Establishing ownership and control of a hotel

Al Tamimi & Company head of hospitality Tara Marlow offers advice to empower operators

The recent news reports of Hilton’s exposure to disputes between some of its hotel owners (see HotelierMiddleEast.com) merits consideration of the potential risks to operators in this area.

As a matter of course, an operator should carry out comprehensive pre-contract due diligence over the property and owner, to establish who owns and controls the hotel to be managed.

The results may give rise to a variety of situations, each of which should identify potential risks areas, to be considered and dealt with.

Likely scenarios
Briefly, I have set out below likely scenarios an operator may encounter:
• Where the property is owned by an individual(s), death and transfer of ownership of the property to heirs must be considered. With regard to joint owners, future disputes and/or breakdown in relationship between them must also be considered.
• How is ownership of the property linked to the owner’s business? Is the property owned by the individual or the business? Who should the operator contract with? What rights to and security over the property does the business have?
• Are the ‘ownership’ rights held under a lease? Does the landlord need to consent to the appointment? How can the operator protect itself in the event of breach by the tenant of its lease obligations?
• Do any third party rights exist over the property? Has the owner/tenant granted security rights as part of financing arrangements?
• Was ownership of the property granted to the owner under a Deed of Grant? Does it contain restrictions over the owner’s dealings?

Possible Solutions
Possible solutions include:
• Use of subordination and non-disturbance agreements.
• Registration of the operator’s rights over the property.
• Restructuring the owner’s interests through transfer of the property into a corporate vehicle owned by him.
• Use of powers of attorney.
• Binding all owners with joint contractual liability to the management agreements.
• Binding the owner and his company with joint contractual liability to the management agreements.
• Imposing restrictions on future sale of the hotel and transfer of shares of the owner’s company.
• Securing a first right of refusal to purchase the hotel by the operator.

It is not possible to discuss in detail, the variety and impact of the different scenarios that may be encountered. However, I have tried to highlight the various complexities to demonstrate the importance in identifying these prior to signing the hotel management agreements.

Analysis of the facts and risks should empower an operator to address this in the contracts, to protect its interests.