Owning and Operating a Hotel or Motel – Common Legal Issues & Practical Advice
Owning and Operating a Hotel or Motel -Common Legal Issues & Practical Advice
Good judgment comes from experience; and experience – well, that comes from bad judgment.
Entire specialized libraries are filled with volumes and books of wisdom and technical advice. Therefore, to break down and/or condense all that wealth of knowledge into a few bullet points in a short article is understandably overwhelming and next to impossible. However, over twenty years as an in house counsel for large corporations including the Ground Round, Inc. and Starwood Hotels and Resorts Worldwide, Inc. and in private practice counseling hotel owners, brands and managers, certain common questions are often asked. This article will address everyday “highlights,” intended to serve as a starting point for you to efficiently and effectively manage the legal components of your business.
Lawyers and Law Firms
There is an old joke about a lawyer nit-picking over a plumber’s bill “What in the world is going on? I don’t charge $250 per hour!” the lawyer said. “Neither did I when I practiced law.” The plumber replied.
Your Lawyer is a Valuable Team Member
Let’s not beat around the bush! Many business people are fearful of the costs involved in hiring legal counsel, and therefore look at legal services as an expense and drag on profits. However, used properly, your legal counsel can be an invaluable business tool and team member, providing you with a wealth of practical guidance and support for a fraction of the cost when compared to expenses invested in hiring business consultants.
Choosing the “Right Lawyer”
When people have trouble with lawyers (usually with the expenses), more often than not it is because they have hired the wrong skill set for the problem. This has absolutely nothing to do with rates, degrees, and size. You would not hire a
foot doctor to perform heart surgery, nor should you hire your local community general practitioner to assist with the negotiation of a Hotel franchise. Notice I said lawyer, not law firm.
For example, if you are thinking about entering into a hotel franchise, (sounds demanding) important to search out a lawyer with experience representing hotel franchisees. The rate might be higher than the local community lawyer, but the experienced franchise lawyer will be your business coach, he or she will (i) know the behavior of the corporate brand, (ii) understand the terms that need to be in your license and (iii) otherwise will be able to steer you in the right direction for negotiating terms. Message here is that the experienced lawyer will save you money over the long term.
Finding a Lawyer with Experience in Hospitality
- Use the web.
- Ask other owners of hotels.
- If a franchise, then ask the franchisor.
- Ask the national or local business association.
Responding to a Business Dispute
No one likes a business dispute, depending on your personality you may take the issue personally and over react, or you may avoid the stress ignore the issue and under react. The best way to handle the dispute is with objectivity. Most if not all business owners will have a least one dispute if not many. Please whatever you do take legal correspondence seriously and think through in advance how you will react to receiving a lawyer’s letter. Let me share an example of what not to do.
In 2009, Dominoes Pizza started to sell oven toasted sandwiches and took on Subway with a television ad campaign. The ad states that Dominoes subs taste better than Subway subs, and feature frustrated Subway employees throwing lettuce around. Subway issued a “Cease and Desist” letter, demanding that Dominoes pull the campaign. The response from Dominoes’ CEO, David Brandon was to create a new ad where he burns the lawyer’s letter in a pizza oven.
Demand or Lawyer’s Letter
First, read the letter carefully. Read every word. It is rare to receive a letter from an attorney that is not the culmination of an escalating dispute with a competitor, customer or vendor. Be honest with yourself, it is unlikely that the other side has hired a lawyer if he or she does not believe they have been wronged in some fashion. Chances are, in your heart you anticipated the matter would blow up, so this should not be a surprise.
Second, collect and copy all documents and facts that you have that relate to the dispute in question. Be sure not to throw anything out or delete computer records. Remember, there is always a way to recover records! Therefore, if you claim records do not exist for example, and they are subsequently “found”, you are undermining your credibility, and that’s the last thing you want to do.
Third, record response deadlines in your calendar with reminder notations in advance.
Fourth, hire a lawyer. When a lawyer has written a letter making a demand, it is in your best interest and wise to hire a lawyer to assist you. If the demand is from the brand or franchisor, then find a lawyer that has experience with your industry. If the demand is from a disgruntled customer, or from your landlord, then your community business lawyer may be the right person to review and respond to the letter.
