The International Hotel Law Review: France
The French hotel industry was doing quite well prior to the health crisis, and despite the social protests in late 2018 and early 2019, occupancy rates increased mainly due to local tourism in place of international customers.
The economy categories gained 0.8 points in occupancy rates, while the mid-range lost 0.3 points and the top-of-the-range and luxury categories fell by 0.4 points. The Paris hotel industry reached a 78.1 per cent occupancy rate in 2019.
In part, these good figures are attributable to an increased usage of digital booking platforms, which create a two-sided market by bringing hotels and potential guests closer. Booking platforms have become particularly popular on both sides of the market over the recent years owing to the fact that they reduce the guests' research-related expenses (the use of the booking platforms is free for guests) and because the booking platforms enable small and medium-sized hotels to reach potential guests across the world, enabling these hotels to compete with larger hotels that are able to bear the costs of traditional marketing themselves.
i Regulation on foreign investments and property ownership, and market of the hotel sector in France
France does not have legislation specifically governing foreign direct investment, nor does it have any policies aimed at differentiating between domestic and foreign investors. However, French law states that an investment that can affect essential public interest (investments related to public order, public security or national defence) but foreign investments in hotel industry would not fall under the scope of this exception.
There are currently no property ownership restrictions in France applicable to hotels or the acquisition of real estate property by foreign nationals.
To operate a hotel, the operator shall hold an 'authorisation to operate' obtained at the opening of the hotel. This authorisation is delivered by the competent local authority, subject to the Safety and Accessibility Commission providing its favourable opinion. This authorisation should also be obtained by the operator in the event that the hotel was closed to public for a period exceeding 10 months. The Safety Commission might inspect the hotel periodically to verify whether the hotel complies with safety regulations. Any issues noticed by the Safety Commission can lead to the closure of the hotel by the competent local authority.
The French hotel sector market is rather dynamic and competitive, and as a result the administration has set up an official rank for touristic accommodations.2 This classification assures consumers access to reliable information about the numerous facilities across the country. It also encourages the development of the hotel sector and creates healthy competition between all the operators. The Agency for the Development of Tourism in France gives a rating from one to five stars to the establishments that volunteer to be evaluated. The rating is granted for five years, after which the establishments are re-evaluated. The criteria to evaluate (1) hotels, (2) campsites, (3) leisure and residential parks, (4) holiday residences or (5) holidays villages, are revised every five years as well. Only the hotels that are part of the classification are allowed to designate themselves as 'Hotels of tourism'.3
ii Foreign exchange and cross-border tax considerations applicable to the hotel sector in France
Any transaction, regardless of the country of completion and the location of the parties to such transaction, on shares of a company, whatever its country of incorporation could be, underlying assets of which directly or indirectly mainly consist in French real estate, may lead to registration duties in France at a 5 per cent rate.
As in other jurisdictions, a hotel property in France will most often be owned by a French company. Individuals and companies, either French or foreign, are free to purchase hotels in France. Note that if the acquisition involves transferring funds out of France or transferring funds from a foreign country into France for an amount of more than €15 million, the French Central Bank (Banque de France) will need to be notified within 20 days of the transaction. Failure to do so can be sanctioned by a fine.
When owned by a French company, the company is typically a special purpose vehicle (SPV). An SPV is a subsidiary company created by a parent company to isolate financial risk. The SPV's legal status as a separate entity makes the SPV's obligations secure, even if the parent company goes bankrupt and vice versa. This separation protects the parent company from risks such as bankruptcy and insolvency issues if the SPV goes bankrupt.
Therefore, an SPV owning a hotel property will most often only have the sole function to own and operate the hotel property. However, it is possible to separate the ownership of the real estate assets and the management of the hotel by creating two separate companies: one owning the real estate assets (frequently under the form of a société civile immobilière) and the other operating the business of the hotel (frequently under the form of a société par actions simplifiée).
The choice of the structure between a single company holding both the real estate assets and operating the hotel will depend on whether it is anticipated that the real estate assets may be disposed of independently from the business, at some point.
The establishment of French SPVs is very easy and does not require a minimum share capital for sociétés par actions simplifiées or sociétés civiles immobilières.
Under French law, leases of building used for commercial and industrial purposes (including hotels) are covered by a special status: the commercial lease status.
