Realignment of hotel contracts: Change from lease to management contracts?

In the German hotel industry, the predominant model has long been the classic lease agreement. According to the German Hotel Association (IHA), domestic investors still dominate the German transaction market with a share of 63%. Developments over the last ten years have seen the brand hotel industry in particular benefit from an increase in new hotels. Branded hotels have expanded the portfolio of available brands and thus the spectrum of categorization.

Previously traditional markets of the “private hotel industry” (especially in B and C cities) have thus become suitable for investment. The contractual model of lease/rental agreements was expanded to include franchise and hybrid models. However, international investors with an awareness of value appreciation through participation in operations prefer management and/or hybrid models. In addition, the pandemic and associated crisis situation strengthened the trend towards more flexible contract models.

Since then, clauses limiting rental payments (so-called CAP clauses) in times of weak sales or variable rents that are adjusted to sales or operating results have become a fixed part of contracts. Is this increasing risk-sharing at the burden of the property the logical consequence of replacing the “traditional fixed lease” with variable models?