The International Hotel Law Review: Germany
The past decade has seen a continuous growth of the German hotel market. The perception of Germany's economy as a 'safe haven' owing to its quick recovery following the financial crisis of 2008–2009 and its steady growth in the subsequent 10 years, including during the euro crisis, has attracted numerous domestic and international investors. With the demand by real estate investors for investment products exceeding the available offer for traditional asset classes such as office buildings, the focus on 'special real estate' such as hotels, but also logistic facilities, light industrial sites or data centres, has increased consistently. The volume for hotel transactions reached €3.64 billion between June 2018 and June 2019, ranking third in Europe behind the UK and Spain.2
This interest has further been boosted by continuous growth in the tourism sector. Affordable travelling costs and growing touristic activities, particularly from emerging markets, have resulted in an increasing number of international and domestic visitors as well as business related overnight stays.3 According to the German Federal Office of Statistics, overnight stays have increased from 368 million in 2009 to 495 million in 2019.4 The hotel industry, and more generally the hospitality sector (i.e., including the restaurant and catering industry) are an important component of the German economy, representing, as of 2019, approximately 600,000 employees (total hospitality: 2,422,000), 43,939 businesses (total hospitality: 222,740) and a turnover of €32.1 billion (total hospitality: €89.7 billion) according to figures published by the German Hotel and Restaurant Association (DEHOGA).5
As in many regions of the world, this dynamic has been interrupted abruptly by the outbreak of the covid-19 pandemic in 2020. This resulted in a massive decline of economic and travel activities and has had a particularly detrimental impact on the hospitality industry, which in 2020 as well as in 2021 shows results that are far below those of 2019.
Unlike certain types of assets that may be subject to protective limitations under German law such as 'critical infrastructure', there are no principal restrictions to foreign hotel investors or operators entering the German market by acquiring or developing hotels or entering into a lease or other type of operation agreement.6 This is particularly valid in relation to individuals or entities from the European Union, who are protected by the fundamental freedoms granted in the European Single Market. Notwithstanding this principal freedom of investment or operation, there are, of course, legal requirements to be observed in connection with the acquisition or operation of hotels, such as the need for non-European nationals to obtain right of residence, formalities for the acquisition of real properties, public law requirements for the development of buildings or licence requirements for the operation of certain businesses. Furthermore, in certain types of real estate transactions (e.g., certain acquisitions of agricultural land) authorisations by public authorities may be required, regardless of whether the purchaser is German or not.
The acquisition of real estate (or the creation of a heritable building right, which is a freehold – similar right) requires notarisation of the entire property purchase agreement including all appendices. Furthermore, the transfer of ownership to the real property only occurs formally upon registration of the purchaser in the land register of the property. The registration itself depends on payment of the real estate transfer tax, which is due upon the sale of the real property (asset deal)).7 While the municipality at the location of the property cannot prevent the sale of the property as such, it may have, under certain circumstances, a pre-emptive right entitling it to step into the purchase agreement and acquire the property instead of the purchaser.
Real estate transactions are subject to the German anti-money laundering laws, which require involved parties and persons such as banks and financial institutions, notaries, real estate agents, lawyers, tax advisers or accountants to fulfil specific monitoring and identification obligations and, in turn, requires obtaining comprehensive KYC information.
For the development of hotel buildings, thorough legal due diligence and prior coordination with authorities should be undertaken to ensure that the planned development is legally (and possibly politically) feasible at the desired location. The specifications and requirements of the zoning plan applicable at the planned location are to be observed (e.g., the limits in terms of size and possible areas of construction). If a specific zoning plan is not in place for the planned location, the general regulations must be complied with, which usually require alignment with existing neighbouring developments. In addition to the requirements of the zoning plan and building permit, any other relevant public law requirement is to be complied with. For example, limitations under monumental protection laws may need to be observed, either in relation to an existing hotel building being refurbished or even in relation to a new hotel development in case the monumental protection regulations that apply to existing buildings 'spread' to neighbouring development projects.
Hotel operations do not require an authorisation by public authorities; the registration of the business operation suffices. However, if a restaurant or bar selling alcoholic beverages is incorporated into the hotel and is open to the public (i.e., not only to the hotel guests) a licence or special notification is necessary. The requirements may differ slightly from region to region as both federal and state regulations are to be considered. Generally, to obtain such a licence, the operator will need to demonstrate reliability and appropriate expertise by providing documents such as certificates of good conduct and evidence of relevant training and education. Furthermore, various legal requirements are to be observed such as those relating to health and security protection, food regulations or minor protections.
Various legal structures can be found in the German market in relation to ownership and operation of hotels. The legal structure will vary depending on the specifics of each hotel and diverse factors such as the number of involved parties, whether the structure relates to an individual hotel or is applied repeatedly by a large hotel company, the involvement of domestic or international parties and brands or the type, costs and predicted duration of the hotel project.
Exemplarily, hotels may be owned and operated by the hotel operator itself or an affiliated group company under its own name and brand, operated in cooperation with an international group using a well-known brand or franchise, or, be owned by an unrelated real estate investor such as institutional investors and operated by the hotel company under different possible types of agreements granting a right of use to the real property.
