As featured in the November edition of the QHA Review.
Part one of this series considered the information a buyer might request from a seller before entering into a contract. Part two looks at the searches, investigations and other enquiries buyers can undertake to verify that information and better understand the property and business they propose to acquire.
Due diligence can involve searches, document reviews, inspections, further enquiries and specialist advice. The investigations required will depend on the particular hotel and transaction, but there are several core areas to consider.
Start with the Contract
Where a contract is subject to due diligence, buyers should understand the scope of the due diligence condition, the timeframe for completing their investigations and their rights if an issue is identified.
Investigations should commence early enough for the results to be considered and, where necessary, further enquiries made before any relevant deadline expires.
Property and premises
For freehold hotels, title searches confirm ownership and identify registered interests affecting the land, such as mortgages, easements, covenants and caveats.
For leasehold hotels, the lease and any other occupancy arrangements (such as licence agreements) should be reviewed, including their terms, registration, assignment and consent requirements, and any outstanding incentives or other arrangements. This is particularly relevant for hotels with detached bottle shops.
Other property investigations may address matters such as rates and water, land tax, flooding, contaminated land and heritage. Depending on the property, building, structural or other specialist inspections may also be appropriate to identify issues with the physical premises.
Council and planning
Buyers should consider whether the hotel’s existing use and improvements have the necessary council approvals and whether there are any outstanding notices or compliance matters.
This may involve reviewing development and building approvals, food business licences, trade waste approvals and other council records against the hotel’s actual operations.
This can be particularly important where the buyer intends to renovate, expand or alter the hotel’s operations after settlement, as existing approvals, planning requirements or heritage restrictions may affect those plans.
Business and assets
Searches of the Personal Property Securities Register (PPSR) can identify registered security interests affecting business assets, including gaming machines, plant and equipment, furniture, and other operating assets. Identifying these registrations early allows the buyer to ensure appropriate releases are obtained prior to settlement.
Buyers should also review material contracts identified during the RFI process and consider any assignment, change of control or third-party consent requirements.
Company, insolvency and litigation searches can also identify matters concerning the seller or business that may affect the transaction or require further investigation.
Liquor and gaming
Liquor and gaming are central to the operation and value of many hotels and require particular attention.
Investigations may include confirming the liquor licence, licensed area, approved trading hours and conditions, along with relevant gaming approvals and operating authorities.
Buyers should also identify and progress the liquor and gaming applications required for the transaction as soon as possible, particularly where approval of those applications or interim arrangements (such as an interim authority or special authorisation) are required for settlement.
Bringing it all together
Due diligence is not simply about completing a checklist. Information obtained from the seller, searches, inspections and specialist advisers should be carefully considered.
An inconsistency or unexpected result may require a further RFI, additional investigation or specialist advice. Depending on the issue and the terms of the contract, it may also require rectification before settlement, additional warranties or indemnities, or consideration of the buyer’s rights under the contract.
If you are considering buying or selling a hotel and would like assistance with the due diligence process, please contact Curt Schatz at Mullins Lawyers.
