BERLIN—The age of fixed hotel leases is over, said Claus-Dieter Jandel. And he couldn’t be happier.
“The fixed lease contracts in the past were not fair, in our opinion,” he said, speaking on behalf of Steigenberger Hotel Group, at which he serves as executive VP and chief development officer.
Executives at Accor shared a similar opinion. “We will not do fixed leases,” said Renaud Jezequel, the company’s senior VP of mergers and acquisitions and real-estate transactions.
Jezequel and Dieter were two of four panelists who discussed the ins and outs of fair lease contracts during last month’s International Hotel Investment Forum.
In the past, many owners required operators to sign ironclad, 20- or 25-year contracts, now many regions in Europe are relaxing those standards in favor of more flexible variable leases, Dieter said.
It’s just good business sense, he added. A lot can change in 20 years. The hotel, Dieter said, will require upgrades, refreshes and other changes to maintain relevancy with travelers. Lease contracts should anticipate that volatility with clearly articulated provisions, highlighting which party—owner or operator—is required to spend what money, where and when.
Anticipating change can be difficult, so both players have to work together to address any problems that arise, said Dominique Ozanne, CEO of Foncière des Murs, which owns 193 hotels, among other asset classes.
It’s the sign of any good partnership, he said. “We always want to find a solution to a problem.”
What is fair?
The lease structure is unlikely to go away in Europe, so panelists were asked, short of taking a different approach altogether, what would ensure a fair arrangement between owner and operator.
“With contracts as it is in real life, fair is if both parties can live, if both parties earn money,” Dieter said. “That’s why we build hotels and operate hotels—to earn money.”
Another key component is if both parties have properly shared liabilities, he added.
Said Ozanne: “A fair contract is when you earn some money.”
Accor’s Jezequel described the optimal arrangement like a good marriage. Conversely, “an unbalanced or an unfair leased contract is a recipe for … disaster. It’s like a bad wedding.”
The panelists agreed “fair” also means anticipating all possible outcomes.
“Part of the contract also needs to asses or anticipate the termination clauses,” Jezequel said.
“Fair is also having clauses avoiding surprises when you enter into a contract. … Having a clear view of what you want and what the other party wants,” said Sandra Thiel, a partner at law firm Clifford Chance.
The rent level also is critical in any lease agreement. During the early 2000s, the rent levels were too high and put pressure on operators, Jezequel said.
Most rents today are revenue based—a certain percentage of revenue is paid as rent, Dieter explained.
“If I have a hotel and have a chance to earn good money as an operator, I will pay rent for that,” he said. “Why wouldn’t I? Only if rent exceeds financial capabilities would it be unfair.”