Fifth, read your lawyer’s letter carefully. If you do not understand your lawyer’s letter, or find the letter to be poorly written, then politely fire him or her and move on. The professionalism of your counsel reflects on you. If you cannot communicate effectively with your own lawyer, and if your lawyer is not a good communicator, then you are not being well represented. Your lawyer should be calm, professional, polite and clearly refute the allegations in the demand letter. If the demand letter includes accurate facts, then your lawyer should first acknowledge those accurate facts, then carefully refute the disputed facts. You will not be well served by a table thumping lawyer who drags you into an expensive protracted dispute. Good, competent business lawyers want to keep you out of court, and therefore will work effectively toward that endeavor.
Hiring an In House Lawyer
For established businesses, there is a point at which senior management will consider bringing legal representation in house. There are both positive and negative consequences to this action: One, it is not a good idea to hire a lawyer to save on legal expenses. It is a good idea to hire an in house lawyer to get better management of legal services. Two, an in house lawyer will learn your business, customers and vendors and therefore provide better counsel. Many companies do make the mistake of assuming that hiring an in house lawyer will be a one stop shop for counsel and not budget for outside legal expenses beyond the in house counsel’s salary.
As a rule of thumb, expect legal expenses to be 3% of gross sales. If you have in house legal staff, this expense is applied against the 3% number; if there is a balance, then chances are the difference will be expended for legal services whether in the budget or not.
Working Well with Your Lawyer
After you have found a lawyer with whom you can communicate, and has experience related to your business, then you have cultivate the relationship. Generally lawyers have a bad rap for being unapproachable and arrogant. This is not true.
The First Date
My suggestion is to get your lawyer out of his or her office and out to lunch or dinner right away. If you have an office or plant, get the lawyer over to your place of business as soon as possible. Lawyers love field trips, and providing your counsel with context is vital, especially if you want him or her to better understand you and your business issues.
In doing this, a lawyer will intuitively pick up clues about your business that can be helpful and save you money. For example, you will shorten the learning curve in describing what your business is and who you have working for you. If your lawyer has met the principals early on and later you have a partnership dispute, the lawyer will know who it is you are describing and can better represent you and your business through the dispute.
Developing a Relationship
Some lawyers want to be your friend, others like to keep some distance. This is a personal preference. If you do not like your lawyer, I strongly suggest you consider moving on. Life is too short and your business is too valuable to you. A good test of this is how comfortable you are with hearing a candid assessment of your legal situation. It is important for you to feel comfortable in challenging your lawyer and having a debate or dialogue on issues.
In many situations, the lawyer will not have an answer but is applying common sense and intuition to come up with a solution or options for you. It is imperative that you feel the lawyer is contributing to the dialogue, as opposed to saying no to ideas and options. With a good relationship, you will get better feedback and
will be an active player in the engagement. We rarely suggest being passive. Like any other part of your business, be aware of what the strategy is and be fully engaged in its execution.
How Lawyers Charge
Law firms make tremendous demands on lawyers to be productive. As the lawyer sells time, you need to be sensitive to the balance of asking for free advice and paying for the service you are receiving. Good business lawyers recognize that if they provide good, sound advice that is affordable to emerging businesses, they will develop a long-term client. I suggest that you take the time to work out an estimate on each distinct matter with your lawyer.
Also important is this: Lawyers are reluctant to be pinned down. Therefore, be clear that if matters become more costly, you will cover the cost. However, expect an explanation before the time is incurred, why the estimate has changed. In other circumstances, it may be helpful to set up a retainer arrangement where the client can call with out worrying about a bill each time he feels the need for advice. When I set these up, I make it clear that any substantive matter will be a separate billable file.
If you are not happy with an invoice from a lawyer, in most circumstances they will make adjustments. Be sure to give a reasoned explanation why you are not happy — such as, “the amount is beyond what we budgeted”. Most lawyers and law firms will adjust the invoice so long as they do not feel they are being taken advantage of. If you are unable to pay the full amount, be sure to pay something every month.
