The number of hotels, particularly limited service hotels, operating under franchise agreements has exploded in recent years, and this trend is expected to continue in the near term. Franchise agreements, including those in the hospitality industry, are personal contracts for the benefit of the named franchisee only, and are further limited by the franchisee’s ownership structure as of the effective date of the franchise agreement. From this point of beginning, it is logical that the franchise agreement would also include strict limitations on the franchisee’s ability to transfer ownership interests of the franchisee both within the franchisee company and to third parties. Each franchisor will adopt its own unique approach to the transferability of interests, but there will be certain commonalities that franchisees should be aware of and carefully study.
Franchisees would be wise to assume that a transfer of any direct or indirect ownership interest in the franchisee is prohibited without the prior written consent of the franchisor or expressly permitted under the franchise agreement. Regardless of some of the variations of language, this means every transfer and covers direct and indirect transfers within the entirety of the franchisee’s ownership structure. There will be variations in the requirements to obtain the franchisor’s consent, and some transfers that may not require consent, but the general expectation should be that the general rule under the franchise agreement will be to prohibit transfers. Continue Reading