Hotel Franchise Agreements and Comfort Letters: Legal Challenges for Real Estate Lenders

Listen as our authoritative panel discusses why specific provisions in franchise agreements are particularly relevant to lenders and how PIP and other conditions might be reflected in the loan's reserves and other structural features. The panel will also take an in-depth look at the provisions to include in all comfort letters, which are critical to many lenders.

Before reviewing and negotiating the franchise agreement and comfort letter, counsel must confirm that the franchise agreement would otherwise be acceptable to the lender as a successor franchisee. Lender's counsel must be able to evaluate the critical provisions in the franchise agreement from the perspective of a franchisee, with particular focus on the remaining term of the deal, termination and liquidated damages provisions, purchase options and ROFRs, property improvement obligations, property management, and area of protection provisions.

The franchise comfort letter is critically important to real estate lenders when financing hotel properties. Most lenders must have assurances from the franchisor that it will be permitted to assume the franchise agreement (at its option) if the lender forecloses on the property and continues with the hotel brand with access to the reservation and other services afforded the franchisee.

The comfort letter also addresses related concerns such as the subordination of the franchise agreement to the loan, notice and cure rights concerning franchisee defaults, and the ability to assign the contract to an assignee of the loan or a subsequent property owner after foreclosure.