This status offers a particular protection to the tenants and sets the main terms and conditions of the commercial lease, which include the following.
Term: the term of the commercial lease may not be less than nine years,4 which is mandatory. Usually, to ensure the stability of the hotel business, parties agree to extend the term of the lease to 12 years.
Right of the tenant to terminate the lease: the tenant has the right to terminate the lease agreement at the expiry of each three-year period, by giving six months' prior notice, unless otherwise agreed by the parties in the lease.5 The tenant is entitled to waive its early termination right, which is common in a commercial lease for hotel premises.
Initial rent or renewal rent: the initial rent is not subject to statutory condition; consequently parties will negotiate the rent to reflect the market conditions. The rent can also be determined in part according to the percentage of turnover generated by the operating of the hotel.
The parties may agree to make the rent increases in line with an index, which is the ILC index for hotel premises.
The rent renewal (at the exclusion of the rent determined on a percentage of the turnover) is set at the rental value of the hotel. Rental value for hotels is calculated based on a specific method, méthode hotelière, that takes into account the turnover of the hotel, the occupation rate and the situation of the hotel or its category.6
Works: it is mandatory for landlords to bear the cost of the structural works. Usually, tenants bear the cost of all other works, the maintenance and the repairs of the premises and the equipment, including the ones regarding safety and accessibility. Works listed in the French Tourism Code7 shall be declared to the landlord prior their completion, to avoid the inclusion of their cost in the estimation of the rental value of the hotel.
Transfer of business or lease: the free transfer of business or lease is the standard. However, it is common that landlords require that tenants obtain their prior authorisation to transfer the lease to a third party. In any case, tenants cannot be deprived of their right to transfer their business.
Right of tenure of the tenant: at the expiry of the lease, the tenant is entitled to remain in the premises8 until (1) it notifies the landlord of the termination of the lease or requests its renewal or (2) the landlord notifies the tenant of the termination of the lease with or without an offer of renewal.9
Tenants's right of renewal or right to eviction indemnity: at the expiry of the lease agreement and providing the tenant is not in breach of the lease, the landlord cannot terminate the lease agreement without paying an eviction indemnity to the tenant. The amount of such indemnity is mainly calculated based on percentage of turnover generated by the hotel.
Intellectual property and branding
IP rights issues in France pertaining to the hotel industry are mainly related to the protection available under trademark law, design rights law, copyright law as well as unfair competition and parasitism.
i Trademark law
A French trademark is obtained through registration with the Institut National de la Propriété Intellectuelle. A sign can be registered as a French trademark, a European Union trademark or as an international trademark designating France. The registration is granted for 10 years and may be renewed for additional 10 years without limitation. A hotel's name, brand and logo may be registered as trademarks provided they are distinctive. In this regard, words such as hotel, resort or spa might not be considered descriptive of the designated goods and services.
Design protection grants legal protection for the appearance of a product. Design protection is granted for any design that is new and has individual character. The initial term of design protection is five years, which can be renewed for an additional five-year period four times (i.e., altogether for 25 years). A design shall be considered to have individual character if the overall impression it produces on the informed user differs from the overall impression produced on such a user by any design that has been made available to the public. With regards to the hotel industry, design protection may be used to protect a room layout, for example.
The regulation of copyright protection is partially EU-harmonised. Copyright includes economic prerogatives that allow the author to make pecuniary profits from the exploitation of his work. The protection is for the duration of the author's life and 70 years after his death. It also includes moral prerogatives, including the right to respect the integrity of the work, which enables authors to oppose any modification that could distort its conception. Moral rights are perpetual under French law. It is possible to obtain copyright for architectural works (e.g., buildings, rooms layout), if the work is original. In the field of architecture, French case law considers that the respect due to the moral rights of the author must be reconciled with the prerogatives of the owner of the material support of the work. A balance must be struck between, on the one hand, the architect's right to the protection of his artistic creation and, on the other hand, the rights of the owner and the needs of the evolution of the building. Thus, case law does not deny the owner of the material support of the work the possibility of making changes to it, but makes the lawfulness of changes subject to the demonstration of a legitimate reason assessed on a case-by-case basis.