The Business Plan Playbook
Strategic Business Plan
A lawyer who has experience in your industry will more than likely be engaged early on in your development. Your lawyer is an independent person who is not emotionally or financially invested in your success and therefore, will aim to provide candid even if tough to hear counsel. Chances are your lawyer will provide structure to a plan that wanders and can provide insight as to what is effective when pitching ideas to venture capital or lenders.
Developing your Concept
If you are developing a new business, keep the focus narrow. You may have many ideas and or products. Describe the business landscape, identify the need or problem that you will be addressing, and then describe how you intend to fill that need. The financials or pro-forma will address the costs and revenues and returns on investment.
How you present is as important because at the end of the day you need to be credible. Your lawyer can be a great coach and in some business environments can give you credibility just by the fact that you knew to hire the right lawyers for your industry and the resources they can bring to you through their industry relationships.
Once you have your idea and business plan drafted, seek out similar businesses or professionals who have experience in your field. With a non-compete agreement in place, ask for candid advice on your plan. Retired executives are very good at this. There are very few new ideas that have not been tried a few cycles ago perhaps with different business buzz words or technology. You are smart, and our grandparents were also smart.
If possible, identify your best potential customers. Go to some of them and inquire for their feedback; particularly if they find your business service or product to be of value, then ask them to assist in the development of your business service or product. You might want to consider offering an exclusive for a short period of time such as preferential pricing, in exchange for their assistance. In doing this, you will end up with a better product, and possibly with one or two major customers from the beginning.
Even the best laid plans miss something. If you need to be up at night, do not worry about business development. Instead, focus on looking for the hairball — the cost item you missed, and hope that if in fact there is one, it is manageable. To be better prepared, always remember that in the end, everything costs more than what you originally budgeted for, and plan accordingly. For example, taxes are higher, employees cost more, and inexpensive components are no longer available. Therefore, when in the midst of possible stress, looking for the hairball as opposed to worrying is certainly one way of placing yourself ahead of the game.
Joining a Franchise System
Many small and large businesses benefit from being part of a franchise system. Although the start up costs and royalty streams are more expensive than an independent operation, in most circumstances, the proven systems, procedures, and marketing will override the additional costs.
One can expect the real cost of a franchise to be 10-12% of sales revenue when you factor in advertising, centralized services, training fees, the initial franchise fee, proprietary or special equipment, and expensive product costs. On the plus side, franchise companies can assist with finding a location, negotiating a lease, and sourcing capital for the build out.
Some franchise companies are unscrupulous and may offer an existing location without fully disclosing its history as a flawed site. Therefore, it is vital that you do your homework. For example, the Franchise Disclosure Document “FDD” will contain reports on material litigation, store openings /closings and other relevant business data that you will need before making a decision. Therefore, be sure to do your research, read between the lines and ask questions of the franchise company and other franchisees before choosing to join a franchise system
Most franchise companies will insist the license agreement is non negotiable. However, that is not completely true. In many cases you can negotiate the size of the protected area around your location and whether you are part of a geographic marketing group. In rare circumstances you can adjust the amount of liquidated damages on a default or early termination, your participation percentage in the marketing coop and the length of the license term. This is where you really will benefit from finding the experienced franchise lawyer.
Very few businesses have just one owner. If you have joined up with another individual, or with several people for a common purpose of operating the business, then you have created a partnership. Every state has statutes that
govern what the responsibilities are between partners. Therefore, even if you do not have a written agreement, each partner has very specific protections and rights. In many ways it is similar to a common law marriage with rights to dissolve (divorce) and force a buyout (allocation of assets).
I strongly suggest that from the beginning, you work out a written partnership agreement. Unfortunately, sometimes the partnership does not survive the exercise of asking the tough questions about what each person expects to get out of the business. For example, one person may be looking for a lifetime job and another may want to sell to the first party that makes an offer. Another instance could be where one person may not want the spouse of the other partner to inherit the deceased partner’s share and have a role in running the business. Therefore, the exercise of drafting a partnership agreement with an experienced business lawyer is a lot like marriage counseling and working out a pre-nuptial agreement – wise and in your best interest!
