Novation Deeds: What Issues Need to be Considered?
In the world of hotel sales and purchases, the Novation Deed holds a particularly important role where a hotel is being sold subject to the rights and obligations of an independent hotel operator pursuant to an existing hotel management agreement ("HMA") (although similar issues also arise where a hotel franchise is on foot). To use the legal vernacular, rights can be assigned but obligations can only be novated - hence the need for a deed of novation as opposed to a deed of assignment.
The Novation Deed is the document which deals with the wash up of the relationship between the vendor and the hotel operator and the start of the relationship between the purchaser and the hotel operator.
In our experience there is potential for the Novation Deed to be left to the last minute during the negotiation of transaction documents for a hotel sale and purchase, which means that parties may be unable to properly negotiate some of the issues relevant to this document due to time constraints. Depending on the complexity of the transaction, the Novation Deed may be accompanied by other documents.
Issues to be considered
What form should the Novation Deed take?
Usually the HMA does not prescribe a form of Novation Deed. In this circumstance the customary approach is for the operator to work off its standard form.
When should the Novation Deed be executed?
In our view this should occur contemporaneously with the execution of the hotel sale agreement(s). If not done by then, the parties to the sale agreement are exposed to the risk that the operator may seek to amend contractual terms within the Novation Deed that either or both of the parties find unsatisfactory. If this is not possible then a Novation Deed agreed between the vendor and the purchaser should be annexed to the sale agreement with the operator agreement to the Novation Deed constituting a condition precedent to completion of the hotel sale agreements ("Completion").
Should the novation begin from the commencement of the HMA or the Completion?
The more usual approach is for the Novation Deed to commence from Completion.
If the approach in item #3 is adopted, is there anything which should be considered relating to the period prior to Completion?
The purchaser should ensure that any beneficial contractual provisions which partially or totally relate to the period prior to Completion are specifically addressed. For example if there is a performance test which applies over two consecutive years, the first of which being the year in which the sale is Completed, then the availability of this year for the purposes of the performance test should be specifically addressed in the Novation Deed. The same considerations apply to any operator funded income support provisions.
The operator should ensure that any beneficial contractual provisions which partially relate to the period prior to Completion are specifically addressed. For example, if under any income support provisions there are claw back rights then these should be specifically preserved. Equally if key money was provided on the basis that it was refundable in certain circumstances then this should also be addressed.
What should the Novation Deed fundamentally achieve?
It should ensure that the vendor's obligations to the operator cease as and from Completion, ensure that the purchaser's rights and obligation with respect to the operator commence as and from Completion, ensure that the vendor remains liable for all amounts owing to the operator prior to Completion (some Novation Deeds will provide that the novation will only become effective once all such amounts are paid), and ensure that the operator's obligations to the vendor cease on Completion and that the operator's rights and obligations to the purchaser only arise as and from Completion.
If the Novation Deed is to be executed on execution of the sale agreement and become effective on Completion, what matters should be addressed relating to the period in between these events?
The vendor and purchaser should ensure that the Novation Deed specifically provides for the approval of the purchaser as a suitable assignee taking into consideration relevant criteria provided for in the HMA; deals with any pre-emptive rights available to the operator prior to Completion; and to the extent the HMA contains any provision which allows for termination on sale by the operator or the vendor, specifically waives the relevant party's rights to terminate on sale.
What if the purchaser and the operator have agreed to amend the HMA as and from Completion?
If the purchaser and the operator are happy for the vendor to be aware of the amendments then these can be appended to the Novation Deed. If not, the purchaser and the operator will usually execute a separate HMA amending deed contemporaneously with execution of the hotel sale agreement(s) on the basis that the amendments come into effect contemporaneously with the novation of the HMA.
What if the sale is between a single vendor and two purchaser entities - one entity acquiring the business assets and the other entity acquiring the land?
This usually requires the execution of two additional documents - a lease between the land purchaser (as lessor) and business assets purchaser (as lessee), and a document usually known as the Land Owner's Deed which is a tripartite document between the operator, the business assets purchaser and the land purchaser.
What if structuring imperatives require that the business assets Completion occurs immediately prior to the land Completion?
In such circumstances the operator will usually require the Novation Deed to contain provisions to the effect that if the business assets Completion takes place but the land Completion does not then the parties effectively agree to "unwind" the novation. This is not as simple as it sounds and requires complex drafting across various transaction documents to achieve a satisfactory outcome for all parties involved.