|July 15, 2014|
Previously published on Summer 2014
A franchised or “branded” hotel is one affiliated with a major hotel franchisor, such as Hilton® or Starwood®. Hotels that are part of a branded chain typically operate under a franchise agreement. A franchise agreement is an agreement between a franchisor and a franchisee, granting a license to use trade names, trademarks and intellectual property, among other things, in exchange for a fee. In the hotel industry, the fee is typically based on gross room revenues.
Potential purchasers of franchised hotels, and their lenders, need to know that franchise agreements are personal to the existing franchisee and do not automatically transfer to a new owner. Each buyer must be approved by the franchisor, and granted a license to use the trademarks and brand name, and to receive the other benefits a franchise agreement provides. The approval and licensing process should be taken into consideration before a branded hotel purchase is finalized.
Financing the purchase of a branded hotel also requires special considerations. From a lender’s perspective, much of the value of a hotel is in the franchise agreement. Re-branding a hotel is costly, risky and time-consuming. Accordingly, potential lenders typically want the franchisor to agree that, in the event of a default by the borrower and foreclosure of the loan, the lender or other purchaser in foreclosure can continue to operate the hotel as part of the same chain or brand of hotels under the same or a comparable franchise agreement, at least for a limited period of time. Similarly, the lender will want the right (but not obligation) to save the franchise from termination in the event the franchisee breaches the franchise agreement. These considerations are usually addressed in a letter agreement, called a “comfort letter” between the lender and the franchisor.
Most hotel brands have a standard comfort letter that will serve as a starting point for negotiations. The usual parties to the comfort letter are the hotel franchisor and lender, although the borrower/franchisee may join in the agreement to acknowledge and agree to its terms. The lender should make sure that the term “lender” as used in the comfort letter will include any successor noteholders, trustees, and servicers.
There are many other concerns associated with branded hotel acquisition and financing. The hotel franchise agreement, loan documents, and comfort letters should be analyzed carefully before purchasing a branded hotel or lending to a potential purchaser. Litigation can arise from all of these agreements, including the comfort letter. In the event litigation does arise in these areas, Rose Marie L. Fiore in our Cleveland office has significant experience with these issues and can provide counsel, advice and representation.