The ownership of the real property on the one hand and of the movable items and inventory, (including the furniture, fixtures and equipment (FF&E) and small operating equipment (SOE)), on the other hand is often divided between different legal entities for tax reasons. Rental income generated from the letting of real estate is generally exempt from trade tax under German law. However, the trade tax exemption does not apply to rental income generated from the letting of business fixtures or from services offered at the property. Such income could then 'infect' the totality of the income generated from the hotel operation and thus make the rental income generated from the letting of the real property subject to trade tax.
The most common form of agreements governing the legal relationships between the different stake holders in the German hotel market are lease agreements, usufructuary lease agreements, management agreements, franchise agreements, or a combination of such agreements. In certain cases, services or operations such as spas and wellness centres or bars and restaurants are outsourced to third-party operators (e.g., in the context of sub-lease agreements). While usufructuary lease agreements have traditionally been prevalent in hotel operations in Germany,8 the growing involvement of international actors as owners, operators or franchisors has led to an increase in the use of management agreements and franchise agreements or other agreements mixing specific aspects of different types of agreements.
Lease agreements and usufructuary lease agreements are regulated in the German Civil Code. Furthermore, there is ample case law existing in relation to these types of agreements. Comparable specific statutory regulations do not exist in relation to management or franchise agreements, which mostly originated from Anglo-Saxon legal systems. These types of agreements are governed by the general provisions of the German Civil Code and the similar use of certain specific statutory provisions, detailed and comprehensive contractual regulations based on market practices and case law.
German law differentiates between two types of leases: lease agreements and usufructuary lease agreements. They are very similar legal instruments, differentiating mainly at the level of the lease object. An usufructuary lease agreement will generally be assumed where a fully equipped hotel is the lease object, while a lease agreement is assumed where a refined shell building is let to the hotel operator who then brings in the hotel specific equipment. Owing to their similarity, the content of this chapter relates to both lease agreements and usufructuary lease agreements and mentions of 'lease agreement' shall, unless specified otherwise, relate to both types of agreements.
The legal rules governing lease agreements are codified in the German Civil Code. The overall statutory regime can to some extent be considered as protective of tenants. However, over the course of time a market practice has been developed, particularly in relation to commercial lease agreements, pursuant to which the contractual parties amend or waive statutory provisions so that a significant portion of the commercial risks and responsibilities in relation to the property are being shifted to the tenant.
The lease object needs to be clearly identified and specified in the lease agreement, mostly by description of the property, specification of its postal address and/or land register data as well as site maps and plans. This requirement is particularly important in built-to-suit development projects where the developer or landlord will build the hotel in accordance with the specifications of the tenant or operator.9
Hotel lease agreements are generally concluded with a fixed term. An initial fixed term between 10 and 20 years is common, with one or two extension options for the tenant for additional three, five or seven years respectively.10 Ordinary termination of the lease agreement is excluded during the fixed term, while extraordinary termination for cause (e.g., rent payment default exceeding certain thresholds) remains possible. Pursuant to unalterable statutory law, the parties cannot bindingly agree on a fixed-lease term exceeding 30 years. If a term exceeding this limit is agreed, upon expiry of 30 years, either party is entitled to terminate the lease agreement with the statutory termination notice period (six months prior to the end of a quarter).
Lease agreements with a fixed term exceeding a period of one year are subject to strict written form requirements. All essential content of the agreement must be included in the deed of the lease agreement, including the appendices. The lease agreement principally requires the signing of physical copies of the lease agreement by both parties (i.e., by wet-ink signatures). The exchange of PDFs only is not sufficient to fulfil these requirements. Electronic signature of contracts is principally possible under German law, whereas various exceptions or requirements on the type of electronic signature exist, depending on the type of contract, and the use of electronic signatures has consistently increased in the recent past, in particular since the beginning of the covid-19 pandemic and its impact on remote working. Signing of lease agreements by electronic signatures, however, requires the use of electronic signatures of the highest standard provided for in the German Civil Code and the European Regulation on electronic Identification, Authentication and Trust Services (eIDAS), called qualified electronic signatures. Yet physical signing and exchange of lease agreements (generally preceded by exchange of PDFs) is the largely dominating market practice in Germany. If the written form requirements are not fulfilled, the lease agreement remains effective, however, the parties are then not bound by the contractually fixed term and are entitled to terminate the lease after expiry of one year with the statutory termination notice period.
The rent agreed by the parties is typically either a fixed rent, often calculated on a euro amount per room basis, or a combination of fixed rent and turnover rent, with a portion of the rent being linked to the income generated from the hotel operation. In the latter case, information, disclosure and control duties and mechanism are inserted in the lease agreement. The (fixed) rent is mostly subject to adjustment following development of the German consumer price index, provided the term amounts at least 10 years. Alternatively, a step rent with a precise rent increase schedule can be agreed by the parties. Rent incentives in the form of a rent-free period are often granted to tenants, the amount of which will depend on the specifics of the local market at the location of the hotel. In development projects, further incentives are frequently agreed to support the start of the hotel operation in the form of payment of a pre-opening fee or technical service fee by the landlord. The tenant is generally required to provide a rent security: at the latest at the handover of the property. The security, that is mostly to be provided either in cash or as a bank guarantee, generally corresponds to an amount of three to 12 months of rent.
