Maintenance accounts are typically a consideration when a hotel or motel business is leasing property from a freeholder. This is because motel and hotel leases are very different from other types of property leases, especially when it comes to who is responsible for upkeep and maintenance. Logically, you might think the freehold owner is obligated to keep up the premises, but in many cases the property owner is only responsible for weather-tightness and structural soundness. All other maintenance concerns, unless otherwise indicated in the lease, are the responsibility of the lessee.
Maintenance Accounts in the Lease
To help ensure lessees can afford to perform maintenance as it becomes necessary, hotel and motel leases adopt a maintenance account provision. A portion of the rent payment is set aside in a fund specifically for this purposes. The average set aside is between 3 and 7 per cent of the rent, though the majority of leases call for a 5 per cent deposit into the fund from each rent payment. The lease is normally specific on maintenance and expectations and payments, so if in doubt have your solicitor review and explain this important clause.
What Is Covered Under the Maintenance Fund?
How the funds in the maintenance account can be spent is often detailed in the lease, making it imperative that buyers review all aspects of the lease and negotiate to protect their best interests. Working with a broker who understands the specifics of hotel leases can help increase the chances that you end up with a workable arrangement that is least likely to leave you paying extra for maintenance on a regular basis.
Common ways maintenance funds can be spent include repairs to the interior and exterior of the buildings, particularly in the common grounds, and upkeep on certain equipment and functionality. Chattels are usually not covered under the maintenance fund, though unique arrangements can be made.
Who Owns the Maintenance Fund?
The maintenance fund is held in trust by the property owner for the use of the business. That means that the freeholder cannot use the funds to support another business, for personal expenditures or for hotel and motel expenses not related to maintenance. The lessee doesn’t necessarily receive any balance of funds if he chooses to sell the business; the funds are part of the lease and could instead be used for scheduled maintenance prior to a new owner taking over or as a transfer of value to the new owner. The lessee does benefit from any value in the maintenance fund because it potentially brings up the value of the business and can help encourage a higher selling price.
Don’t Rely Solely on the Maintenance Fund
One mistake some hotel and motel business owners make is relying solely on the maintenance fund to cover necessary upgrades and repairs. First, the maintenance fund doesn’t cover all upgrades you might want to make or which would be good for business; renovations and new chattels aren’t usually covered, though painting or other repairs might be. Second, 5 per cent of the rent isn’t always enough to cover every necessary repair, and hotel or motel owners might find themselves having to fund capital expenditures out of different revenue streams to keep their premises competitive.
Gordon Fridge
LINK Auckland, Ellerslie
Gordon.fridge@linkbusiness.co.nz
022 1569 330
