In this article we explore the rise of the hotel industry in Spain, where more and more private real estate investors are seeking to acquire hotel assets as an alternative to more mainstream real estate investments.
Many of these investors do not have the capability or the expertise to manage a hotel, and so are looking for agreements with professional operators who have the resources to operate such assets and provide the expected return.
Historically, in Spain there have been three operating models that allow for this sort of structure:
- An industry lease, subject to the Civil Code (CC). The investor leases to the operator both the physical space and the hotel business itself. During the lease, the investor does not intervene or control the hotel business; it is the operator/lessee who does it. Under these leases the parties are free to establish a fixed rent, a variable rent, or a mixture of both.
- A hotel management contract, or active management model. Here, the investor assumes the risk and ownership of the business, but employs a "manager" (operator) to manage the hotel business on its behalf.
- A lease for other than residential use subject to the current Urban Leasing Law (ULL). In this scenario, only the use of a physical space, where the hotel activity is developed, is ceded. The operator, under his own responsibility and means, will develop and manage the hotel business.
The choice of one or the other option will be decisive under Spanish law. Any purely real estate investor will typically opt for the leasing option subject to the ULL, mainly because its business is not the hotel business, and its main fear will be that of assuming the hotel business at the end of the lease, as a result of the principle of business subrogation enshrined in Article 44 of the Spanish Workers' Statute (WE). This would include the obligation by the investor to take over as its own all the workers of the business hired by the operator, and therefore all its labour liabilities.
What does the Case Law say?
The Spanish case law is pretty clear with regards to cases where business subrogation occurs. Thus, a properly drafted lease subject to the ULL would deactivate business subrogation and protect an investor from the risk of being required to take on the hotel operating business (and the corresponding employee liabilities).
Sentences such as that of the Court of Justice of Andalusia have confirmed this, in the Sentence nº 226/1994 of 8 March, in which it concluded that: "[...] the legal institute of business succession or transfer does not cover the mere lease of business premises, in which the lessor and his predecessors have not had and do not have any more than the ownership of the property, establishment or business premises, having leased them as such, without prejudice to the possibility of the lessee exercising an industrial activity ...". Similarly, there are other pronouncements of the Supreme Court of the Canary Islands, the Supreme Court of Catalonia and the Supreme Court itself.
When representing an investor, however, we should be cautious in drafting such contracts. Investors, while still wanting to avoid subrogation under the ULL's umbrella, are increasingly demanding greater supervision of the operator and the business or operation. For example, consider the increasingly frequent cases in which variable rents are fixed linked to the hotel's profits, performance test clauses that allow the investor to control or supervise the correct evolution of the business, or other agreements related to the FF&E. The inclusion of this type of clause is dangerous because it can bind the investor to the hotel operation. Therefore, even if the contract is configured as a lease subject to the ULL, it could be reclassified in court as an industrial lease, or as a variant of hotel management, with the undesirable consequences that the application of the principle of corporate subrogation could have for the investor in those cases.
This article was originally published on LegalToday.