Selling a hotel business operated under a commercial lease

When the hotelier does not own the building, much of the value of the business, or fonds de commerce, rests on a single contract: the commercial lease. A buyer is not only acquiring a client base, a trading name and a team. They are acquiring the right to occupy a building, at a given cost, for a given period. Alongside the accounts, the lease is the first document they open.

This guide sets out what the buyer checks, the ratios they calculate and how to manage the relationship with the landlord during a sale that must remain confidential. It covers principles only. The rules that apply to your lease should be confirmed with your lawyer at the time of the transaction.

What the buyer reads in the lease

Before making a firm offer, the buyer and their counsel go through the lease and every amendment, clause by clause. Six points draw most of the attention.

Remaining term

The closer the expiry date, the more risk shifts to the buyer: they pay for a business whose occupation is secured for only a short time, and they will have to negotiate or request renewal soon after taking over. A short remaining term does not prevent a sale, but it is reflected in the price and may justify dealing with renewal before going to market.

Permitted use

A narrow permitted use limits the buyer’s plans. A buyer who wants to develop food and beverage or group business will check that these activities are covered, or that adding them does not require the landlord’s approval. Widening the permitted use is negotiable, and it often affects the rent.

Rent, indexation, charges and works

The buyer rebuilds the true cost of occupation: rent, indexation, recharged service costs, taxes passed on to the tenant, works for which the tenant is responsible. They check that the indexation clause is valid and has been applied, that no rent arrears are pending, and that the allocation of major repairs complies with current rules. In an older building where the roof, façades or services need work, the lease reads very differently depending on whether that work falls to the landlord or the tenant.

The rent-to-revenue ratio

This ratio is one of the first measures of whether a hotel lease is sustainable. It compares annual rent with the business’s annual revenue. Buyers often add the ratio of rent to EBITDA before rent, which shows how much of the operating profit is absorbed by occupation costs.

Illustrative calculation, fictitious and rounded: a 40-room hotel generates €2m in revenue excluding VAT and pays €300,000 in rent excluding VAT. The rent-to-revenue ratio is 15%. If EBITDA before rent is €700,000, rent absorbs around 43% of it.

There is no universal benchmark. An acceptable ratio depends on the category, the operating model, the weight of food and beverage, the condition of the building and the allocation of works. What matters to the buyer is the margin left once rent is paid, and its ability to absorb a fall in trading or a higher rent at renewal. A high rent is not a deal-breaker if it is documented and consistent with performance. An unusually low rent raises a different question: whether it will survive the next renewal.

Key point: the buyer values a leasehold business on EBITDA after rent. Anything that makes future rent uncertain (an imminent expiry, a questionable indexation clause, a risk of the cap being lifted) weighs on the price.

Renewal and the rent cap

Under French law, the rent on a renewed commercial lease is in principle capped by reference to the change in an index. There are exceptions, which the buyer and their lawyer will examine: a lease granted or extended beyond a certain length, a material change in the factors that determine rental value, or the nature of the building itself. Premises built or fitted out for a single use, which is often the case for a hotel, may be subject to their own rent-setting rules, outside the cap.

For the seller, the question is straightforward: is the current rent durable? If the cap is likely to be lifted at expiry, the buyer will factor it into their model anyway. It is better to have anticipated it, with advice from a lawyer specialising in commercial leases, than to discover it during due diligence.

Depending on timing, there are two options:

• sell with the lease as it stands, documenting the risk and reflecting it in the price
• negotiate a renewal or an amendment before going to market, which means opening a discussion with the landlord and weighing its effect on confidentiality

The assignment clause and landlord consent

French law protects the tenant’s right to assign the lease together with the business: a clause simply prohibiting it would be ineffective. The lease can, however, regulate the assignment. The most common clauses:

• the landlord’s prior approval of the incoming tenant
• the landlord’s participation in, or summons to, the signing of the assignment
• a joint guarantee by the seller for rent due after the assignment, limited in time by law
• a right of first refusal for the landlord, allowing them to acquire the business on the terms offered by a third party

These clauses drive the timetable. The sale and purchase agreement then includes a condition precedent of landlord consent, and the buyer wants to know early whether it will be satisfied without difficulty. Note that in a sale of the shares of the operating company (a share deal), the lease is not assigned and stays with the company. It is still worth checking that it contains no change-of-control clause.

Other formalities relate to the sale of the business itself, regardless of the lease: prior information of employees required in certain companies (the so-called “loi Hamon” regime), the transfer of employment contracts, or a possible pre-emption right held by the local authority over businesses in certain areas. Their timing should be organised with your lawyer and notary.

The landlord during the sale

The landlord will be informed sooner or later. The question is when, and by whom.

During the approach phase, nothing is passed to them. Buyers sign an NDA that prohibits any contact with the hotel, its staff and its partners, the landlord included. All questions go through the seller’s adviser. A landlord informed too early may, without any ill intent, mention it to their notary, their property manager or other tenants. They may also prepare for a renegotiation.

The landlord is usually approached once the buyer has been identified and their offer formalised, often after the letter of intent (LOI), with a full file on the incoming tenant: identity, operating track record, financial capacity. A consent request is prepared like a presentation: a landlord who receives a strong, well-documented candidate has little reason to delay. If a discussion on the lease is needed before going to market (renewal, wider permitted use), it can be held without mentioning the sale, or by presenting it as part of a wider estate review, as the seller decides.

When the landlord is a potential buyer

The landlord is sometimes the most natural buyer: bringing the property and the business together allows them to take over operations, hand them to an operator of their choice, or sell the whole on. This has advantages: no consent to obtain, familiarity with the building, sometimes a shorter timetable.

It also carries risks for the seller:

• the landlord knows the rent, the condition of the building and the expiry date, and may use them to push the price down
• if they are the only party consulted, the sale loses all competitive tension
• knowing they alone can approve an incoming tenant, they may be tempted to let things drag

The approach is to treat them as one candidate among others: the same NDA, the same information, the same timetable, and an offer compared with those of the other shortlisted buyers. If the lease contains a right of first refusal, the seller’s lawyer checks its terms so that the process respects them. RR Hôtels & Finance runs this kind of approach on behalf of the seller only, without representing the landlord or the buyer.

Preparing the lease file

Before going to market, gather the lease and its amendments, rent receipts and indexation records, recent correspondence with the landlord, a schedule of works completed and planned, and your lawyer’s analysis of the remaining term and renewal. These documents go into the data room at the advanced stage. For the effect of the lease on price, see also the guide to hotel valuation and the guide to choosing between property, business or shares.

If you are considering selling a hotel business operated under a lease, an initial conversation is a chance to review your lease before taking any step: selling a hotel.