Corporation vs Limited Liability Company
There are very few reasons to start a company as a corporation. I strongly suggest that you consider hiring a good experienced accountant because having a knowledgeable accountant is just as important to a successful business launch as having a qualified lawyer.
Furthermore, before deciding on which way to go, let your taxation considerations be your primary guide. Key points to remember: One, a corporation is more expensive to maintain and requires maintaining minute books and holding regular meetings. Two, a limited liability company is more flexible and provides the very same protection from liability as a corporation. Based on where you stand after having weighed your options, you will have better clarity, and equipped with directional knowledge before answering the burning question — “to be a corporation or to be a limited liability company”.
If you have a corporation or a limited liability company, in most circumstances you will not be personally liable for the actions of the entity. A plaintiff may try to “pierce the corporate veil” to get past the entity to your personal assets.
Before I continue further, if you are a non-attorney reading the legal phrase “pierce the corporate veil” for the very first time, http://dictionary.law.com does a great job in defining and simplifying what this means: “to prove that a corporation exists merely as a completely controlled front (alter ego) for an individual or management group, so that in a lawsuit the individual defendants can be held responsible (“liable”) for damages for actions of the corporation.”
Although the standards vary from state to state, as a general rule, so long as the entity is legitimate, capitalized, records are maintained, and has not been used as a shield or a tool for avoiding liability, you will be protected. Some examples where you may not be protected is if you personally commit a negligent act that was not clearly on company time, or you commit intentional bad acts such as fraud or theft (or choose to look the other way when you knew or should have known this was going on).
On the other hand, for example, if the company legitimately files for bankruptcy because it cannot meet its obligations, creditors cannot go after your personal assets unless you personally guaranteed the obligation or misappropriated company assets for personal use.
Having said that, like anything else, if you are looking for 100% protection from liability in the event of a lawsuit against your entity, I strongly suggest you have all your “i-s and t-s” crossed both contractually and in practice while exercising extreme care stamped with good faith from the very get go. Therefore, I cannot emphasize this enough — be sure to do your research, weigh your options, be aware of your tax considerations, ask questions, and equip yourself with knowledge before making any quick decisions prior to becoming an entity.
Always remember, YOU are your number one asset, therefore worth your quality time and money invested, especially when your ultimate objective is to best protect your vision, your very footprints you leave behind for successors to follow, whether that be your company, product, or services.
Developing an Employee Handbook
This is a section that could be an entire book. Employment law is a very dense specialty with lawyers who just represent employers. If you intend to have employees and you do not have human resources expertise, for immediate consideration, I highly suggest consulting with a qualified employment lawyer regarding your state specific regulations. Also very important is to develop an employee handbook that covers vacation policy, discrimination policy, medical and maternity leave, Paid Time Off (“PTO”), disciplinary actions and other corporate work place rules.
As you may already know, there is a legally established, root understanding that you cannot discriminate against hiring / firing of employees on the basis of race, color, religion, sex, national origin, age, veteran status, disability, marital status, or sexual orientation. Therefore, you may not ask questions in interviews regarding a person’s age, health, or pregnancy, for example, unless directly related to the ability to perform or failure to perform the specific physical requirements of the job in question for hire / fire. Bottom-line, be aware of your rights, be on top of and up to date on employment laws within your state, and bluntly stated – be sure not to discriminate!
Having employees has become administratively easier with third party payroll companies such as ADP Payroll Services and health plan administrators. However, there are less obvious activities where the employer can run into issues. One key area is privacy.
Many of the employment regulations are intended to protect employee personal files and the release of medical information to third parties — Health Insurance Privacy Act of 1999 (“HIPA”). Some progressive states have privacy and security regulations for the protection of Personally Identifiable Information (“PII”). With PII for example, you are required to have a written security program for protecting client and employee data such as telephone numbers, credit cards, birth dates etc. You are also required to have a data breach notification plan. Therefore if your laptop is stolen and it has your client list with addresses, and the laptop was not encrypted, you may be required to notify everyone on that list of the theft and potentially pay for identity theft protection services for each person. I simply wanted to bring this to your attention to raise awareness concerning the role of Privacy as it pertains to employee issues.
