Investors are now applying stricter criteria in hotel lease agreements when it comes to financial security and transparency: higher rent guarantees, stricter credit requirements, and detailed reporting obligations have become the new normal for hotel operators. The aim is not only to mitigate risks, but also to identify and manage them at an early stage.
Question: Investors are tightening their requirements towards operators, in some cases in a significant way, e.g. by higher rental guarantees. How high are rental guarantees in hotel leases now?
Answer: Investors' need for security has increased significantly in recent times. In commercial leases, and thus also in hotel leases, the amount of the rental guarantee is generally “freely” negotiable. This freedom in negotiating is being used consistently. While around six months' rent is standard in the general commercial sector, we regularly see demands for up to 24 months' rent in hotel leases.
The most common form is a directly enforceable bank guarantee on first demand, which gives the landlord quick access to the guarantor in the event of a security claim; a key instrument for the landlord to be able to immediately access liquid funds in the event of a rent default. In addition, landlords often insist on a letter of comfort from the tenant's parent company with a strong credit rating, which is intended to give the landlord direct access to the tenant's parent company in the event of a security claim.
Meanwhile, the situation for tenants is made more difficult by the fact that, in the event of the lease being transferred to a new tenant, landlords not only require the (new) tenant to provide the same rental security as the previous tenant, as is customary, but also require the new tenant's parent company to be comparable to the previous tenant's parent company, inter alia, in terms of creditworthiness and reputation. This is an additional security instrument for the landlord, which aims to ensure that it has a reliable and solvent contractual partner for the entire term of the lease agreement.
The requirements on rent guarantees are also a response to the consolidation of the hotel market following the coronavirus pandemic. Several insolvencies among smaller hotel companies have cleaned up the market, while some larger chains and operators have been able to expand their market shares. Investors are therefore increasingly turning to so-called “big players,” whose
operational stability, brand awareness, and creditworthiness are considered a reliable basis for long-term leases. This is a crucial factor in risk management: instead of relying on numerous smaller, more volatile operators, the risk is shifted to larger, more established hotel groups.
Question: In addition to the rent guarantees, investors are demanding ever greater transparency through reporting. Why is this so important and what does it mean for hotel lease agreements?
Answer: Higher rental guarantees are a reactive instrument – they limit the damage once the crisis has already hit. The far more intelligent approach is proactive, and this is precisely where stricter reporting comes in. Anyone investing in hotels or similar commercial properties cannot afford not to have insight into the actual processes. Regular reporting based on standardised key performance indicators (KPIs) constitutes a monitoring system. It enables investors to objectively measure the operator's performance, compare it with benchmarks and identify negative trends long before rent payments fall into arrears. Reporting obligations must therefore be contractually enshrined with legal precision: What does the tenant have to report, when and how?
In addition to economic indicators, landlords are increasingly demanding R&M reports in which the expenses and measures for repairs and maintenance are systematically recorded and evaluated. The aim is to create transparency about the technical condition of the rental property and the associated costs.
The investor is thus not only “landlord”, but also an active supervisor of its investment.
