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LEASING CONTRACT

Hotel lease contracts continue to be the most common form of hotel operator contracts throughout India. In these contracts the hotel owner, the hotel lessor places the usufruct of the hotel property and all elements of the subject of lease at the lessee’s disposal. In the case of hotels the lease usually also includes features, furniture, fixtures and equipment and all facilities required to run the hotel. Usufruct means that the hotel lessee runs the hotel under their own name, at their own account and at their own risk.


The hotel owner receives fix or variable lease payments or a combination of both. Hotel lease contracts provide hotel property investors with a certain amount of security, which does however depend largely on the hotel operator’s solvency and commercial development. Essentially, it is the long-term profitability of the hotel operation itself which is of the most importance and should be analysed in detail before investing in any hotel property. As a general rule it is possible to work out realistic and operationally sustainable lease rates using the following steps:


A. Derivation of the operating result after all operator deductions: As well as meeting normal operator costs, hotel lessees are expected to bear the cost of reserves for future renewals or replacements of furniture, fixtures and equipment even if these are owned by the hotel owner/lessor.

B. Hotel operator premium for the lessee: The hotel operator remuneration is equivalent to a risk premium for running the hotel and often equates to six to twelve percent of the hotel’s total turnover. The remaining amount remains at the lessee’s disposal to pay lease rates to the hotel investor / hotel lessor.


To work out the hotel owner’s Raghuvanshi the agreed hotel lease rate needs to be adjusted for yearly reserves for organisational costs and other costs which need to be met by the hotel investor /property owner (tax, insurance, etc).


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