Wage and Hour
Many employers are being tripped up by new strict wage and hour laws that provide no room for error. In Massachusetts, for example, if an employee can demonstrate that he or she was denied meal breaks, or did not receive all of the gratuities paid to the business or any other wage or hour violation regardless if it was a good faith mistake, and even if the employer pays the money back, lawyers can file a lawsuit on behalf of the workers and receive their legal fees and double in damages. Another common wage and hour issue is classifying a worker as an exempt manager when the position is not truly a management position.
Bottom line, be aware that many lawyers are taking advantage of this strict liability law to file law suits with no intention or incentive to settle as they know they cannot lose. Therefore, be very careful with wage and hour regulations, including proper implementation of breaks and overtime with consistency to protect against such lawsuits that could have been avoided.
Independent Contractor Agreements
The key issue when engaging third party help or in holding oneself out as a consultant is to make sure you are not considered an employee of the hiring party. An independent contractor needs to have autonomy and cannot be under the direct control of the hiring party. Therefore, it is very important to have a detailed scope of work and understanding of what the engagement is to accomplish. On the other hand, if the independent contractor is deemed to be an employee, then you may be responsible for providing overtime, vacation, benefit contributions, insurance, pension, withholding, and social security. Worth reminding, be sure to read third party agreements carefully with the full understanding that independent contractors are “independent”, non-employees.
Protecting Your Company Name
There are a number of misconceptions regarding copyrights and trademarks. The most common misunderstanding is the difference in clearing a name with the state Secretary of State (or corporations office) and having the right to use the name under intellectual property law. When you develop a name for your company, Uniform Resource Locator (“URL”) or product and you register the name with the Secretary of State, you are only establishing a record with the state registry of company names. The Secretary of State may reject a name if that name is already registered with another company in that state.
In order to ensure you have full rights to use your name, the name should be reviewed in the US Trademark Office’s Trademark Electronic Search System (“TESS”) search engine (www.uspto.gov) and a common law search on the internet should be checked for use of that name in the same business. The underlying principal for protection is whether a reasonable person could confuse your company or product with another company or product because of the name or appearance. The second principal is for the name to be non-descriptive. You are not allowed to reserve language. Therefore, you cannot get protection for “the sandwich shop” if you have a deli. You can trademark “Jalapeños” for the shop as it is not descriptive of the actual business or product.
The simple answer is no. Your legal rights are based on the date you first use the name in commerce irrespective of whether you have registered the trademark. However, the registration does serve two purposes: First, having a registered trademark protects you in states where you are not currently doing business when people look up the name on the United States Patent and Trademark Office (“USPTO”) web site. Second, by having the trademark symbols of ™ or ®, you are essentially notifying all others in your sphere of business that you own the name and that if they try to poach or bootstrap on your business, you have a strong presumption of ownership.
Also important to know is that trademark approval is not an absolute right to the name. There are rare instances that as the trademark office might have made a mistake and someone else could have prior use rights in a particular location, thereby giving them rights to continue to use the name in that specific location and market.
A common issue arises over the right to use photographs and model images within your marketing materials. Typically, a marketing firm will hire a photographer or graphic artist and a model for your advertising. It is important to be aware of any restrictions on the use of the images and the term of use. In many cases, the right to use the images are limited to three years. You can be sued by the photographer and or the model if you do not renew the license or pull the ad.
If you pay the marketing firm, and the photographer or model for any reason is not paid, you could end up paying twice as much, because the copyright belongs to the artist until they release their rights. Bottom line, due to the common worldwide use of the internet, your small business may have an international reach. Be sure to get unlimited rights to use the image worldwide for ultimate marketing collateral leverage
When raising money to invest in a new or existing business, you are selling a security. The question is whether you are required to register with the Securities and Exchange Commission (“SEC”) and whether your investors can rely upon the regulations of the SEC to void the investment if they claim that you illegally sold a security.