Maintenance and repair obligations, which according to the statutory regime of the German Civil Code are principally the responsibility of the landlord, are widely transferred to the tenant in the contractual practice. Due to certain limitations set in the provisions of the German Civil Code regarding general terms and conditions and case law, the obligations are generally divided between the parties, with the landlord being responsible for maintenance and repair of the roof and structural elements (Dach und Fach) of the building, while the tenant is responsible for the remaining parts of the lease object. The tenant is generally responsible for the maintenance, repair and replacement of FF&E and, as the case may be, is required under the lease agreement to build a reserve (2–4 per cent of the hotel income) for the fulfilment of this duty. Under certain circumstances the transfer of the entire maintenance and repair obligations to the tenant is possible (triple net leases).
The right of use of the tenant may be threatened despite the existence of an effective lease agreement. In cases of insolvency of the landlord or of a foreclosure sale of the real property, statutory extraordinary termination rights exist that enable the insolvency administrator or the purchaser of the property to end the lease agreement prior to its contractually agreed fixed term. Furthermore, as described above, a termination of the lease agreement after 30 years regardless of whether a longer term was agreed by the parties cannot be excluded contractually due to the limitations imposed by the German Civil Code.
To secure the right of use of the tenant irrespective of the fate of the lease agreement, the parties may agree on the registration in the land register of the hotel property of an in rem right, predominantly in the form of a tenant easement or a permanent use right. There is, however, no automatism in the German market on the granting of such registered right. As it will generally be considered as having an impact on the value of the property, its creation will only be considered where an enhanced protection of the tenant appears justified (e.g., where a term of more than 30 years is desired by the parties or in cases of substantial investments by the tenant for the development of the hotel property). Furthermore, to achieve effective protection for the tenant, the cooperation of beneficiaries of prior ranking registered rights, such as land charge creditors, is necessary. It is required that such creditors either accept to subordinate their right or to maintain the right for the tenant on the property in the case of the enforcement of a senior ranking right. Financing banks may consider such cooperation if the tenant right is created in compliance with the forms developed by the association of mortgage banks.
Intellectual property and branding
Trademarks are normally the most important IP rights for hotels to consider. This is because potential licensees or other business partners and potential guests in a new territory are more likely to be attracted to the 'brand' of a hotel than anything else. Trademark law is national and territorial and, even though there are some principles that generally apply, the variations of the law may differ in each country.
The best way to protect a trademark is to register it with the competent authority. For Germany it is the German Patent and Trademark office (GPTO) and for an EU-wide registration it is the European Union Intellectual Property Office (EUIPO). European Union trademarks in particular, which are centrally handled, are a cost-efficient way to gain protection for the entire European Union. While a national registration with the GPTO covers only Germany, a registration with the EUIPO conveys protection in every member state of the EU.
Trademark registrations are not obtained for the trademark per se: the registration must always indicate the goods or services that are to be protected according the Nice Classification. The most relevant class for hotel services is class 43.
There are several ways to apply for registrations internationally. Next to national registrations in every single country, that are mostly very cost intensive, one might use international registration systems such as the Madrid Agreement, which allows multiple territories to be covered (although the rights obtained are still granted on a territory by territory basis). The international registration system can be a very cost-effective method of filing applications in numerous territories at once, and should, therefore, be considered by all hotels interested in expanding into a number of different territories.
Unregistered trademarks and company names
Without registration, a sign in Germany may be granted protection if it has acquired public recognition. In addition, a company or business name or even a specific shop name may convey rights without further registration.
Copyright could become important for the hotel industry since copyright could subsist in the visual appearance of the hotel, such as its architecture and interior design.
In Europe, the author of the copyright is the creator. Copyright is established informally through creation of the work and does not have to be registered in Germany. There is no protection against parallel creations. Copyright protections expire 70 years after the author's death (post mortem auctoris).
As the result of two international conventions (which most countries in the world are signatories to), copyright can be enforced in every country that has signed those conventions.
A design is the protection of the external appearance of products. The essential requirements for protection of the design are novelty and individual character.
In comparison to trademarks the design is registered at the GPTO without a formal examination. The same applies for Community Designs on an EU-wide level. The registered design may enjoy protection for up to 25 years or without registration through publication within the EU (protection period three years). The advantage of a design registration compared to trademark registration is the much lower costs involved. The disadvantage is the lack of examination by the GPTO. Validity may, therefore, be much more easily be attacked by an infringer in court proceedings.
iv Confidential information
The expression 'confidential information' refers to commercial or business information that has not been made public. This type of information is often referred to as a 'trade secret' or as 'know-how'.
In theory, information can remain confidential forever, if it is not disclosed to anyone. There are three main requirements that must be met before information will be capable of protection as confidential. The information must be secret, confer some economic value or benefit to the owner and the owner must have taken reasonable efforts to ensure that the information remains secret.
Confidential information also generally requires that an obligation of confidence has been placed on the person who receives the relevant information.
