12- Hotels purchase Legal Keys

After participating in numerous hotel acquisition processes from the point of view of negotiation and operational legal advice, one learns to detect which are the aspects that can potentially entail the greatest legal contingencies in this sector. These are issues that, if are not properly analyzed within the framework of a prior due diligence work, can critically affect the operation’s profitability and can turn into a dead end what at first sight appeared to be an excellent business.

It is true that the approach will not be exactly the same if what is being acquired is a pure and simple hotel establishment, as a real estate asset with its corresponding facilities, or on the contrary, if the company that owns the business or businesses is being acquired. The acquisition via a company facilitates many things, such as the unnecessary need to subrogate one by one in the different contracts, rights or licenses that the hotel may have. But this also implies a greater risk due to the rights and obligation global assumption that this route entails.

That said, what are some of the legal key issues that have to be particularly analysed with special intensity within a hotel purchase transaction’s framework?

1.- Employment contracts and Social Security contributions. The hotel business is labour-intensive, so achieving higher production means hiring more staff. And that is why the main item of expenditure in any hotel business in the strict sense of the word is staff costs. Consequently, the labour compliance analysis contracts with the law, compliance with the applicable collective bargaining agreements and that the workers have been adequately paid for, is one of the key aspects to examine in a hotel purchase operation. In the same sense, if it is not planned to continue with the current management of the hotel and/or certain department heads, if the workforce is oversized and it is intended to adjust it, the labour compensation that such changes will entail must be estimated.

2.- Administrative law. In this section, in addition to the verification and validity of the establishment’s opening licence, attention should be paid to ensuring that the change of hotel’s ownership does not imply the loss of certain subsidies or public aid; it is also essential,  to verify that there is no urban planning contingency affecting the hotel that could lead to significant sanctions or a demolition order. In hotels located on the beachfront, another issue that should not be overlooked is that they are not affected by the Coastal Law, which must be accredited by means of the relevant ownership certificate issued by the mentioned public body.

3.- Industrial property rights. Fundamentally in this category and as far as the hotel sector is concerned, it is important to check that the acquired brand or brands are registered under the seller’s name and have not expired. Also, the internet domains from which the hotel is commercially exploited.

4.- Contracts with tour operators, suppliers and providers. The contracts in force with wholesale agencies should not only be studied by the commercial area of the purchasing company; their remuneration, duration, obligations and potentially damaging clauses should be subject to legal analysis. In the same sense, the contracts signed with suppliers and providers must be thoroughly analysed, without forgetting the financial providers (banks) and the contracts of this nature in which, if applicable, the buyer of the hotel will be subrogated to (loans, credits, leasing, renting, factoring, and a long etcetera).

5.- Ongoing litigation and/or administrative proceedings. Any litigation in progress, even at the pre-judicial stage, should be analysed insofar as its outcome, if it is of a sufficient amount, may affect the purchase’s viability. The same applies to any administrative proceedings that may have been initiated, whatever stage they are at. It should be remembered that hotel business is a highly regulated activity in which different administrations intervene and may exercise their sanctioning powers: health or tourism inspection bodies, the Data Protection Agency, etc…

These are some of the legal issues to be analysed in the prior phase to the hotels purchase. Without forgetting the always relevant tax issue, which would be another article’s subject. Finally, it is important to always have in mind that each transaction is different and must be approached with professionalism and rigour.


David Devesa Rodríguez.

Founding partner – CEO of Devesa & Calvo Abogados

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