In the simplest of terms, you do not have to file a prospectus (a formal summary of a proposed venture or project) with the SEC if you are raising money privately and if the people from whom the money is raised are “Sophisticated Investors.” A Sophisticated Investor is generally defined as having either a net worth of $2.5 million or having earned more than $250,000 in the past two years to qualify. Important for the investor to acknowledge in writing, that he or she is a sophisticated investor or accredited investor.
Private Placement Memorandum (PPM)
Even if you are raising money from family and friends, it is advisable to have a Private Placement Memorandum (“PPM”). Often if the business does not perform to expectations, investors will try to recoup the investment by claiming the risks of the deal were not adequately disclosed. The PPM will provide you with some legal protection if any investor(s) sue(s) you to recover their investment. This is another area where having a lawyer with industry experience will save you money.
A PPM consists of your business plan with a detailed list of investment risks. The substantive cost of generating a PPM is developing the risk factors. An experienced industry counsel will likely have assisted industry clients with PPM-s in the past so that he or she is aware of any special or unique risks inherent in your business thus saving you money and giving you a better product.
SBA Loan Guarantees
The Small Business Administration (“SBA”) provides loan guarantees for small businesses. There are several programs in place at any one time. The SBA works through local lenders and does not provide financing directly. Loans are personally guaranteed. The SBA has a very good website with useful tips and resources for new businesses at www.sba.gov . The SBA programs are available to US Citizens and are currently capped at six million dollars.
USDA Loan Guarantees
The United States Department of Agriculture also has a business loan guarantee program that in some cases can reach up to twenty five million dollars. http://www.rurdev.usda.gov/RD_Loans.html These programs work in a similar fashion to the SBA Loan Guarantee Program. The program is administered through state offices. With the USDA program the more money you borrow the ratio of equity (Cash) you need increases. For example if you borrow up to five million dollars the USDA will require that you have twenty percent of your own money. If you borrow from five million to ten million you will need to put in fifty percent of your own money. (Keep in mind when I say your own money this money can be investor money). These programs are only available for businesses in communities with less than fifty thousand people.
When negotiating a loan, there are few key terms that are critical to the rights of the lender and borrower. The most important term is “Recourse.” Recourse is a nice word for personal guaranty of performance.
Throughout the past ten years, many commercial loans were underwritten based on assumptions that the asset or business would grow in value, and as such, the lender would be secure in the event of a default. In this environment, the borrowers were not required to personally guaranty the loan unless they committed a bad act or violated certain loan covenants. These loans are “non-recourse.”
For most small business loans, a principal will be expected to guaranty the loan. However, as your business will develop assets and value over time, you can try to negotiate the burn down of the guaranty. Often the amount of the guaranty will be reduced — either based on the term of the loan or when you can demonstrate that there is a certain increased value in the business. Personal guaranties will affect your ability to obtain personal credit, so try to limit them.
Material Adverse Condition
Be careful with the language in the Material Adverse Condition clause (“MAC”). The MAC clause can be overlooked as harmless. However, this provision can be a free ticket for the lender to default you based on a negative turn in business or from events outside of your control. For example, sometimes the seller may want a loophole to terminate the deal with you because someone has offered more money. If the MAC clause says that the deal may terminated due to a change in business conditions, the seller can always find a change in business conditions such as worsening sales. Therefore you might want to say that continuing poor sales is not a MAC event.
Major Business Contracts
Purchasing or Selling a Business or Property
So you are buying a business or piece of commercial property. This is a multi step process that starts with a Confidentiality Agreement or Non-disclosure Agreement (“NDA”). Once you have identified a deal or potential customer, you will want to keep any information that you have regarding your business or asset from competing parties. The NDA can be short and to the point.
One important aspect to let the party receiving the confidential information understand that he or she is responsible for the people he or she shares the information with. Therefore, if you share the information within the office and your assistant tells her friends, you are liable. The term for keeping the info confidential after the deal transpires or breaks up should not exceed three years in most circumstances. Some agreements say that only info marked confidential will be subject to the agreement. I prefer the opposite. I suggest that the agreement presumes all information that is not otherwise commonly known, be deemed confidential.