Data and hotel tech
The handling of customer data has been an obligation for hotel operators for numerous years. Pursuant to the Federal Act on Registration, any hotel guest shall sign a form upon arrival containing specific personal data such as name, date of birth, nationality or address. Foreigners shall prove their identity by providing a valid identification document. Hotels are compelled to keep the form for a period of one year following departure of the guests and to destroy or delete the data within three months following expiry of the one-year period.
Since the European General Data Protection Regulation (GDPR) came into effect on 25 May 2018, legal obligations in relation to the processing of personal data have further increased. The impact of the GDPR is wide, as its scope is not limited to personal data processed by European actors but also applies outside the boundaries of the European Union, whenever personal data of EU residents is processed in connection with offered good or services. The GDPR has introduced new concepts and requirements in relation to permissions to be obtained for the processing of data, information duties, pseudonymisation of data or the 'right to be forgotten'. This has led to the need for businesses of all kinds to implement comprehensive procedures in data processing. Violations of the obligations under the GDPR can lead to substantial penalties of up to €20 million or 4 per cent of the global turnover.11 Hotel operations are confronted with the processing of personal data at several levels, either based on legal obligations as described above or in the context of regular operations (e.g., in the booking process, marketing activities or payment procedures). It is, therefore, necessary to ensure compliance with the legal requirements and, in particular, to educate and train personnel, establish appropriate IT systems, verify and update data protection declarations and IT settings, obtain required consent from customers or, if required by law, appoint a data protection officer.
The hotel sector is one of the industries with the most notable increases of digitalisation in Germany.12 Digitalisation has had an impact that goes far beyond the processing of personal data. In the course of the past 20 years, internet-based platform services have emerged that have substantially affected the hotel industry. Online booking platforms have become one of the most important forms of distribution for hotel reservations. As of 2016, already a third of all hotel reservations in Germany were said to occur through such platforms.13 While the growth of such distribution channels is profitable for both the platforms and the hotel operators, certain aspects of the relationship between these two actors are subject to legal discussions. In particular, the 'best price clauses' that are often part of the general terms and conditions applicable to the agency agreements between the platforms and the hotel operators have been object of legal disputes for several years. Best-price clauses limit the possibility for the hotel operator to offer the public rates more favourable than those available on the reservation platform outside of the platform. This practice has been contested by German antitrust authorities, arguing that it would represent unfair competition. In June 2019, the Higher Regional Court of Düsseldorf ruled that 'narrow' best price clauses (i.e., clauses that prohibit hotel website to offer better rates than those on the platform) are valid, arguing that they are necessary to ensure a fair and balanced exchanges of services and benefits between the parties, considering that the platform would only gain a remuneration when a reservation occurs in fact.14 The dispute was, however, not finally settled by this decision. In July 2020, the German Federal Court accepted to review the appeal filed by the antitrust authorities against the decision of the Higher Regional Court of Düsseldorf15 and in its decision of May 2021 has ruled that these clauses are not valid.16
Digitalisation has also enabled the market entry of platform-based shared economy businesses, most prominently represented by Airbnb. Such platforms have rapidly become a relevant player in the market, representing a substantial portion of overnight stays in Europe. Similarly to other platforms, they are facing legal discussions, in particular in relation to the lower level of regulations applying to them in comparison to the hospitality industry or regarding their impact on local housing markets, which are particularly tense in large European cities. Various municipalities have issued regulations that intend to control to some extent the use of private accommodations for commercial purposes, limiting, for example, the number of nights per month that individuals are entitled to let accommodation to guests via such platforms.
Franchising of hotels
Franchise agreements are concluded between (international) hotel companies as the franchisor and hotel operators as the franchisee. The franchisee conducts the business in its own name and for its own account and risk, in accordance with the guidelines and specifications established by the franchisor. The main interest of the franchisee is to benefit from the prominence of the franchisor and its brand, as well as of its know-how, while maintaining its economic independence. For the franchisor, hotel franchise agreements represent a distribution system to develop its brand and activities without the need for intensive financial involvement in comparison to the acquisition or new development of hotel properties.17
Through the hotel franchise agreement, the franchisee obtains a licence to use the brand of the franchisor and is incorporated within the system of the franchisor, through participation in marketing activities, access to the booking and IT system and other internet and social media activities. The franchisee benefits from the know-how of the franchisor, which provides specific training and coaching as well as information material to the franchisee.
The franchisee is compelled to maintain a quality level complying with the requirements of the franchisor, both in relation to services and condition and equipment of the hotel, as well as to participate in marketing activities. The franchisor is often granted monitoring and inspection rights to verify compliance with the standards set out in the franchise agreements. The consent of the franchisor is often required for the hiring, promoting and dismissing by the franchisee of the hotel director or other hotel key personnel.18
Hotel franchise agreements generally provide for several fees to be paid by the franchisee, which will often consist of:
- a one-time initial fee to be paid upon signing of the franchise agreement;
- a licence fee to be paid on a monthly basis and amounting to a certain percentage of the turnover (generally, 3 to 5 per cent of the turnover);19
- and a training or marketing fee that may either be agreed as a fixed amount or as percentage of the hotel turnover.
