The sale and purchase of a hotel is a complex process that calls for a series of preparatory steps and operations to ensure that the transaction is executed efficiently and safely. The most common of these are the agreement of intent, the confidentiality agreement, and the due diligence process, although the particular circumstances of each case must be considered when deciding which preparatory steps are most advisable to facilitate successful completion of the sale and purchase.
There is no clear cut rule as to the preparatory steps and operations required for the sale and purchase of a hotel, since this will depend on multiple factors, such as the location of the hotel, the law applicable, and the object of sale and purchase.
The specific object of the sale and purchase must be identified first because, when we speak of a hotel, we can be mentioning different concepts, each of which calls for a different legal treatment. We may, for example, be referring exclusively to the sale and purchase of a hotel property which, in turn, can be a completed hotel which already holds the necessary licenses or a new hotel (at the project phase, under construction or already built). On the other hand, the object of sale and purchase could be the hotel in a broad sense, meaning the hotel business or enterprise, whose main asset is the hotel property but which also comes with a series of assets and liabilities (both tangible and intangible) which, considered overall and in conjunction with the building, make up the hotel business, as a sole and individually identifiable object. It may also be the case of a share deal, where the object of the sale and purchase is the company owning the hotel asset (which may consist of the property exclusively or of the hotel business).
We provide below a brief description of the preparatory steps and operations most commonly found in the sale and purchase of a hotel:
The agreement of intent, also known as a letter of intent (LOI), is a preliminary document which, on the understanding that both parties are acting in good faith, establishes the real interest of one party in selling and of the other in buying, as well as setting out the main premises and general terms of the sale and purchase. This agreement is not usually binding (or not in all aspects, at least), but it serves as a guide for the parties involved and helps to define a framework for the negotiations. The essential aspects that are usually covered are: (a) the definition of the object of the transaction, identifying the hotel and indicating whether it consists of the property exclusively, or of hotel business, along with all the assets and elements that are linked to it; (b) an indication of the price, which may be the mention of an approximate figure, or a band of values or a calculation formula, along with a brief description of the payment method and schedule; (c) the inclusion of any necessary references to aspects requiring analysis or negotiation, such as certain contingencies, special conditions, maximum negotiation periods, a condition making the operation dependent on the obtaining of financing by the buyer, or any tax implications that may affect the price; (d) an indication of the rules applicable as regards exclusivity; (e) a timeline of the entire process of analysis and negotiation through to the closing of the sale and purchase; and (f) reference to the confidentiality agreement, which is usually drafted and formalized as a separate document. It should be noted that the LOI is sometimes replaced by other very similar documents, such as the so-called heads of terms (HOT) document or the memorandum of understanding (MOU), which also have very little in terms of binding content. On the other hand, if more is known about the object of the sale and purchase, or the negotiations are sufficiently advanced, agreements may be entered into whereby the parties assume greater obligations and become bound to a greater degree, such as, for example, a purchase option agreement or sale and purchase commitment agreement.
Secondly, a confidentiality agreement, also known as a non-disclosure agreement (NDA), is also commonly documented. This is a document that protects sensitive and confidential information exchanged during the negotiations. This agreement is essential to prevent the hotel’s financial, operational and strategic data from being disclosed to third parties, the aspects most commonly covered being the following: (a) the definition of confidential information; (b) the commitment of the parties to refrain from disclosing or using the confidential information for purposes other than the actual negotiations; (c) the length of time for which the information is to be treated as confidential; (d) applicable exceptions (situations in which information may be disclosed, e.g. in order to comply with a court or administrative order); and (e) the consequences which any breach or violation of the agreement will have.
Last but not least, mention should be made of the due diligence process, which involves a review of legal aspects such as verification of the ownership of the hotel, its zoning status, its situation as regards licenses, compliance with legal rules, contracts currently in force, labor and tax liabilities, pending litigation and any other relevant legal aspect. It is also necessary to undertake a technical review as part of this process to assess the physical state of the hotel, including both the building and the facilities, equipment, furniture, etc., as well as an analysis from an operational perspective (analysis of the hotel’s management, processes, personnel assigned to the different functions and departments, etc.). In addition, it is advisable to undertake a review of the financial area (review of the financial statements, income, expenses, profitability, depreciation/amortization, debts and economic projections) and of the commercial aspects (positioning of the hotel in the market, competition, clientele, marketing strategies, sales channels, etc.) A possible legal, technical and operational review carried out prior to the sale negotiations — known as vendor due diligence — can be beneficial, as it allows possible problems to be identified and corrected before they are detected by the buyer. This can streamline the negotiation process and increase the buyer’s confidence in the transaction.
In conclusion, the preparatory steps or operations taking place prior to the sale and purchase of a hotel are essential to ensure that the transaction is successful. The agreement of intent, the confidentiality agreement and the due diligence process are key elements that should be carefully considered and executed by the parties involved.
Head of Tourism and Hotels industry
