Here is a list of the top legal documents you will use to acquire a hotel property. While various attorneys (yours, the seller’s, the franchise company’s, etc.) will prepare these, you and your attorney should review them so that you understand all the implications and can negotiate appropriately as necessary.
- Letter of Intent
- Noncompetition, Non-solicitation, and Disclosure Agreement
- Purchase and Sale Agreement (PSA)
- Escrow Agreement
- Franchise Agreement
- Management Agreement
- Bill of Sale and Assignment
- Assignment and Assumption Agreement
- Settlement Statement
1. Letter of Intent
A Letter of Intent is used by a buyer or seller before they enter into a business transaction. Specifically, purchasing a hotel begins with a Letter of Intent between the buyer and seller. The Letter of Intent highlights big-picture items that will be further defined in the various agreements and other documents to memorialize the transaction. Such items include, but not limited to:
- proposed purchase price
- proposed due diligence period
- proposed conditions of the sale
- exclusivity period regarding the seller accepting other offers
- full or partial payment of the purchase price at closing (sometimes the balance is paid based on a promissory note or an accepted payment schedule)
- specifically which paragraphs of the letter have a binding effect.
2. Noncompetition, Non-solicitation, and Disclosure Agreement
The Noncompetition, Non-solicitation, and Disclosure Agreement helps to protect the Buyer’s interests by memorializing any agreements that (noncompetition) the Seller will not go into competition (across the street) with the Buyer, will not solicit employees or vendors away from the Buyer to a new enterprise the Seller pursues (non-solicitation) and will not disclose material information about the transaction (disclosure).
3. Purchase and Sale Agreement (“PSA”)
The Purchase and Sale Agreement or PSA is an agreement between a Buyer and Seller to structure a hotel property acquisition as a purchase or sale of hotel real estate and assets. The PSA incorporates the provisions contained in the Letter of Intent, expands on such provisions and includes additional details about the transaction, including which paragraphs of the PSA survive closing of the hotel acquisition (meaning some paragraphs remain to have a binding effect on the buyer and seller after the sale of the hotel property).
4. Escrow Agreement
An Escrow Agreement is a contract that outlines the terms and conditions among buyer, seller, and escrow agent, the parties involved in the hotel acquisition. The Escrow Agreement also clearly specifies the responsibility of each party. An escrow agent is an independent third party who holds the initial and subsequent deposits of money submitted by the buyer pursuant to the terms of the PSA until the specified conditions of the PSA and Escrow Agreement are met.
5. Franchise Agreement
A Franchise Agreement is a binding agreement between the hotel franchisor (Hilton, Hyatt, Marriott, Choice, etc.) and franchisee (buyer/owner). It details the business relationship between the two parties and explains the rights and obligations of each. Hotel franchise agreements vary depending on the hotel franchise but should address the following areas:
- the area or territory granted to the franchisee
- trademark use and restrictions
- duration of the agreement
- conditions for terminating, transferring and renewing the agreement
- any restrictions placed on the goods or services offered
- noncompete covenants
- the method of resolving disputes between the parties
- the training and support the hotel franchisor will provide
- tax issues
6. Management Agreement
A Management Agreement is used by providers of hotel management services. Whether you as the hotel buyer will manage your own hotel or whether you will hire a third-party management company, a Management Agreement is required. A Management Agreement states the specific administrative, management and development services provided, and the compensation for such services. A typical management agreement term can last for as little as 1 or for as many as 5 years. However, the term can be negotiated.
7. Bill of Sale and Assignment
The Bill of Sale and Assignment accompanies a sale/purchase transaction to demonstrate clear transfer of interests from the seller to the buyer. The Bill of Sale and Assignment is usually signed at closing. A Bill of Sale and Assignment is necessary because the sale of a hotel invariably will come with some personal property, such as beds, sheets or curtains, etc. Such personal property must be listed and numerated in the Bill of Sale and Assignment.
8. Assignment and Assumption Agreement
An Assignment and Assumption Agreement is used after a PSA is signed, in order to transfer one of the contracting party’s (Buyer or Seller’s) rights and obligations to a third party who was not originally a party to the contract. The party making the assignment is called the assignor, while the third party accepting the assignment is known as the assignee.
For example, buyer purchases a hotel from seller pursuant to a signed PSA today. Seller has an existing contract with a landscaper to maintain the grounds of the hotel. Such contract is between seller and landscaper and does not expire for another 6 months. Buyer wants the hotel to continue to use this landscaper’s services. Thus, seller transfers its contract with the landscaper to the buyer by using an Assignment and Assumption Agreement.
9. Settlement Statement
The Settlement Statement (aka the ALTA settlement statement) is an itemized list of all of the fees or charges that the buyer and seller will pay during the settlement portion of a hotel real estate transaction. Everything from the sale price, loan amounts, stamp taxes and other pertinent information is contained in this document. The Settlement Statement details the funds owed to real estate agents collecting commission from the sale, local governments owed taxes and recording fees, attorneys’ fees, and final charges going to the lender.
A Deed is both the means by which a seller transfers title to real property (a hotel property) and important evidence of such transfer. Each Deed represents a “bundle of rights” accompanying the transfer of title to real property. While the main function of a Deed is to convey an interest in real property, there are several ancillary purposes as well. Once a deed is recorded, it provides notice to third parties of the transfer. Deeds can also be used to control or limit the use of the real property being transferred, as well as how the property will be disposed of in the future. In addition, a Deed replaces a signed PSA, except for those paragraphs in the PSA that remain in effect after closing.
This article was written by Michele Hyndman of The Hyndman Group, a Family Business Lawyer™. We offer a complete spectrum of legal services for hoteliers and can help you make the wisest choices on how to deal with your hotel business(es) throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing hotel business, which includes a review of all the legal, financial, and tax systems you need for your hotel. Please contact us at email@example.com or at 754-253-8825.