Hotel rental management in France is back in fashion

Driven by more flexible legislation, hotel management rental in France is attracting a growing number of investors thanks to its excellent risk/benefit ratio.

What do the Society of Members of the Legion of Honor, the Château de Chailly Golf Hotel in Côte d’Or and the American fund Sonder, a direct competitor of Airbnb, have in common? All three have chosen rental management to develop their French hotel business. A decision that owes nothing to chance. If management leasing appeals to investors in the sector, it is thanks to its flexible legal structure adapted to investment.

The key word here is “flexibility”

If there is one advantage that rental management can claim, it is flexibility. It should be noted that the legal straitjacket which has long held back owners wishing to rent a business in France has gradually been lifted. Although still subject to legal registration, the lease-management contract is no longer encumbered with as many formalities and can be concluded verbally, although a written agreement is strongly recommended.

Subject to compliance with the few basic rules governing lease-management in France, the parties have complete freedom in their contractual relations. On the operational level, the lessor and the lessee-manager can define the duration of the contract, distribute any investment costs and decide on any improvements to be made to the hotel building.

This flexibility is also found in the terms of payment of royalties, a central issue in lease management. Royalties are generally based on a guaranteed minimum, supplemented by a variable royalty indexed to turnover and/or gross operating profit. The business owner can also impose performance objectives on the tenant-manager. In practice, the distinction between a lease-management contract and a hotel management contract can be blurred. If the tenant-manager is a tenant, a fee of around 20% of turnover may be collected as rent for the business and the premises of traditional 3 to 4 star hotels, for example. However, this fee may be higher, depending on the business model of the tenant-manager. Finally, if the lessor is both the owner of the premises and the business, and if the tenant-manager is contractually responsible for the major renovation work and costs, the fee will be even lower. It is useful to specify here that the fee is tax deductible in all cases in France, provided that it is not excessive and does not mask a business transfer.

Controlled risk

The main attraction of hotel management is its excellent risk/benefit ratio. The French lessor remains the owner of the hotel business without having to bear the operating risk. And between the collection of royalties paid by the tenant-manager and the valuation of a regularly operated activity, the return on investment can be as attractive as it is rapid. This solution also allows French hotel owners to choose a potential successor by involving them in the management of the hotel. For the tenant-manager, hotel lease-management is an opportunity to develop their hotel business in France over a shorter period than under a commercial hotel lease contract, which has become more restrictive since the Pinel law of 2014. Finally , the solution allows the tenant-manager to operate a hotel at his own risk, but without having to make the investments necessary to create a hotel business.

It is in the lessor’s interest to control the risks associated with leasing the management of the hotel business, in order to optimize the investment. Indeed, a malfunction is synonymous with the depreciation of a good. In this respect, certain exit clauses may be provided: the lessor could, for example, terminate the lease-management and call on the guarantees if its co-contractor has difficulty paying the royalties. Another possibility is to impose a short but renewable management lease, offering the possibility of a quick exit. To cover its risk, the lessor may also be able to negotiate various financial guarantees in the form of a bank guarantee and/or guarantees granted by the parent company of the lessee-manager. These stumbling blocks are often ruthlessly negotiated between the parties and justify calling on a leasing-management specialist.

All good things come to an end, and lease management agreements are no exception! In some cases, the contract provides for the transfer of the business to the lessee-manager, but the lessor can just as well take over the business. To avoid any unpleasant surprises, the parties must take their precautions. In addition to the inventory at the start and end of the lease, the lessor may reserve the right to be consulted on the recruitment, changes in working conditions or staff remuneration. Finally, it is also in the lessor’s interest to negotiate a non-competition and non-solicitation clause, which is essential vis-à-vis the tenant-manager.

Well advised and well prepared, lease-management could well become an essential investment vehicle in the French hotel sector.

1 See our LinkedIn article Hotel Management Contracts Vs. Hotel leases and management – ​​Similarities and differences: https://www.linkedin.com/pulse/le-contrat-de-management-h%C3%B4telier-vs-location-g%C3%A9rance-boinet/?originalSubdomain= Fr

2 See our article on LinkedIn on Commercial leases vs Hotel management leases: https://www.linkedin.com/pulse/bail-commercial-h%C3%B4telier-vs-location-g%C3%A9rance-h%C3 %B4teli%C3%A8re-boinet/?originalSubdomain=en

Christophe Boinet
FR – IE Paris – Lawyers
In Extenso Lawyers

Peter M. Doran