THE CONTRACT TO PURCHASEYour solicitor will no doubt have advised you about the contract, particularly in respect of restrictive covenants. These need not be complicated but are designed to ensure you can operate your new business unhindered by anything the vendors may decide to do.
Debts
Since payment is normally made before a guest leaves, it is unusual to have any clients as debtors. The same may not be the case with your vendor since money might be owed to one or more suppliers. There may even be disputes outstanding on what is owed.
You will have enough problems of your own without getting involved in debts left by the vendor. It is up to your solicitor to ensure you are fully indemnified in this respect.
In the same vein, it is
not a good idea to take over a vendor’s VAT registration number since you would then be held responsible for any monies owing on that account (see
Chapter 7 on VAT).
Restrictive Covenants
A covenant should be included in the contract to protect your future trading position. Bearing in mind what has been said about guests following individuals, would you want to see your vendor set up shop in another hotel just up the road?
Contracts should include terms as favourable to you as your solicitor can secure. Though the vendor, at this juncture, might genuinely have not the slightest intention of staying in the hotel business, circumstances change and intentions with them.
If your solicitor can get agreement to a covenant that restricts the vendor from trading within a 25-mile radius for the next ten years, great. If not, a watering-down might be necessary. But don’t give in and agree to terms you think are inadequate.
Assess the type of hotel you are buying in terms of how much trade is repeat business. If much of it is, stick out for a covenant that will ensure you a clear run until you get established – irrespective of what the vendor might say.
Make sure you know where the vendor is going once the hotel has been vacated. The fact that a contract has been agreed to and signed does not, of course, mean the vendor is physically unable to break any of the terms; it merely means you can seek redress in law. In case this course should prove necessary, it is important that the terms entered in a contract are seen to be reasonable. Those deemed unreasonable are unlikely to be upheld by a court.
Other Clauses
Circumstances peculiar to your hotel may indicate that other clauses should be included. For example, the vendor should continue to trade and/or take bookings on your behalf up to the date of completion.
Further clauses will, of course, be necessary if the property is leasehold. The need for a very experienced solicitor to negotiate the right terms for you in a lease agreement cannot be over-emphasised.
Insurance
In a nutshell, insurance can be divided into two categories:
- that which is optional, eg to cover disasters and other risks
- that which is required by law, eg motor insurance.
In the hotel business, under the Employers Liability (Compulsory Insurance) Act 1969 it is compulsory, with a few exceptions, to provide employers’ liability insurance, and if you are leasing equipment the leasing company may oblige you to insure it as part of the contract. Further, if you are buying the hotel with a loan, the lenders will require their investment to be insured.
Although, otherwise, insurance might not be compulsory, it is highly recommended in order to keep you solvent if disaster should strike. And strike it does! Slates fly off roofs in very high winds; a guest with typhoid fever can cause your hotel to be closed down for a while; thieving is commonplace, maybe even by your staff.