Unfair competition and parasitism: If a creation does not meet the requirement of originality, such creation may in some instances instead obtain protection against imitation on the ground of unfair competition (Article 1240 of the French Civil Code). Unfair competition aims at protecting economic players against disloyal marketing practices and requires a risk of confusion. Parasitism aims at protecting them against free-riding and the exploitation of others' efforts, and does not require the demonstration of a risk of confusion.
Data and hotel tech
i Data protection
The hotel industry, primarily due to the processing of personal data relating to guests (name, date of birth, nationality, email address, etc.), is subject to the General Data Protection Regulation (GDPR) and the French Data Protection Act.
The GDPR is applicable to the processing of personal data by hotels owners, operators, franchisors, franchisees and technology providers established in the EU, regardless of whether the processing takes place in the EU. It also applies in the case where they are established outside the EU, if the processing is related to the offering of goods or services to data subjects in the EU. The French Data Protection Act is also applicable.
The hotel industry is likely to collect and process sensitive data (biometric data, health data or religious beliefs of guests). In order to do so, it is necessary to comply with one of the specific applicable conditions. For hotels, processing sensitive data will likely be based on the explicit consent of data subjects provided consent meets validity criteria set by the GDPR.
As a general principle, personal data shall be kept no longer than necessary for the purposes for which they are processed. This is particularly important for hotels since they usually process personal data subject to specific legal provisions under French laws (i.e., video surveillance data can only be retained for 30 days and WiFi traffic data for a year).
The hotel industry operates in multiple countries and in this context may transfer personal data outside of the EEA. Hotels should only transfer data if the recipient country guarantees an adequate level of data protection, or if they implement appropriate safeguards (EU Commission standard contractual clauses, binding corporate rules), or if an exception applies. The EU-US Privacy Shield, on which most of the data transfers to the USA were based was invalidated by the Court of Justice of the European Union (CJEU), in the Schrems II decision of 16 July 2020.
If a hotel fails to comply with GDPR provisions, it may face a fine of up to €20 million or up to 4 per cent of its annual global turnover.
ii E-commerce in the hotel sector in France
Specific rules apply regarding the contracting process between hotels and consumers. The French Civil Code11 sets out mandatory rules regarding the conditions of the offer made on the website, for example by making sure that the 'double-click' formality allows consumers to check the details of their orders twice before validation and payment. The French Consumer Code12 supplements those requirements with additional mandatory information to provide before a consumer books a reservation. These include the price, main characteristics of the product or service as stated at the beginning of the booking process (price charged for one night in a double room, information on the services actually offered (internet connection, breakfast included or not, etc.)), the means of payment accepted or the contact details of the hotel.13 The terms and the contract must be provided to consumers on a durable medium once the reservation is validated.14
French regulation also provides that the withdrawal delay usually granted to consumers do not apply to online hotel reservations. The hotel must notify such a limitation of their right of withdrawal to the consumers.15
It is also important to note that the French Code of Tourism may also impose some requirements regarding a hotel's online activities. As an example, Article L311-5-1 states that the contract between a hotel industry professional and an operator of a renting platform of hotel rooms to consumers, might only be concluded in the name and on behalf of the professional of the hotel industry and within the framework of a mandate, although the hotel remains free to grant any discount or advantage to the clients.
To finish with, and although this does not directly concern hotels but rather their partners, (1) whenever hotels offer their services on an online platform, these platforms shall comply with specific requirements applying to those platforms under Decree No. 2017-1434 of 29 September 2017 and (2) specific regulation apply to agencies selling hotel stays (either as part of a package or as a standalone service).
Franchising of hotels
i Regulation of franchise agreements in France
There is neither specific regulation nor statutory definition of franchise agreements under French law. However, case law and legal literature consider that a franchise agreement is a contract by which the franchisor makes available to the franchisee a particular know-how, a trademark and provides the franchisee with permanent assistance, whether technical or commercial, to enable it to be able to repeat the franchisor's success.
Three main elements are required for a contract to be qualified as a franchise agreement:
- the provision of know-how;
- the licensing of a trademark or distinctive signs; and
- a permanent or ongoing technical or commercial assistance by the franchisor.
