A Brief Introduction About the Hotel Lease Agreement
A hotel lease agreement is a document that keeps legal evidence of every detail contained in an agreement for the Lease of a hotel, a portion of the hotel used for conducting some programs, or for a corporation or business firm’s official purposes. The agreement must be framed in a clear and concise manner such that it is understandable to everyone, as defaults in the agreement could cause severe losses in the future.
Who Takes the Hotel Lease Agreement?
In an agreement, the hotel lessee holds the entire financial burden. The hotel company in this manner is a tenant and assumes all operating duties together with all the financial obligations; thus, it enjoys the benefits of the property if successful but also bears all of the losses if the property doesn’t perform adequately. The hotel lessee receives all of the profits after rents were paid.
Purpose of the Hotel Lease Agreement
This agreement signifies a passive investment in a hotel property. The lessee of the hotel property makes profits from running the hotel, in particular as subletter of the hotel rooms as well as other facilities and also by furnishing other hotel services. The property investor could only expect a lasting return on investment if the lease rates are market-based and remain so.
Contents of the Hotel Lease Agreement
When it concerns hotel management agreement vs hotel for lease, it’s important to note that legal terms hotel management contracts are the complete opposite to hotel lease contracts and should be accordingly drafted to suit the individual needs.
In this agreement, the rental structures could vary depending on the amount of risk that the investor is ready to take. Some of the possible choices are:
- Leased Property: The Leased Property shall mean all the buildings, structures and other improvements of every kind including tunnels, sidewalks, utility pipes, and lines (on-site and off-site), equipment, machinery, fixtures, and other items.
- Term: The commencement date and the end date (Unless the agreement is terminated in accordance with the provisions hereof)
- Option to Terminate Lease: If the event lessor chooses to enter a contract to sell the Leased Property to a non-Affiliate, Lessor can terminate the Lease by giving a prior written notice
- Transition Procedures: On termination of the Term should cooperate in good faith for an orderly transition of the management
- Books and Records: All books and records should be delivered promptly to Lessor or Lessor’s nominee, along with the termination of this Lease.
- Receivables and Payables: Lessee shall retain all cash, bank accounts and house banks, and collect all Gross Revenues and accounts receivable.
- Final Accounting: Lessee should deliver to the Lessor a final accounting statement, along with any statements of any sums due from Lessee to Lessor.
- Fixed fee: It is a fixed rent with indexed growth. This type of hotel lease agreement has a guaranteed return, which bears the least risks for the property owner.
- Share of Revenue: In this variable lease situation, the rent is calculated on the sum of sales generated. The property owner shares some of the risks related to the levels of performance of the hotel. They do, however, have the opportunity to assess the performance of the hotel against available market data.
- Share of Net Operating Income (NOI): In this variable lease situation, the rent is related to the NOI after all the operating expenditures have been deducted. This situation carries the highest risk to the owner, as it also comprises the operating risk of running the hotel as well as offers little transparency as to likely income.
- Both the revenue‐based and NOI‐based rents could comprise a base rent, which is a guaranteed return to the owner (hybrid lease). A hybrid lease might also comprise of a few clauses that could be found in management agreements, such as a responsibility to maintain brand standards, and hotel eviction laws
How to Draft the Hotel Lease Agreement?
It is appropriate to use the agreement if the property being rented shall be used as a hotel. The tenant’s success is a benefit towards both. It also acts as liability protection for the landlord. To set up a hotel lease, both parties should agree to the terms.
Some key terms to negotiate consist of:
- Which party carries insurance on the property
- The due date for rent payments
- Space for consumers when it’s busy/overcrowded
- Tenant and customer safety
- Property renovations
- Condition and use of the leased property
- Default by the lessor, and lessees remedies
The conditions for leasing a hotel could vary from the terms included while leasing other types of property. The hotel lease protects the interests of both the tenant as well as the landlord. Like a regular property lease, the tenant shall pay for the right to use the property. Leases for commercial purposes are usually longer than residential leases and could vary in length from three to five years. Tenants in commercial properties also have the option for renewal that let them stay in the property at a predetermined rate.
A hotel lease agreement format hotel lease agreement template provides a detailed view on the inclusions.
Benefits & Drawbacks of the Hotel Lease Agreement
- This agreement is an alternative to the sale contract and much similar to a rental contract. A lease has a more steady income than other types of management models, as the hotel chain would have an obligation to pay the price agreed for the rent, whatever the economic outcomes of the business would be. Through this, the owner of the hotel has an income that is guaranteed.
- There is a diversity of rental conditions, and every case is different. A fixed rent is when there is a base rent indexed towards inflation, and a find variable rent is when the sum is negotiated under the income. There are numerous options and more models that could be adapted to each case. Through this, we find the hybrid rent in which the tenant would pay a variable rent with a guaranteed minimum.
- In the leasing model, the manager assumes the business risk and is liable for the functioning of the business. The owner still owns the property and would charge a rental fee agreed upon in advance.
The big difference and drawback amid a hotel lease and other hotel management agreement is that the owner doesn’t participate in the day-to-day management of the hotel and just acts as a mere landlord. In return, the operator (the hotel chain) takes responsibility for all of the financial risks.
What Happens in Case of Violation?
If there is a breach of contract(1), the lessor might terminate the lease by giving not less than 30 days’ prior notice to the lessee of lessor’s election towards terminating the agreement effective upon, as appropriate.
A hotel lease agreement is a basic commercial lease form that you fill in with particular details relating to leasing property for use as a hotel facility. The agreement is a rental contract made between the landlord and the tenant. This type of agreement is used when you have found the desired location to open a hotel, or if you are a property owner who wants to rent out a property for use as a hotel.