This is the third and final installment of GPSolo eReport’s series on real estate law regarding hotels.
This installment concludes the list of issues that real estate practitioners should consider in the purchase or sale of a hotel asset. Such transactions present complexities related to the operation of the business in addition to the usual real estate–related issues of title, taxes, deeds, and the like.
Below are nine final hotel-specific concerns you could encounter:
A buyer may want access to the personally identifiable guest data collected by the owner and its management company for marketing and other purposes. However, the disclosure of this information is highly regulated by a multitude of state and international privacy laws, as well as by privacy policies that guests have opted into. For example, if the hotel markets to customers located in the European Union, its treatment of such data will be subject to the European Union’s General Data Protection Regulation (GDPR). As liability under these laws is potentially severe, sellers should carefully consider whether they are permitted and willing to give the buyer access to this information and, if so, under what conditions.
Yes. Items that require proration include cash at the hotel, booking deposits, employee compensation, inventory, and other items, including payment for stays for current guests (in addition to customary real estate prorations for items such as taxes, utilities, and lease payments). An audit and inventory by the parties on the day prior to closing is generally required and may also be subject to a post-closing true-up.
This is a typical concern for the buyer, who feels the seller could become less proactive and diligent in this “lame duck” period. To protect the buyer from that occurring, the contract should clearly specify that the seller must maintain day-to-day operations of the hotel in a manner consistent with its customary operations, such as repair and maintenance, inventory levels, and the like. In addition, the buyer may have the right to consent to new operational contracts and leases. This is intended to preserve the value and goodwill of the asset.
Yes, but indemnities in the hotel context can be complex. These are designed to protect the buyer from various claims, including those arising from the seller’s breach of the representations about the property. It is customary for the seller to require a deductible and/or a cap and a time limit on the indemnity obligations. The deductible prevents the indemnity from kicking in until claims reach a certain minimum amount, as minor claims are common in the hotel business, so buyers are expected to accept some risk. The cap limits the seller’s exposure to protect its downside, and the limited survival period will provide the buyer with a deadline for making claims under the indemnity. The amount of the deductible and cap are often the subject of substantial negotiation.
In certain cases, the seller retains the right to this money, and the buyer agrees to provide the seller with any funds collected. In other cases, to avoid time-consuming administration, the buyer keeps the receivables and credits the seller for the outstanding amounts, often at a discount because the buyer bears the risk of not receiving payment.
Some contracts specify a detailed process for the parties to jointly inventory and log the items prior to closing. Other contracts handle this transfer in a more cursory way. Either way, the parties need to address these items in some fashion to have a record in the event the guest files a claim of loss against the hotel.
The seller will often require the buyer to honor pre-existing room bookings for periods post-closing. If any of the rooms are booked with loyalty reward redemptions, the buyer will expect to be reimbursed by the seller at market rates.
The seller will want to limit the conditions that entitle a buyer to a refund of the seller’s deposit. However, there may be unknowns that the buyer will want to confirm before it is obligated to close. These may include securing a new franchise agreement, liquor license, or bulk sales tax sign-off. Whether the buyer will have to bear the risk if any of these conditions are not met will be part of the contract negotiation.
If the existing hotel brand will change upon closing, then the hotel will need to be physically debranded prior to closing. All references to the brand, such as names and logos, will have to be either removed or covered. This includes logos at the bottom of a swimming pool and on guest towels, as well as other signage. It may even extend to proprietary furniture, fixtures and equipment, and other design elements that are unique to the brand. The seller will also have to physically remove other items that they have excluded from the sale, such as software systems, guest data, and other proprietary information.
This three-part series has described some of the unique legal issues involving the purchase and sale of hotel real estate. As hotels are operating businesses as well as real estate, there are many complexities to keep in mind that may not arise in transactions involving other asset classes.