On the other hand, a French general principle stands that the franchisee must remain autonomous from the franchisor to conduct his or her business. Otherwise the franchise agreement might be requalified either as (1) an employment agreement, (2) a management contract or (3) a managing representative agreement. That being said, general commercial and contract law govern French franchise agreements.
ii Mandatory regulation applicable to franchise agreements
Although there is no specific regulation for franchise agreements in France, some mandatory provisions are considered to be of public policy and shall be considered when drafting the agreement. First of all, Article L442-6 1. 2° of the French Commercial Code states that business entities are prohibited 'to subject, or attempt to subject, a trading partner to obligations creating a significant imbalance in the rights and obligations of the parties'. In addition to the nullification of the clause, the party suffering the imbalance can claim for damages that would not be subject to a limitation under the liability cap, as such a claim is not considered as a contractual claim.
Moreover, Article L330-3 of the Commercial Code requires – for franchise agreements as for any other agreement implying exclusivity commitments – that information disclosed in a pre-contractual disclosure document (DD) is to be provided 20 days before signing the franchise agreement. Such document shall notably contain general information on the franchisor, its history, its financial health and its network. It shall also contain national and local market reports, usually carried out by third-party providers – which are not market studies per se but include information allowing the franchisee to enter into the agreement knowingly. This Article applies in addition to the general pre-contractual duty to disclose relevant information covered by Article 1112-1 of the French Civil Code.
Furthermore, payment terms are also subject to mandatory provisions.
Finally, the agreement might also be subject to the mandatory provisions of Article L.442-1 of the French Commercial Code, which prohibits the termination of established commercial relationships without reasonable notice – and regardless of any notice period contractually provided. The reasonable notice period is assessed by taking into account the duration of the commercial relationship and the circumstances surrounding it (i.e., the existence of an economic dependence of the ousted partner or of a legitimate hope that the commercial relationship would last forever).
Hotel management agreements
i The regulation of hotel management agreements in France
As a quick reminder, a hotel management contract is an agreement between a management company, also called an operator, and the owner of a hotel, whereby the operator manages the hotel by providing direction and a certain expertise through an established method and know-how. Notwithstanding the absence of specific regulation, the agreement should in principle include a mandate entered into between the hotel owner and the management company.
Hotel management agreements (HMAs) do not usually grant real estate rights in France. The term of the contract is generally fixed and an early termination clause is provided either upon performance, test or sale results. Any misconduct of any of the contractual parties, for example a condemnation for bankruptcy, may also cause an early termination.
Termination for convenience is rejected most of the time by the contractual parties, even if the clause provides an indemnity in such a case. Usually the operator also specifies that he is guaranteed by an adjusted gross operating profits guaranty. It is also common to add a non-competition clause, although they are submitted to specific rules under French law to be valid.
Furthermore, the contract usually grants to the operator a wide influence on the contract and its application through time. In this regard, parties often include a clause setting that any change in the ownership of the hotel would be subject to prior approval of the operator, and any sale being subject to operator's prior consent. Most of the time and for the sake of convenience, parties also agree to transfer the HMAs with the hotel whenever it is sold by the owner. Finally, and depending on the hotel management company, the HMAs might also come along with a technical service agreement or a franchise agreement.
The alternatives for HMAs in France are commercial leases, but this type of contract has become less and less popular among international operators as it is subject to strict mandatory regulations pursuant to the French Commerce Code and due to the applicable liability regime.
There are three ways to structure the acquisition of a hotel: (1) acquisition of the business (fonds de commerce) or the property only, (2) acquisition of the business and the property or (3) acquisition of the shares of the company holding directly or indirectly the business or the property.
The asset deal or share deal dichotomy, well known in real estate finance, applies to the hotel sector but with a clear preference for the share deal, notably due to the advantageous tax regime applicable to the transfer of shares versus a transfer of assets (sales of shares in real estate oriented companies are subject to a transfer tax of 5 per cent of the sale price versus 5.09 per cent or 5.81 per cent for real estate transfer). Acquisitions are mainly made through the sale of shares of the company holding the business or the property via an SPV, which will be the borrower of the banking loan subscribed to finance the acquisition.
With regards to the financing, loan agreements entered to finance the acquisition of the business or the shares are mid-term loans with a maximum term of seven to 10 years. With respect to the acquisition of the property, loan agreements are usually entered into on a longer-term basis for a period of 12 to 15 years. While for the acquisition of the business or the shares, the loan agreement may take the form of a private deed, for the acquisition of the property it will take the form of a notarised deed signed before a French notary.