Alternatively to a training and marketing fee, the parties occasionally agree on an incentive fee that becomes payable upon achieving of specified economic results. The incentive fee will mostly consist of a percentage of the gross operating profit.20
The terms of franchise agreements are generally shorter than those of lease agreements or management agreements. It is not unusual to agree on a term of five to 10 years with extension options. In addition, the parties generally agree on certain conditions for extraordinary termination rights, such as economic collapse of one party or the violation of substantial contractual obligations.
The parties will generally agree on non-competition clauses where the franchisee undertakes to refrain from initiating business activities that may be competing with the franchise system. In return, the franchisor grants regional protection and exclusivity to the franchisee.
It is recommended to insert in the hotel franchise agreement an obligation on the franchisee to agree with the landlord in the lease agreement for the hotel property on a step-in right for the benefit of the franchisor, entitling the franchisor to replace the franchisee as tenant in the case of an early termination of the lease agreement. This is particularly relevant in the case of insolvency of the franchisee and the related threat of termination of the lease, if the franchisor is interested in keeping the site until a new franchisee can be found to replace the original contractual partner and continue the hotel operation under the brand of the franchisor.
Hotel management agreements
Hotel management agreements (HMA) are not specifically codified in German law. HMAs are generally legally qualified as mixed agreements that contain characteristics of agency agreements and services agreements. HMAs have been used in the German market since the 1980s.21
Under a customary HMA structure, the hotel is operated by an experienced (international) hotel company with a renowned brand and extensive know-how (the 'manager') that acts for and on behalf of the owner or tenant of the hotel property (owner or tenant referred to jointly in this Section as the 'owner') against payment of a fee. The owner benefits from the experience, brand and organisation of the manager with the expectation to achieve an increase of revenues. The hotel is incorporated in the network of the manager, in particular in relation to a central procurement, booking and IT system and marketing activities to improve efficiency.
Typically, the manager has comprehensive decisional authority over the daily hotel operation while the rights of the owner are restricted to the greatest extent possible,22 often limited to budget approval, information, inspection and consultation rights. The economic and legal risks, however, principally remain with the owner.
The manager selects, appoints, instructs and supervises the general manager of the hotel and other key personnel, who all must have substantial experience and qualification. However, the personnel are often employed by the owner, who may have a right to veto the employment of the director or key personnel for good cause. Typically, the management personnel, acting under the supervision of the manager, are granted comprehensive control and discretion in the management and direction of all aspects of the hotel operation and corresponding power of attorneys.
The manager, acting through the hotel director or other key personnel, determines and controls the hotel operation in relation to its most important aspects and departments within the standards, terms and conditions and limits established in the HMA. The manager determines terms of admittances, charges for rooms and commercial space, negotiates and administers contracts for food and beverage and all other kind of goods, services and supplies, leases or grants of concessions for certain spaces. The services provided by the manager also comprise the establishment of labour policies, the determination of wages, the conduct of hiring and dismissal process for employees, the provision of training for personnel, marketing and sales services, monitoring and coordinating of maintenance, repair and replacement works and ensuring insurance cover. The manager prepares and delivers regular and annual profit and loss statements and reports as well as a budget proposal and annual plan for the upcoming year, which shall reflect, among other things, contemplated marketing activities, capital and operating expenses and estimated revenues. The hotel operation shall principally be conducted within the range of the prepared budget and annual plan, without it being fully binding on the manager. Nonetheless, the owner remains responsible and liable for all costs and expenses relating to the hotel operation.
The management fee payable to the manager generally consist of two components: a basic fee that amounts to between 2 and 4 per cent of the turnover and an incentive fee which consists of a percentage of the gross operating profit generated in the hotel, the range of which is between 8 per cent and 15 per cent in the market.23 In light of the impact of the incentive fee for both parties, the process for the determination of the gross operating profit, including the calculation of revenue and expenses, is often specified in detail in HMAs.
While there are no limitations imposed by statutory law on the term of HMAs, the market practice has evolved towards terms not exceeding 20 years, including extension options, due to the 'Holiday-Inn' case law of the German Federal Court of 1981.24 In this judgment, the Federal Court examined HMAs under various perspectives and assessed that the validity of the term agreed by the parties depends on the specific circumstances of the case and in particular on the extent to which the owner is excluded from the possibility to influence or shape the business operation. Although uniform solutions may not be applied to all HMAs, the Court assumes that a term exceeding 20 years in cases where the control over the business operation is vastly transferred to the manager is invalid. Furthermore, the Court assessed that the owner has an inherent special termination right when the hotel operation does not generate profit or is limited to such extent that it is insufficient to cover ongoing costs and obligations. Consequently, certain HMAs explicitly specify for purposes of clarity, the conditions for the exercise of such special termination right in the event of negative economic results for the hotel.
In contrast to lease agreements, HMAs are not transferred by operation of law in case of a sale of the real property. A transfer of the HMA to the purchaser of the property requires a three-party agreement that provides for the consent of the manager. HMAs often specify the conditions for the transfer of the HMA or for a special termination right of the parties in such a scenario. In the case of insolvency of the owner, there is a significant risk that the HMA is terminated by operation of law if it is qualified legally as mainly being an agency agreement due to specific insolvency regulations. If agreeable between the parties (and, possibly, prior ranking creditors), the right of use of the manager may be secured by a right in rem registered in the land register of the property, such as an easement.