Letter of Intent
When the parties have the NDA executed, it is very important to negotiate and document the basic terms of the deal in a Letter of Intent (“LOI”). In some states the LOI to purchase real estate has generally been found by courts to be binding even if by its own terms, it is non-binding. Therefore, be careful not to include terms that you do not intend to or cannot honor.
The LOI should address all business terms that are not otherwise expected by any party entering into a similar transaction. In other words, if you put every detail into the LOI, then you would in effect be writing the definitive agreement and you could skip over drafting the LOI. In deal terms a “definitive agreement” is any document that will be the final say after the negotiations. If the transaction is commonly performed, then you may already have a Purchase and Sale Agreement (“P&S” or “PSA”) template that you can provide as the LOI with a cover letter stating that “the terms of the attached agreement are not binding until executed by both parties.”
Be sure that in any agreement you have contingencies for financing and have the seller hold back sufficient funds from the purchase price to cover any post closing obligations. It is much harder to chase the seller after the sale then to put some of the sale proceeds aside in an escrow account.
Be sure to be prepared with a thorough due diligence check list. If you are selling, be organized in advance. Consider setting up a password protected online war room. This minimizes disruption and will provide data as to who is viewing the material.
The Purchase and Sales Agreement (“P&S” or “PSA”) will cover all details for the transfer of the assets and liabilities of the entity you are buying. The PSA needs to be very specific with respect the terms and conditions you are negotiating. This will be the playbook and if you miss a term and later try to get it, you may be branded as “trading back” which is not good for the deal. The terms and conditions should be tailored to the particular industry and business you are buying.
Again, we have to emphasize that the general business attorney may not capture all of the nuances of the business that a lawyer with specialized industry experience will have. One good example is in the hotel industry, where there is subtle negotiation over group business booking approval, the ability to interview executive staff, accounting of open inventory and so forth. In other industries there are special business conditions that are unique and need to be addressed in your PSA.
In most transactions the seller would like to have the purchaser put up some money as a good faith symbol that he has funds and that he is serious about the transaction. This deposit is usually refundable for a the due diligence period. After the due diligence expires the seller will require an additional deposit of funds that will be non refundable. This is called “going hard”. Therefore it is an important consideration to preserve enough time to perform due diligence before the deposit becomes non-refundable. Check with the Title Company, environmental engineers, and surveyor to be sure they can get reports back to you within the time you are given. There is always a tug or war over how much time you need and the sellers’ desire to get the transaction done quickly. Be very careful with the drafting of the PSA as this is the play book for your entire deal.
Leases and Concession Agreements
Many small businesses operate under the authority of another party making you a sub tenant or sub-concessionaire. This structure is common in shopping malls where the developer lets out the entire premises to a Master Tenant who has responsibility for finding sub tenants or sub concessionaires to operate the individual stores and kiosks. The key difference between a tenant and a concessionaire are the legal rights they possess if they get behind in payments. To evict or remove a lessee, one has to follow the eviction procedures of that state. Evictions can take several months and require the filing of a court action.
A concessionaire generally is in possession by a use agreement and you may not have to use a formal eviction process to remove them. A person contracting under a concession agreement is bound by the terms of the contract and does not have “property” rights. Therefore upon a default or termination of the agreement, the party that has the master lease does not need to follow the eviction procedures to remove the concessionaire. If the concession agreement uses terms such as “rent” and “demise” and other terms common in lease, then the party being asked to vacate may argue that the concession agreement is a lease.
Although this article does not include important legal concepts along with forms and other useful documents, I assure you this is deliberate on my part! Why you ask? Simple really; every business situation is different and each state has its own rules and regulations.
Having openly shared that, the key takeaway here is for you to remember to invest time in finding a qualified lawyer who is knowledgeable in your area of expertise. Find a lawyer who will be your partner and will cover your back. Develop a relationship with your lawyer. Take your lawyer out of the office and observe him or her with others. Ask yourself if the lawyer genuinely, professionally, and personally gets you and fully grasps your business.
If your answer is a resounding “YES” to all of the above, congratulations! You now have a starting point, an important tool in your business toolbox, to efficiently and effectively manage the legal components of your hotel!