I recently attended a webinar hosted by business consultancy HVS and legal firm Bird & Bird on German distress.
Distress is the word no one in our industry likes to hear, so it is rarely discussed.
The word “distress” is the last-chance saloon, isn’t it, with other words preferred before the inevitable conclusion occurs to us all and cannot be denied?
In Germany, there has been some distress, not just to one hotel but to large portfolios of them, notably Revo Hospitality, formerly HR Hotels, which had, by CoStar’s count, more than 130 hotels.
The notion from the webinar is that the situation in Europe’s largest economy is one of correction, which some cynics might say is another word for distress.
We got a crash course in German law pertaining to insolvencies.
Elie Kaufman, senior counsel, Germany, at Bird & Bird, said two key aspects should be noted.
The first is that “insolvency administrators” (words are great, aren’t they?) have significant powers to confirm or reject contracts, with their decisions having binding and immediate effects on leases, hotel-management and loan agreements.
He added the second is that disputes over fixtures, furniture and equipment and reserves usually are more contentious in Germany than in other European countries.
Paperwork is all, he said, in insolvency disputes.
“Early documentation of ownership of FF&E is encouraged,” he added.
What I found fascinating is that in situations of illiquidity/over-indebtedness, it is the obligation of management to file for insolvency, while in situations of “threatening illiquidity,” it is the right of the management to file for insolvency.
To me this is a very subtle difference, but I am not a hotel owner. I am sure the first stage would pass me by completely, and then I would be in the second stage without a paddle.
The two general principles are that agreements entered into by the insolvent company remain effective during the insolvency process and that the insolvency administrator has the option and right to fulfil or to not fulfil pending agreements.
In the rare case of the insolvency of a hotel management agreements (just as HMAs are a rarer beast in Germany), the HMA (in German, the wonderful word, geschäftbesorgungsvertäge; although, AI translates that word as “contract for the provision of services”) would automatically expire in law upon opening of insolvency proceedings.
There is the belief that leases are under threat in Germany, but I am not sure everyone would agree.
Kaufman provided a cheat sheet:
- Under German Insolvency Code regulations, administrators have the right to either assume the ongoing lease or reject it. If they reject it, landlords face sudden vacancies.
- Once an operator files for insolvency, landlords are generally prohibited from terminating the lease based on rent arrears that accrued prior to the filing. This locks landlords into the distressed agreement while the estate is assessed.
- Many standard German leases are structured as fixed-rent models. In cases of operator distress, the fixed rent frequently becomes unaffordable, leading to necessary restructurings, waivers, or operator insolvency.
- With avoidance claims (Anfechtung), insolvency administrators can legally challenge and reverse transactions (such as rent payments or concessions made) in the look-back periods prior to the insolvency filing, threatening the financial settlements of both parties.
This makes me happy not to be a lawyer, although if I could understand it all, I might be happy to change careers.
Probably I understand little. Law often reads to me like the text of a play, and I am sure many share thar view.
Simge Kocabayoglu, senior director, legal counsel, Europe, IHG Hotels & Resorts, who was also on the webinar, said the correct procedure in such cases is to stay close to the administrators and be part of any conversation.
If you have an asset that is branded, and the reasons for insolvency do not relate to the brand, the best solution is closer alignment, she said.
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