Financing of hotel transactions will occur in the context of an acquisition or development of a hotel property or a subsequent refinancing. A typical financing will consist of a bank loan agreement and several security documents securing the claims of the lender.
The loan agreement will often be a short- to mid-term loan facility (five–seven years) governed by German law. However, in scenarios involving international parties, in particular where the owner of the real estate and borrower is a vehicle governed by the laws of another country, it is not unusual for the financing to be granted by foreign banks and governed by the laws of other jurisdictions than Germany, whereas the security documents will typically remain under German law as relating to the real property or hotel operations, which are located in Germany.
The loan amount will generally not exceed a certain loan-to-value threshold that will depend on the respective market conditions and economic environment at the time of the financing. The loan agreement typically contains the obligation of the borrower to provide comprehensive security as condition precedent for the draw down and utilisation of the loan. The security will generally consist of the following legal instruments:
- land charge registered over the property;
- assumption of personal liability by the borrower and any co-debtor;
- pledge agreement over the shares of the company holding the property, and, where operator and owner are affiliated, possibly also over the shares in the operator;
- security assignment regarding all current and future rent receivables;
- global assignment agreement regarding other claims of the borrower, such as warranty claims, insurance claims or similar claims and rights;
- pledge agreement over bank accounts of the borrower or operator, or both;
- duty of care declaration from the property manager company, if any; and
- subordination declarations in relation to shareholder loans.
Co-debtorship declarations, letters of comforts or other guarantees by affiliated group companies are also required. The borrower remains in possession of the property and responsible for the operation of the hotel. The security instruments, however, grant the possibility for the lender to take over control comprehensively in a default scenario. A sale of the property by the borrower will require the consent or cooperation of the lender based on the provisions of the loan agreement and for the redemption of the rights encumbering the property.
In addition to any security, the loan agreement will generally contain several covenants and undertakings to be fulfilled by the borrower. These include, for example, financial covenants, information and documentation duties and other reporting obligations. The loan will also generally provide for the possibility for the lender to syndicate or transfer the loan agreement, subject to certain regulations protecting the interests of the lender.
Alternative financing forms are hotel finance leasing for hotel development projects or sale and lease back structures that are mostly used for generation of liquidity for the hotel owner or operator.25
In the German hotel sector various employment models are used: fixed-term, unlimited (especially for core employees) and seasonal (often consisting of students or other temporary employees). Also, foreign workers are common in the industry. A proper work visa needs to be secured before foreign workers may start working in Germany.
Fixed-term contracts (without reasons) are permissible for up to two years. Such contracts mandatorily require the written form (wet ink signature) and – just for the sake of completeness – must include all statutory employment rights, such as holidays, resting breaks or sick pay.
The Federal Working Time Act as well as all statutory health and safety laws and regulations generally apply to any kind of employment. This means that the general working hours (sole working time, shifts may be longer including breaks) are eight hours per day (max. ten if as average eight hours will not be exceeded in the long run). If the working time includes a lot of on-call duty, the working time may be extended under certain circumstances. Employees must observe rest breaks of at least 30 minutes during a workday, after a period of continuous work of six hours. In case employees work for more than nine hours in a day, they must observe a total of 45 minutes of rest break at least. For hotels, work may be scheduled for Sundays or for any public holidays within the framework of regular working time (the general ban of Sunday work does not apply for hotels). An alternate day off is to be granted to employees within two weeks. Generally, 15 Sundays must be free of work per year. Because of the 24-hour operation of hotels, workers may even work in a two or three-shift system.
Base salary is a mandatory element of every employment contract, but other forms of remuneration are also applied and agreed in the hotel sector (i.e., salary on performance or time basis). Bonuses, benefits and allowances are also common in the sector. The statutory minimum wage that applies for all employment relationships without exemption currently amounts to €9.60 gross per hour (as at August 2021). This must be reached without exemptions, and non-compliance may result in significant fines. In the hotel sector there have been several non-compliance cases concerning the minimum wage (or excessive working hours) that led to administrative or criminal proceedings.
To terminate employment, the employer must comply with the relevant notice periods as set by statute, any collective bargaining agreement or the individual agreement. The statutory notice period ranges from two weeks to seven months (which, with certain limited exceptions, is required to expire at the end of a calendar month) depending on length of service. The Dismissal Protection Act applies if an employer employs more than 10 employees in Germany and if the employee concerned has been continuously employed for more than six months.
If the Dismissal Protection Act applies, the dismissal must be 'socially justified'. High standards apply and in general only the following – high level – reasons can justify a termination of employment: (1) reasons related to the personal characteristics of the employee; (2) reasons related to the conduct of the employee and (3) reasons related to operational requirements of the business. If there is no socially justified reason, the dismissal is invalid. If the Dismissal Protection Act does not apply, employment may be terminated in accordance with contractual provisions alone (and without any kind of discrimination, etc.).