The typical security interest required by lenders in relation to real estate financing are mortgages and the assignment of rents or insurance indemnities receivables (Dailly Law assignment form (Bordereau Dailly)). Mortgages are security interest on an immovable property created without dispossession of the owner under which the unpaid lender has the right to have the mortgaged property sold in any hands and to be paid by preference over the sale price. Mortgages can only be entered into before a French notary; the absence of such notarial deed is sanctioned by the absolute nullity of the mortgage. Mortgages must be registered with the mortgage office (service de la publicité foncière) to be enforceable against third parties and the registration fee may be a substantial amount. As regards the assignment of receivables, no registration is required but a Dailly law assignment form (Bordereau Dailly) shall be signed to render the assignment enforceable against third parties.
In addition to the aforementioned security interest, lenders may also require from the SPV a pledge over the shares held by the SPV, a pledge over the SPV's bank account or a pledge over the ongoing business (nantissement de fonds de commerce).
Since the beginning of the covid-19 pandemic, the tourism sector has been one of the most impacted in France. During the lockdown, all restaurants and hotels were closed. Hotel occupancy rates were close to zero during the lockdown, even though these rates tended to increase significantly since the end of the lockdown due to the reopening of hotels and the opening of the summer season vacations. This shutdown has made the sector extremely fragile and caused significant losses. As a result, companies in this sector are especially exposed to the risk of bankruptcy.
According to commercial real estate professionals, the commercial real estate financing activity in France was particularly dynamic, with €7.3 billion invested in the market before the beginning of the covid-19 pandemic. They also consider that transaction volumes will proportionally decrease considerably due to the covid-19 crisis and the impossibility for market players to conclude transactions. Professionals expect a return to normal in 2021.
The current trend in France in respect of financing real estate assets is to move towards 'green' investments and more sustainable assets to reach a higher level of environmental performance. A number of incentives are available to enable stakeholders to deliver sustainable and environmentally friendly hotels.
i Employment models
Under French employment law, jobs in the hospitality industry are mainly classified between several professional categories including employees, supervisors and executives, and for each of them, several types of employment contracts are possible.
The most commonly used form of employment is the indefinite-term employment contract.
Other 'precarious' employment contracts are often used by companies in this sector, to cover the need for a temporary workforce (including 'general' or customary fixed-term contracts, seasonal contracts, as well as temporary workers) for which the conditions of recourse, maximum duration and grounds for termination are strictly defined by law. Most of the time, the fixed-term contract is used to replace an absent employee or during peak tourist periods. As a general rule, the maximum duration is 18 months (some exceptions apply).
For an employee working full-time, according to the national industry-wide CBA, the weekly working time is 39 hours. Part-time employees (frequent in the industry) are those working below this weekly working time. Conversely, for employees working independently, such as senior executives, a fixed-annual working time in days scheme may be apply so that their working time is counted in days and not in hours (without overtime).
ii Pay and benefits
The CBA-based minimum wage is higher than the minimum provided by French law (i.e., the minimum hourly wage in 2020 is €10.15 gross in the hospitality industry).
Certain additional benefits may be granted if a collective agreement provides for it or if the employer decides so unilaterally (e.g., specific bonus, professional expenses). Also, it should be noted that certain specific working hours (overtime, night work, and work on Sundays – which are quite common) require that additional monetary or rest time compensations be granted to the employee.
iii Termination of employment
The indefinite-term employment contract may be terminated by the employer (with cause), or the employee, or by mutual agreement. However cases of lawful termination of a fixed-term contract are more limited.
With specific regard to a dismissal, only employees with eight months of uninterrupted length of service can benefit from an indemnity for dismissal (except in the event of serious or gross misconduct). The law sets a minimum and a cap for damages awarded as compensation for unfair dismissal.
iv Employment disputes
In France, the resolution of Labour law disputes depends on the subject matter of the dispute. Two main categories of disputes can be distinguished:
- the performance or termination of employment contract are settled by the Labour Court. The procedure includes (most of the time) a first stage of conciliation, before the case is pleaded and judged; and
- trade union rights, as well as social security issues are settled by Judicial Tribunal;
It should be borne in mind that procedures and time limits in France are long and complex. It is often necessary to wait several months or even several years to obtain a first decision. For this reason, negotiating post-termination settlement agreements is rather common.
Dispute resolution and management
The French hotel sector has been shaken by several cases in the past few years; most prominent later matters of case law France are as follows.
