A change of operator can trigger a transfer of undertakings with significant legal implications for the new operator, especially in the fields of tax and employment.
A change of hotel operator takes place when a new company steps in to operate an establishment previously operated by another. Although the concept is simple, the legal implications can be complex: the transaction may meet the requirements for a transfer of undertakings, with significant implications for the new operator.
A hotel is a complex economic entity combining tangible assets (real estate, plant, furniture or FF&E) with intangibles (brand, goodwill, know-how, booking list, relationships with tour operators, OTAs and suppliers), all intertwined with a human-resource intensive component.
A hotel business owner operates the establishment, organizes human and material resources, provides services to the customer and bears the risk of the business. This position can be held by a person other than the owner, under a legitimate legal instrument, such as a hotel business lease agreement. However, this apparent simplicity is made more complicated by the array of models existing in the industry.
Not all models involve the same degree of participation. It is not the same where owners operate the hotel themselves as under a model where a manager act on the owner’s behalf. The arrangement can become more complex where several parties are involved simultaneously: the owner may have leased the business; the lessee may have engaged a third party to manage it; this third party could operate under a franchise; and there may be additional soft branding agreements or separate business units (restaurant, spa, laundry) with separate agreements.
A change of operator can take place through a sale of the property and business, or through a replacement of the lessee under a business lease.
In a sale, the purchaser receives the hotel as a going concern, including plant, licenses, customer list, bookings, suppliers and employees. A lease produces similar effects if the new lessee receives an organization that can continue operating. A franchise alone, however, does not necessarily determine a transfer of undertakings, although such a transfer can arise if the new franchisee continues substantially the same operations with equivalent resources.
Numerous jurisdictions have included transfers of undertakings in their labor laws and, less frequently, in their tax laws. In relation to the EU, it is important to mention Directive 2001/23/EC, on the safeguarding of employees’ rights in the event of transfers of undertakings. However, there is no harmonized European legislation establishing the transferee’s liability for the previous owner’s tax debts.
Spain serves as a paradigm in this context, because it has adopted provisions on transfers of undertakings in labor laws (article 44 of the Workers’ Statute) and in tax laws (article 42.1.c of the General Taxation Law); with similar provisions in tax laws for the Spanish “foral” provinces.
Although both the labor and tax provisions are similar in substance, the definition of undertaking and the requirements determining transfers of undertakings are not identical in both sets of rules, making it necessary to study separately the requirements and liability rules in each.
The General Taxation Law contains succinct provisions on a transfer of undertakings, attributing joint and several liability to the transferee of “ownership or performance of operations or economic activities”. The Workers’ Statute is more explicit: “a transfer of undertakings shall be deemed to exist where the transfer affects an economic unit that retains its identity, understood as a set of means organized for the purpose of carrying out an economic, essential or ancillary activity”.
For the new operator, a transfer of undertakings can transform a transaction that appears to be confined to the liabilities incurred since it came about into the taking on of pre-existing legal relationships, debts, or contingencies: including both the taking on of rights and obligations relating to or held by the previous owner’s employees, and joint and several liability for tax debts arising under the previous operation arrangement.
The law also provides protection mechanisms, however. Under article 175.2 of the General Taxation Law the transferee can apply to the tax authorities for a certificate of the transferor’s debts, penalties and liabilities (with the transferor’s consent). Once that certificate has been issued, the transferee’s liability is limited to the certified amounts, and the transferee is released from liability for any debts not included. Moreover, if the certificate is not issued within the statutory time limit, it is considered that there are no debts for the purposes of the transfer of undertakings. This is an essential tool for mitigating tax risk.
Despite this, the significance of the contingencies that could arise when taking over a hotel business as a going concern makes it necessary to conduct a due diligence process to examine the legal relationships, debts and contingencies that may be transferred to the new owner.
A recommendable approach is to anticipate the problem before signing: identify which business is being transferred, which employment contracts are attached to the economic unit, which taxes apply to it, which debts may be connected with operation of the business, and which contractual or administrative mechanisms can mitigate the risk. Although this does not remove the uncertainty, it can convert a hidden risk into an identified and negotiated contingency.
Put simply, any change of hotel operator must be analyzed as a potential transfer of undertakings. If there is continuity in the operation of a hotel business, the new operator could acquire the previous operator’s tax and employment obligations. Legal risk prevention should be a component of design of the transaction from the outset.
Head of the Tourism and Hotels industry