An employer may also introduce short-time work for parts of or the entire business (under a tariff regulation, works agreement or agreement with the employees). Short-time work reduces the employee's working hours (including a reduction down to zero hours) and remuneration is reduced accordingly. In addition to remuneration for hours actually worked, employees may receive short-time work compensation in the amount of generally 60 to 67 per cent of their reduced net remuneration (depending on further circumstances, such as children and duration of short-time work), capped at the social contribution ceiling. Short-time work compensation must be paid out by the employer who is reimbursed by the Federal Employment Agency, if at least 10 per cent of the workforce (temporarily reduced amount due to covid-19) is affected by a temporary significant loss of work, due to external circumstances. In light of covid-19, the German government has preliminarily amended the general rules.
Dispute resolution and management
In accordance with the European Regulation No. 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I Regulation) it is principally possible for the parties to a real property purchase agreement, lease agreement or other type of operation agreement to agree on a different governing law than German law. However, this principle does not apply comprehensively to real estate related agreements. Certain aspects must mandatorily be governed by German law, such as the declaration of conveyance (i.e., declaration of the parties on the transfer of ownership to a real property). Consequently, real estate purchase agreements and lease agreements are almost always governed by German law. In relation to other types of agreements, in particular franchise agreements, in projects involving international parties, agreeing on a foreign law is more conceivable and can be observed in the market in some cases.
Disputes relating to hotel operation may be subject to alternative dispute resolution procedures if agreed by the parties in the respective agreement, such as arbitration procedure, mediation or amicable arbitration. Such alternative dispute resolution procedures are relatively rare in the context of lease agreements where the parties generally tend to rely on German courts. However, it is also common market practice that the parties agree to alternative dispute resolution mechanisms in relation to certain specific aspects. Lease agreements generally provide that disputes relating to the size of a real property, compliance with the fit-out or other technical specifications agreed in the contract or the scope of renovation works to be performed at the end of the term, shall bindingly be decided by an external (certified) expert appointed jointly by the parties or, if the parties cannot agree on the person of the expert, by an expert appointed by the locally competent chamber of commerce. Clauses on alternative dispute resolution are more common in HMAs or franchise agreements.
Court proceedings relating to the legal title to a real property or leases are to be conducted at the competent court at the location of the property as the German Civil Procedure Code provides for an exclusive jurisdiction in such cases.
In relation to customers, the German law maker has implemented the European Directive 2013/11 on alternative dispute resolution for consumer disputes into law. According to these rules, a central organisation for dispute resolution at European level shall enable consumers to access an online alternative dispute resolution platform in relation to reservations made online. Hotels that are offering electronic business transactions are compelled to inform their customers about such systems. Consequentially, hotels have updated their websites and inserted standard wording and links enabling clients to access the platform electronically.
Already prior to the outbreak of the covid-19 pandemic, questions were raised on the sustainability of the growth of the German hotel market. As of the end of 2019, hotel operators and investors named shortage of qualified personnel and the increase in costs, in relation to acquisitions, developments, rent, personnel and operations in general, as their most urgent concerns.26 Worries were also voiced regarding an oversupply of hotel rooms in the light of a globally slowing economy,27 which at the end of 2019 resulted in more pessimistic expectations for the future than in previous years.28
These concerns have by far been surpassed by the unprecedented impact of the covid-19 pandemic. Hospitality, together with the travel, entertainment and event industries, is one of the hardest affected sectors. The turnover in the German hospitality sector plunged by 76 per cent in April 2020 in comparison to April 2019.29 In June 2020, hotel turnover was still between 40 per cent and 50 per cent lower than in June 201930 and in June 2021, the number of overnight stays was still 39 per cent lower than in June 2019.31
Pre-existing instruments of the German social system such as the possibility for enterprises to apply 'short-time work' as described above, financial support measures by federal or regional authorities as well as legislative measures, such as the Act to Mitigate the Consequences of the covid-19 pandemic that was passed in March 2020 and subsequent pieces of legislation that temporarily waived the obligation to file for insolvency or the right of landlords to terminate leases due to rent payment default in cases of covid-19 caused financial distress, have limited to some extent the negative impacts. However, as the pandemic continues, it will not be feasible to maintain such measures indefinitely.
Despite some elements of hope, such as a lesser dependence on foreign tourists than other European countries and early signs of potentially quicker economic turnaround than initially expected,32 and the progress of the vaccine campaign, the industry nonetheless expects a lengthy recovery and estimates that it will take several years to achieve results corresponding to the time prior to covid-19. The market remains unstable and the future hardly predictable. Many businesses in the hospitality sector consider their existence as threatened.33
A noticeable increase of insolvencies and market consolidation is to be expected as a consequence of the covid-19 pandemic or has already started in some instances, also due to the fact that a majority of the hotels operated in Germany are small, individual businesses that are less able to resist durably to the current challenges. In the long term, as people and businesses increasingly accommodate to a new environment of remote working, video conferences, webinars and the like, it will need to be ascertained whether the crisis will have a lasting impact on future habits and behaviours.