In November 2014, the French Supreme Court handed down its final judgment16 and terminated the management contract between Hilton and the SIHPM (real estate company that owns the hotel) based on Hilton's several breaches. This judgment confirmed the first instances judgments.17 The dispute was based in particular on SIHPM's disappointment with the performance achieved by Hilton's management. SIHPM complained that Hilton had under-exploited the potential of the hotel, which it believed should be a five-star establishment instead of four. The judgment is interesting for two reasons.
First, the Court dismissed the plea of inadmissibility raised by Hilton, which was arguing the existence of a mandatory conciliation clause, on the ground that the clause was not clear and unequivocal enough due to the use of words such as 'may', 'if necessary' or 'if required'.
Second, the Court noted that the contract between the parties provided for REVPAR (room revenue per available room) panel to enable a comparative test to be carried out with comparable hotels competing on the market. Most of these hotels were operated as 4-star hotels and kept a 4-star classification, so the Court inferred from this that the parties, even at the conclusion of the contract, accepted that the hotel would be operated under similar conditions to those of the hotels in the panel classified as 4-star hotels.
The French Supreme Court also issued a judgment on 8 July 202018 regarding some clauses inserted in the terms and conditions of Expedia's booking platform (tariff, non-price and promotional parity clauses and the 'last available room' clause) and confirmed their illegality, due to the fact that they allowed Expedia to automatically benefit from more favourable conditions than its competitors. However, the Court considered that these clauses, by their cumulative effects, do not create any significant imbalance between the rights and obligations of the parties. Through this decision, the French Supreme Court also stated that French law is applicable notwithstanding contractual provisions stating otherwise since Articles L. 442-6, I, 2 and II, d of the French Commercial Code are overriding mandatory provisions (at least when the claimant is the French Ministry of Economy).
In relation to the current covid-19 epidemic, the Nanterre Commercial Court19 ruled in favour of five hotel-keepers and ordered the insurer Albingia to pay a provisional amount of €450,000 aimed at covering two months of operating losses to its clients.
In a nutshell, the judicial situation in the hotel sector is rich and the consequences of the anti-propagation measures of the covid-19 virus should bring a great deal of case law that might be interesting for the hotel-keepers, and should be closely followed.
Generally, the regulation applicable to hotels mainly results from general commercial contract and employment law and regulation resulting from the Tourism Code, with very few rules specifically tailored for the industry.
As for most countries, the state of the French hotel market and its development (and the tourism market as a whole) is uncertain for the following months due to the sanitary crisis – even though restrictions have been eased in France since the end of lockdown, which include the hotel sector. The development of the market would mainly depend on how the virus progresses and subsequent measures and restrictions that will apply accordingly.
1 Alexandre Vuchot, Ariane Mole, Bertrand Levy, Djazia Tiourtite, Boris Martor and Maroun Abinader are partners at Bird & Bird. The authors woudl like to thank Benjamin Lichtle, Jessica Derocque, Virginie Estéoule, Rami Kawkabani, Camille Champetier De Ribes, Julie Verdure, Floriane Chartier and Myriam Douillet for their assistance with this chapter.
3 Article D311-4 of the French Code of Tourism.
4 Article L 145-4 of French Commercial Code.
5 Article L 145-4 of French Commercial Code.
6 Article R 145-10 of French Commercial Code.
7 Article L 311-1 of French Tourism Code.
8 Article L 145-9 of French Commercial Code
9 Right of the landlord to terminate the lease at its expiry is explained in the section 'right of renewal/right of eviction indemnity'.
10 Law No. 2004-575 for the Trust in Digital Economy of the 21 June 2004.
11 Article 1127-1 of the Civil Code.
12 Consumer Code 'Book I – Information to Consumers and Commercial Practices' and 'Book II – Formation and Execution of Contracts'.
13 Article L111-1 Consumer Code.
14 Article L221-8 Consumer Code.
15 Article L221-28 Consumer Code.
16 Supreme Court, Commercial Chamber, 4 November 2014, No. 13-10.494.
17 Paris Commercial Court, 5 July 2012, No. 2011042987.
18 Paris Court of Appeal, 9 November 2012, No. 12/12982.
19 Supreme Court, Commercial Chamber, 8 July 2020, No. 17-31536.