Issues facing the hotel industry: standardisation of lease forms across borders

A large hotel chain whose hotels are all leased is likely to have a major management headache if, as is quite likely, each lease throughout the world is in a different form with many different languages.

The hotel operator will be told by its advisers that each jurisdiction is different with different laws relating to landlords and tenants, some with specific codes, others with law based on case decisions. But is this an excuse and does the practice really have to be that way?

There are common factors in all leases in whichever continent and whichever legal system. For instance the period of the lease, the provisions for the payment of rent, the need to insure, the need to repair and the need to have a clear use obligation.

Based around these and other common features, there is no reason why the hotel group should not have a standard form of lease in English, or indeed any other language, which is tailored to the particular jurisdiction but where, for consistency, that tailoring is always located in the same part of the lease for ease of recognition, with common wording used wherever possible.

Repair

Take an example, the repairing obligation. In many hotel leases in the UK the obligation to repair both the interior and the structure will be placed firmly on the hotel operating company as tenant. However in many continental European civil jurisdictions the obligation to repair the structure is placed by code on the landlord. The code is often general and whilst it may be fairly clear that the landlord is responsible for foundations, structural walls, roofs and so forth, what about external parts that are not structural in nature such as canopies, verandas, paving, downpipes, gardens and so forth? If the standard lease lists all the common aspects of a hotel from structural and external parts to internal non-structural parts stating against each who is responsible for repair or redecoration, namely landlord or tenant, the lease can be simply modified from jurisdiction to jurisdiction because in each case all that needs to be changed is one word, namely "landlord" to "tenant" or vice versa. The same method can be used to show the responsibility for repair. The parties can then see at a glance who is responsible for a particular part of the hotel and need not employ local lawyers to interpret the relevant code to find out what, if anything, the code has to say on the subject.

Business aspects

The lease of a hotel is a particularly specialised document. It is not merely a lease of the real estate. In many senses it is the full lease of the business including moveable items, from large objects (such as beds down to small objects such as teaspoons), intellectual property (such as hotel software and the name of the hotel), forward bookings, cash in hand and staff. Where the hotel is an ongoing business, the lease documentation must provide for what happens at the beginning of the lease term in relation to wet and dry stocks, apportionments, long stay guests, the takeover of staff and the transfer and novation of third party maintenance and supply contracts. Likewise the documentation must also provide for what happens at the end of the lease term. Will the landlord want to take back the hotel business as well as the bricks and mortar or will it want the tenant to liquidate the business? Save in relation to the responsibility for hotel staff (where broadly similar rules apply across the EU) it is unlikely that local code provisions will have anything to say. It therefore makes sense for the hotel company to use a standard form provisions in its lease so that broadly similar procedures can be adopted in relation to each hotel.

Rent

Whilst there are no doubt some hotels which are still leased on an annual rent which is increased either in line with inflation or by reference to open market rental values, most hotels are now leased on the basis of a turnover or profit rent often based on earnings before interest, tax, depreciation and amortisation (EBITDA). As most hotels the world over adopt the common hotel accounting system (the Uniform System of Accounts for the Lodging Industry), logically the method of calculating the turnover or earnings upon which the rent is to be based can use the Uniform System. This again aids the preparation of a standard lease which, for the assistance of the parties, could contain a template, based on the Uniform System, for calculating the turnover or earnings upon which the rent is to be based.

Insurance

In the case of many investment buildings, the lease or the local law or both place the responsibility for repairing the building on the landlord. However, in the case of hotels arrangements for the insurance of the structure are often different, and even where they are not, it is generally the responsibility of the hotel operator to insure the fixtures, fittings and equipment and small operating equipment. A standard lease can be used to list the insurance risks which are to be covered and to state in respect of each aspect of the hotel whether the landlord or the tenant is to insure.

Increasingly, certain insurance risks, for instance terrorism, cannot be covered in all jurisdictions. Sometimes the local law clearly states which party must carry uninsured or uninsurable risk but often the law is not clear and it is for the parties to agree the apportionment of this risk. A standard lease can do this clearly, rather than by implication as is often the case. For instance it can provide that any uninsurable risk to the structure is the responsibility of the landlord and any of the FF&E and SOE is the responsibility of the tenant.

Code provisions

In most jurisdictions, even those such as the United Kingdom which do not have a legal code, there is legislation binding upon the landlord and tenant of a lease which implies certain provisions into the lease. It may be a right for the tenant to renew the lease at the end of its contractual term. It may be a detailed procedure which the landlord must follow when dealing with a breach by the tenant of its obligations under the lease. Or it may be a law limiting the expenditure which a landlord may pass to the tenant by way of service charge or reimbursement of costs. In a standard lease, for the assistance of both parties, wording can be used specifically to refer to implied laws and their effect particularly where they impose obligations above and beyond those covered by the basic wording of the lease.

Conclusion

As more and more landlords invest across boundaries they are likely to accept less and less the notion that the form of the lease must be materially different in each jurisdiction because of the requirements of local law or practice. Major suppliers of space across borders can determine practice over a period because at the end of the day no country which requires inward investment is likely to allow practice to deter that investment. If landlords require standard forms it must be for lawyers and real estate practitioners to be sufficiently flexible to create those standards. That is likely to be the future of the real estate investment market, particularly in Europe, in the coming years. Hotel operators, leasing a very specialised type of real estate, can be at the cutting edge when it comes to the standardisation of lease forms across borders.

If you would like to find out more about the standardisation of lease forms across borders please contact the following partner from our CMS International Hotel Group: Charles Romney T+44 (0)20 7367 2727 F+44 (0)20 7367 2000 or charles.romney@cms-cmck.com