The bedrock of any hotel transaction, representations and warranties (“reps and warranties”) offer protection to the buyer by guaranteeing that a business’s assets and liabilities conform to the statements of fact made by the seller. Here, we outline the key points and strategies for successfully negotiating reps and warranties when selling a hotel.

Reps and warranties: key points

1. Definition and purpose

Reps and warranties are a guarantee provided by the seller to the buyer that the value and reality of the business assets and liabilities are consistent with the statements of fact made. Reps and warranties present an avenue for the buyer to conduct due diligence to identify risk factors.
Reps and warranties allow the buyer to claim damages if inaccuracies or occurrences linked to any cause prior to the sale are uncovered.
Specific procedures must be set out for implementing and prescribing reps and warranties.

2. Impact on the sales price

The presence or absence of reps and warranties influences the sales price – if none are in place, the price may be reduced.
Investment funds often avoid providing reps and warranties so as not to be bound by future commitments.

3. Standard seller statements

Regulatory compliance (public-access buildings, hygiene, safety, accessibility), absence of a closure or downgrade threat, completion of required work, compliance with public domain occupancy regulations, validity of intellectual property rights, GDPR compliance, etc.

Negotiation strategies

1. Duration and cap

Negotiate a limited time period for reps and warranties (often based on legal requirements).
Cap reps and warranties at a percentage of the sales price, usually between 5 and 10%.

2. Sliding scale and grace period

Include a sliding scale to reduce the seller’s exposure over time.
Negotiate a grace period before the guarantee is triggered.

3. Solidarity of sellers

Determine who will provide reps and warranties, especially in the case of multiple sellers or an in-family sale.

4. Securing payment

• Negotiate additional commitments, such as a first-demand guarantee, a bank guarantee, a guarantee from the seller’s parent company, or the deposit of part of the sales price in a CARPA account (most common practice).
• Seller’s security bond: the seller pledges as collateral its capital to the buyer, or part of the sales price, or grants a mortgage (less common practice).
• Defer payment of part of the sales price, or temporarily leave a specified sum in the shareholder’s current account (both rare, as sellers tend to be wary of such practices in reality).
• Reps and warranties (R&W) insurance, arranged by either the buyer or seller: the indemnity mechanism is transferred to the insurer rather than the seller, and is based on the seller’s statements and guarantees (which, together with the data room and due diligence, are also verified by the insurer).
  • Advantages for the seller : the deal can be finalised without financial exposure for the duration of the reps and warranties agreement, thus improving liquidity for the seller.
  • Advantages for the buyer : the buyer enjoys the requisite financial security.