Driven by more flexible legislation, hotel management leasing 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 Honour, the Château de Chailly Golf Hotel in the Côte d’Or department and the American fund, Sonder, a direct competitor of Airbnb, all have in common? All three have chosen management leasing to develop their French hotel operations – a decision that owes nothing to chance. If management leasing is attracting investors in the sector, it is thanks to its flexible legal structure that is tailored to investment.

The key word here is “flexibility”

If there is one advantage that management leasing can claim, it is flexibility. It can be noted that the legal straitjacket that has long restrained owners wanting to lease a business in France has gradually been removed. Although still subject to legal registration, management lease arrangements are no longer encumbered by as many formalities, and can be conducted verbally, even if a written agreement is strongly recommended.

Provided that the few basic rules governing management leasing in France are respected, parties have complete freedom in their contractual relations. On the operational level, the lessor and lessee-manager can define the duration of the contract, split any investment costs and decide on any improvements to be made to the hotel building.

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

Controlled risk

The main appeal of hotel management leasing is its excellent risk-benefit ratio. The French lessor retains ownership of the hotel business without having to assume the operating risk. And between the receipt of royalty payments paid by the lessee-manager and the increase in value of a regularly operated business, return on investment can be as attractive as it can be fast. This solution also allows French hotel business owners to choose a potential successor by involving them in the running of the hotel. For the lessee-manager, hotel management leasing is an opportunity to grow its hotel operations in France over a shorter period of time than under a commercial hotel lease agreement, which has become more restrictive since the 2014 Pinel Law. Lastly, the solution allows the lessee-manager to operate a hotel at its own risk, but without having to make the investments required for setting up a hotel business.

It is in the lessor’s interest to control any risks associated with leasing the management of the hotel business, in order to optimise the investment. Indeed, poor operation is synonymous with asset depreciation. In this respect, certain exit clauses can be included: the lessor could, for example, terminate the management lease and invoke the guarantees if its co-contractor has difficulty paying royalty fees. Another possibility is to impose a short but renewable management lease, offering the opportunity for 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 lessee-manager’s parent company. These sticking points are often ruthlessly negotiated between parties and justify calling in a management lease specialist.

All good things must come to an end, and management leases are no exception! In some instances, the contract provides for the transfer of the business to the lessee-manager, but the lessor can just as easily take over the business, too. To avoid any unpleasant surprises, parties must take their precautions. As well as taking an inventory of fixtures at the beginning and end of the lease, the lessor can reserve the right to be consulted concerning recruitment, changes in working conditions or staff remuneration. Lastly, it is also in the lessor’s interest to negotiate a non-competition and non-solicitation clause, essential vis-à-vis the lessee-manager.

With proper advice and preparation, management leases could well become a staple investment vehicle in the French hotel sector.

1 See our article on LinkedIn on Hotel management contracts vs. Hotel management leases – 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=fr

Christopher Boinet
FR - IE Paris - Avocats
In Extenso Avocats