The Motel Lease

By David Burrough

The Lease is an important asset which, if correctly structured, protects the value the tenant’s business and the value of the landlord’s freehold investment.  However a Lease that does not reflect current industry standards will be a cross that both parties will have to bear for many years.

For those of you familiar with the Management Rights industry a Lease can be likened to the Management and Letting Agreements between a resident unit manager and the body corporate.

The purpose of the Lease is to set out the rules by which the tenant is able to occupy the motel.  It will also set out the responsibilities of both the landlord and the tenant.

Term

The length of a tenant’s tenure and security will be derived from the Lease.  This is extremely important in creating the maximum value in a motel business.  Obviously a business which has 5 years left to run under its lease is of far less value than one with a lease which has 20 years left.

Where a lease has a few years left to run, a tenant should seek advice as to the details of the formula recognised in the industry which applies to negotiations for lease extensions.  A tenant will in effect buy more years to add to the term of the lease.

Enforcing the idea that short leases are of greatly reduced value is the fact that should a purchaser wish to buy a leasehold motel, obtaining finance will be particularly difficult when the remaining tenure of the lease is short.

Again this is similar to the Management Rights Industry where the term of the resident unit manager’s agreement with the body corporate raises similar issues.

Rent

The Lease will set out the amount of the rent and how it is to be paid to the landlord.  As mentioned in our last article there are industry formulae for the calculation of rent.  It is essential that anyone considering purchasing a motel lease has experienced consultants to consider the rent compared with industry standards.  This is important when assessing whether there is any room for improvement in the profitability of the business and whether the business is readily saleable.

Repairs and maintenance

An important subject for any motel lease is repairs and maintenance.  It is a feature of most well drawn Leases that responsibility for maintenance and upkeep of the motel is clearly set out.  It is important that the Lease clearly specify who is responsible for the replacement of the fixtures and fittings when they come to the end of their working life.

Conclusion

It is essential for all purchasers, tenants and landlords to understand as much as possible about the lease document and how it works.