Noteworthy M&A legal risks in the hotel industry

The growing clientele are driving mid-to-high-end, chained and limited-service hotels in China to upgrade their brand and services. Meanwhile, major hotel brands are losing no time in building their presence at core locations of most visited cities through quick M&A transactions. Except for legal risks customarily associated with M&A transactions, points summarized below need extra attention in the process of performing due diligence and drafting transaction documents:

PROPERTIES LEASED BY TARGETS

Generally, properties at core locations of most visited cities that meet the lists of requirements of acquirers can be labelled non-renewable. When conducting a review on a property leased by a target, access to all documents relating to the lease of the property is needed, including the land use right certificate, property ownership certificate, lease agreement and sub-lease agreement provided by the owner or original tenant. The review should focus on the following factors:

Ownership of the leased property. Urban buildings may be held in varied ownerships due to historical issues, local policies or various other factors during the construction of specific buildings. When carrying out due diligence to control risks of an M&A transaction, the counsel should ensure that at least the land use right certificate and property ownership certificate are available, screening out any property that does not have both certificates. Moreover, if any special property owner is involved, such as a military or government agency or a research institute, relevant policies should also be reviewed to minimize policy risks of hotel operations following the M&A transaction.

Li Yanshan is a partner and Yang Li is an associate at East & Concord Partners in Hangzhou