor/manager to alter the legal and financial terms of the existing agreement upon a sale. Clearly, this is not desirable from the point of view of the owner and could hold up or even hinder your proposed sale. Therefore, you should carefully negotiate this aspect, when you enter into the relevant franchise or management agreement to make it clear that the agreement will transfer “as is” upon a change of control.
Documentation required
In addition to your SPA or asset purchase agreement, there will be a number of contractual documents required to transfer the brand or flag to the new owner. These include:
Consent letter - In this letter the brand approves the sale. Watch out for conditions precedent and representations hidden in the consent letter.
Novation agreement - In this agreement the brand agrees to allow the new owner to continue with the existing agreement on the same or amended terms. The novation agreement should also apportion liability for historic and future liabilities between the parties.
Waiver of ROFR - And other rights.
New franchise agreement - Where required.
New Guarantor - Where required.
PIP - In the event of PIP, the buyer may also need to enter into a technical services agreement for the review and approval of the PIP by the brand, and a PIP fee may be payable. You should anticipate this in your SPA and apportion the costs.
Conclusion
It is best to anticipate the future sale of the hotel in your hotel franchise and management agreements by carefully negotiating the relevant provisions when you first enter into these agreements. Our strong recommendation would be not to delay these aspects until the time you wish to make a sale. At that moment your negotiation position will likely be weaker. Points to include, where possible, would be an expedited approval process, a cap on transfer and other fees and a right to transfer the hotel free from PIP during an agreed “holiday” period after a major renovation.
Babette Märzheuser-WoodPartner Head of Retail Group, Managing Director Franchise Advisory, London