1 Elie Kaufman is counsel, Joseph Fesenmair is a partner and Benjamin Karcher is an associate at Bird & Bird.
2 CBRE Hotel Market Report Germany 2019.
3 Billiand/Lauterfeld in Schäfer/Conzen – Praxishandbuch Immobilien-Investitionen (2016) chapter VIII, section 4.2.3.
4 https://www.destatis.de/DE/Themen/Branchen-Unternehmen/Gastgewerbe-Tourismus/_inhalt.html, whereas these figures incorporate different types of 'accommodation businesses' (i.e., in addition to the different types and categories of hotels, also such objects as holiday homes, cottages, hostels, etc). For hotels only, DEHOGA shows 306 million overnight stays in its quarterly report for 2019.
5 DEHOGA-Zahlenspiegel IV/2019: https://www.dehoga-bundesverband.de/zahlen-fakten/zahlenspiegel-und-branchenberichte/.
6 Article 86, sentence 1 of the introductory act to the Civil Code provides that 'regulations that restrict the acquisition of rights by foreigners or by legal persons who have their statutory seat, their main administration or their main place of business outside Germany (foreign legal entities), or that make them dependent on approval, do not apply from 30 July 1998 anymore', whereas this freedom of restriction can be limited under certain circumstances.
7 An alternative form of real estate acquisition is the acquisition of the shares in the company holding the real property (share deal), which, depending on the percentage of shares being acquired, also triggers real estate transfer tax. Until 2021, the acquisition by a purchaser of 95 per cent or more of the shares in a real estate holding company triggered real estate transfer tax. Share deal transactions can, however, legally be structured to avoid the trigger of real estate transfer tax, e.g. with structures involving separate purchasers of the shares. This was to some extent being negatively perceived in the public as an instrument for tax evasion. Following a yearlong public debate and legislative process, the threshold has been reduced to 90 per cent and further measures to limit real estate related share deal transactions have been introduced with effect as of 1 July 2021. The real estate transfer tax amounts between 3.5 to 6.5 per cent (depending on the region) of the purchase price or value of the property.
8 Eggersberger/Laas in Linder/Figura/Oprée/Stellmann, Geschäftsraummiete, chapter 23, recital 138.
9 In such cases, the lease agreement will also have characteristics of construction agreements such as detailed fit out specifications, (building) permit documents (if already available at signing), a precise construction time schedule, a change request mechanism, a regime for legal consequences in cases of delays and clear allocation of responsibilities if the tenant conducts certain works itself for the completion of the hotel such as bringing in the FF&E and SOE.
10 Joachim in Guhling/Günter, Anhang 1 zu § 535 BGB, recital 230.
11 Bird & Bird Guide to the General Data Protection Regulation, https://www.twobirds.com/~/media/pdfs/gdpr-pdfs/bird--bird--guide-to-the-general-data-protection-regulation.pdf?la=en&hash=D7EC7D1FADB322CE5A05FF4C47A645D1E398E7C4.
12 Summary of the study of IW consult for DEHOGA on the importance of the hospitality industry for Germany, 2017.
13 Dehoga position paper 'Digitale Angebote', November 2016.
14 Decision of the Higher Regional Court of Düsseldorf of 4 June 2019, case No. VI-Kart 2/16 (V).
15 Decision of the German Federal Court of 14 July 2020, case No. KVZ 56/19.
16 Decision of the German Federal Court of 18 May 2021, case No. KVR 54/20.
17 Eggersberger/Laas in Linder/Figura/Oprée/Stellmann, Geschäftsraummiete, chapter 23, recital 175.
18 Joachim in Guhling/Günter, Anhang 1 zu § 535 BGB, recital 488.
19 Eggersberger/Laas in Linder/Figura/Oprée/Stellmann, Geschäftsraummiete, chapter 23, recital 175.
20 Joachim in Guhling/Günter, Anhang 1 zu § 535 BGB, recital 492.
21 Joachim in Guhling/Günter, Anhang 1 zu § 535 BGB, recital 397.
22 Petzold, Hotelmanagementverträge mit internationalen Hotelketten, RIW 2016, 577.
23 Joachim in Guhling/Günter, Anhang 1 zu § 535 BGB, recital 415; Eggersberger/Laas in Linder/Figura/Oprée/Stellmann, Geschäftsraummiete, chapter 23, recital; 167.
24 Decision of the German Federal Court of 5 October 1981, case No. II ZR 203/80.
25 Joachim in Guhling/Günter, Anhang 1 zu § 535 BGB, recital 460,461.
26 DEHOGA Branchenbericht Herbst 2019: https://www.dehoga-bundesverband.de/zahlen-fakten/zahlenspiegel-und-branchenberichte/.
27 Wirtschaftswoche, 11 April 2018.
28 Survey of the tourism industry by the chamber of commerce of Frankfurt, autumn 2019: https://www.frankfurt-main.ihk.de/images/broschueren/Infografik_IHK-Saisonumfrage_Tourismus_Herbst.pdf.
29 DEHOGA press release of 19 June 2020.
30 DEHOGA press release of 19 August 2020.
31 DEHOGA press release of June 2021.
32 Press release of the German Ministry for Economic Affairs and Energy of 1 September 2020.
33 Around 60 per cent according to the DEHOGA press release of 11 August 2020.