Legal issues when buying or selling a hotel business

Buyers and sellers of hotel businesses need to carefully consider the strict regulatory landscape governing the sector. Sellers must be prepared to verify compliance with a range of long established statutory obligations from alcohol and entertainment licensing to strict food safety and hygiene rules, consumer protection laws and health and safety rules. All of these are aimed at protecting guests, employees and visitors to the establishment. Where there has been previous enforcement action affecting the target business, this must be disclosed.

During due diligence buyers should satisfy themselves that all relevant licenses will transfer smoothly on completion and seek appropriate warranties and/or indemnities relating to historical regulatory breaches and historical claims that may not have been fully resolved.

Additionally, anyone acquiring a hotel business should take account of the cost implications of The Employment Rights Act, 2025. This significant piece of legislation, with its enhanced employment law rights for individual workers, is likely to have a disproportionate effect on owners of hotel and other hospitality enterprises because of the high number of casual staff, flexible contracts and high staff turnover.

Sustainability is now fundamental to the operation of any business in the hotel sector. Adherence to recognised environmental and ethical standards secures visitor loyalty, encourages repeat business and adds value to the target business in the eyes of investors.

Areas that buyers will wish to explore during due diligence include energy efficiency measures implemented at the target establishment, waste management systems and water consumption levels.

Where infrastructure is outdated or environmental standards are not met, the capital cost of improvement works will be a crucial factor in deal price negotiations. Sellers should carefully consider ESG issues well before going to market. Where there are shortfalls, the business will be less attractive to investors. Indeed, financing acquisitions of properties with poor ESG credentials has become increasingly difficult.

In addition to environmental considerations, ESG due diligence extends to social issues, including employment practices and protections against modern slavery. Also key is the impact the establishment has on the local community.

In any M&A, acquirers will understandably wish to stress test the target entity against future growth plans. In the fast changing hotel sector, this exercise is particularly crucial.

In our experience, purchases in the sector are increasingly driven by the possibility of diversification of the product offering and the creation of new revenue streams. This will usually involve adapting facilities and services. Acquirers should, therefore, establish whether there is an appropriate balance between existing revenue streams (bedrooms, food and drink, entertainment and events and leisure offerings such as spas and gym facilities). The more diverse the mix the less vulnerable the establishment is to downturns in one specific area of income.

From a legal perspective, checking that existing planning consents and relevant licences are transferable and compatible with future intended use, for example, is a necessary part of due diligence.

Hotel acquisitions tend to be structured either as share purchases or asset purchases. It is important that parties agree the legal mechanism for the transaction early on in the process because of the legal, taxation and accounting implications of each method of purchase.

For example:

• In hotel sector transactions where land and buildings will form a significant part of the deal, Stamp Duty Land Tax (SDLT) – applicable in an asset purchase – may well determine whether to structure the sale as an asset or share sale
• When purchasing shares in a company that owns the lease of the hotel premises, a buyer will not normally have to obtain the consent of the freehold landlord (although some leases require consent on a change in control of the tenant company)
• TUPE consultations should not be necessary when purchasing shares in a company that employs the hotel staff. Staff will be taken on their existing contract terms, but no consultation is needed
• Purchasing shares rather than assets means that all liabilities will be inherited
• In an asset sale the purchaser may be able to choose not to purchase certain assets and avoid any historic liabilities, which can be significant (food hygiene, taxation, personal injury)
• Payment and booking systems can be complex with a process to comply with for a buyer to take over a contract in an asset deal. Whether share or asset deal, dealing clearly with proper allocation/responsibility for operational expenses, deposits and booking fees is critical.

Buyers should carefully assess staffing arrangements at the target establishment. For the transaction to proceed smoothly, sellers must be ready to provide complete information regarding employment contracts. This will include details of bonuses and incentives payable to senior management as well as pension contributions and other benefits. Sellers should also disclose details of any historic or future liabilities relating to employee disputes or legal claims.

Hotel businesses are labour intensive, with success often down to the quality of individual members of staff. For sellers, demonstration of investment in staff training is essential.

Additionally, questions about how key members of staff can be retained post completion should always be addressed. With a significant proportion of casual, seasonal employees, and a high staff turnover, any purchaser of a business in the sector is taking a significant financial and legal risk. This, and the health of labour supply locally, should be carefully assessed during due diligence.

Immigration rules and self-employed status

Checking employees comply with immigration rules is important and it is critical all records are checked.  Failure to check can lead to buyers’ reputation being damaged because sellers failed to properly comply.

Many hotels use agency staff, often from established agencies. Generally, this will be safe, but the contract with the agency needs to be checked.  With self employed staff retained direct, there can be a risk the individuals will be viewed as part time employees, triggering a risk of historic liability for PAYE and NI.

If the sale is structured as an asset deal, sellers and buyers alike should take care that all relevant TUPE regulations and consultation timetables are followed. It is essential to deal with these matters early on in the deal cycle to ensure appropriate consultation periods are followed, delays are minimised and any exposure to claims from employees are avoided.

The UK hospitality sector continues to attract significant interest from domestic and international investors. The UK remains a leading travel destination for international and domestic travellers as well as for the lucrative business travel sector.

We have outlined key areas to consider if you are thinking about buying or selling a hotel in the UK. This is just a selection of issues you may have to face, however.

Depending on the nature of the target business, buyers and sellers may have to navigate international employment contracts, negotiate a range of warranties and indemnities and deal with data protection issues.

In larger transactions, competition law may play a part as well, and national and international tax implications of the deal should be considered carefully.

If you are entering or exiting the sector, get in touch.  Without any obligation we will go through your options and help you understand the legal and financial implications. The team of experienced merger and acquisition lawyers at DMH Stallard has all the resources, you’ll need, specifically in the hotel and leisure sector.