Hotel Law is a unique blend of Real Property Law, Franchise Law, Employment Law and Corporate Law. Baker & Company has a long history of representing clients in the hospitality industry througout Ontario.
What makes a hotel valuable?
Like most other forms of commercial real property, hotels are valued on the basis of their earning potential. Earning potential is not only a function of the property's ability to earn revenue but also a function of what it costs to operate. A property that is too big will have a lower occupancy rate and a cost structure which will diminish or eliminate the margins required for success. Larger hotels generally require a wide assortment of meeting and banquet rooms so as to attract conventions, trade shows and corporate meetings. While food and beverage facilities are necessary to service groups of guests and large meetings, food and beverage operations are seldom profitable which is another reason why choosing a hotel to operate is an exercise requiring significant skill and experience.
Should I buy a hotel with a popular brand name?
The last 50 years has seen the proliferation of hotel "brands"; some of which have gained international recognition and loyalty. Hotel guests are attracted by the assurance of a level of quality which they come to expect from a particular brand. Add to that a system of international booking and comprehensive loyalty programs and all of this forms the basis of the success of the major hotel brands that we all expect to find in major centres.
While it certainly was the case that successful hotel brands once owned and operated vast numbers of hotel properties, this trend has now shifted. It is now the case that most major brands have either stopped owning and operating hotels or otherwise have placed significantly less emphasis on property ownership. Most of the major, well-known brands focus their efforts on expanding their brand by franchising or licensing their brand to property owners (licensees or franchisees) who agree to operate their properties according to the strict requirements of the Licensor. The brand will require that the hotel property be in a condition that meets the brand standard and that the hotel have facilities, services and amenities that the public have come to expect from that brand.
The major brands have now each developed "sub-brands" that have further segmented the hospitality marketplace. Brands once known for a single level of quality, have now developed sub-brands at varying price points in recognition of the fact that not all travelers have the same requirements or budget. Hotels with smaller rooms and fewer amenities are sometimes the perfect fit for the budget conscious business traveler whose principal requirements are a clean high quality bed and proximity to the airport. By proliferating their brands, the major hospitality companies hope to compete within various market levels and price-points, capturing guests with carefully crafted offerings under distinctive and different brand names.
As such, there needs to be a nexus between the way a hotel is built and the brand or type of brand under which it will eventually operate.
Most Licensors will inspect a prospective property to ensure that the hotel has the amenities and facilities that are appropriate for the brand in question. These brands are successful because travelers can rely on the fact that a property bearing a certain brand name will predictably deliver a certain quality of experience that the traveler has come to expect from that brand, all at a price point that can also be expected within that particular market segment.
Property Improvement Plans
Hotels operate 24 hours a day and 365 days a year which places unique pressures on hotel operators, not the least of which is maintaining the property in pristine condition under circumstances where it is always in use. The amenities which make a hotel attractive and successful such as decor, linens, carpeting, beds, and bathrooms, for example, all have a defined lifespan and require replacement from time to time. Most brands will require a prospective hotel franchisee to implement a "Property Improvement Plan" as a condition of being awarded a Licence or Franchise to operate under the brand. A typical PIP or Property Improvement Plan might require upgrades to carpeting, curtains, tv sets, bedding and lobby decor. Depending on the size of the hotel, these upgrades could cost the operator several millions of dollars. The franchise or licence agreement will predictably require the franchisee to set aside perhaps 4% of revenues each year in a fund to pay for future capital improvements and replacements during the currency of the licence agreement. In addition, Licensors reserve the right to inspect the hotels operating under their brand and to issue PIPs to operators whose properties fall below the standards required by the brand.
Franchise and Licence Agreements
Most Licence or Franchise Agreements have lengthy terms which are meant to reflect the significant investment of both Licensor and Licensee in bringing a new property into the brand fold. If the brand is successful, this can bring some comfort and stability to the franchisee. It is often enough the case, however, that a brand may struggle in a certain location or in respect of a particular property that may be mismatched to the brand. In this event, the long-term franchise agreement becomes a burden to the franchisee as there are few if any "escape doors" in the contract. It can even be difficult to sell a property bound by a less than successful franchise relationship as the term extends to new buyers who must assume the remaining years of the franchise agreement or otherwise face the prospect of buying out the old brand; generally, an expensive proposition.
Hotels can have large numbers of employees ranging from food service and housekeeping staff to customer service, sales and marketing and executive level employees. A significant number of hotels have been unionized and are subject to collective agreements. For management level staff and for non-union hotels, the importance of employment agreements cannot be over-stated. Canada has comparatively employee-centric employment laws which require employers to provide long notice periods to employees who are to be terminated. This is particularly relevant when buying or selling a hotel. Special care must be taken to manage the transition of the hotel employees to the new owner-employer. The costs associated with that transition can fall on the buyer or the seller, depending on how the purchase agreement is negotiated. Special attention must be given to senior management employees during an ownership transition. Often as not, senior managers are not required by the purchasing party and a sale represents the end of the road for the managers of the sold property. Having said that, senior managers are key members of the transition team and steps must be taken, early in the sales process, to incentivize senior managers to stay on board during the sales process and to postpone their job search until the sale has been completed.
Financing Hotel Acquisitions
Unlike many other kinds of commercial real estate, hotels have only one purpose and cannot be easily adapted to other uses. Banks who would finance the purchase or remodeling of a hotel property face a difficult analysis of risk involving both an appreciation of local occupancy rates as well as an assessment of upcoming capital requirements. Because the underlying real property value can only be captured by demolishing the hotel itself (also an expensive and time consuming proposition), banks have been unwilling to extend loan to value ratios much higher than 50%. Most lending agreements require monthly reporting from the hotel borrowers as well as a requirement to segregate a percentage of revenues for future capital expenditure requirements.
If you are building, buying or selling a hotel, it is important to retain lawyers who are familiar with the hospitality industry and who are tuned in to the unique requirements of hotel owner-operators. A good lawyer with experience in hospitality properties will be able to save you more money than you will spend on his/her fees. The opportunities to win or lose in hotel transaction negotiations is almost endless; it is one area of the law where having experienced counsel is particularly important.