As featured in the February edition of the QHA Magazine
There are many ways in which a business owner may be able to finance the acquisition or refurbishment of their hotel business. When funds are borrowed, it is common for the lender to require security, or several forms of security, to secure the debt against the borrower. This security may be over the borrower’s personal assets, business assets or real property, or a combination of these. In this article, we discuss the most common forms of security which may be required from hotel owners when obtaining a loan.
Mortgage
A lender may require a mortgage against the borrower to be recorded with the Queensland Titles Registry over the business premises until the debt has been paid in full, where the borrower owns the land. Whilst the borrower will still be the legal owner of the land, it is subject to the terms of the mortgage which has been granted to the lender.
A mortgage will usually include terms that prohibit the borrower from leasing, sub-dividing or otherwise changing the use of the land without first obtaining the lender’s consent. Where a borrower defaults in their repayments of the debt, under the mortgage the lender will have the right to take possession of the land and sell it to recover the outstanding balance of the debt.
Where the hotel premises is leased from a third party, the lender may require a mortgage over the registered lease of the hotel premises which would generally be accompanied by a side deed (or right of entry agreement). Where the business owner defaults in their repayments, the mortgage and the deed (which creates a contractual relationship between the lender and the landowner), will allow the lender to enter into possession of the business premises and deal with the business in accordance with the terms of the mortgage.
Personal Guarantee
Personal guarantees are commonly requested from directors and shareholders of a company borrowing money. This form of security allows a lender to pierce the corporate veil and requires the guarantor to personally guarantee the payment of debt and other obligations of the borrower. Where the borrower defaults in repayments, the lender may call upon the personal guarantee which requires the guarantor to remedy such default.
A personal guarantee may be limited to a certain amount of money or duration. It is important to fully understand the extent of any personal guarantee, in particular whether the personal guarantee includes a ‘charging clause’. This ‘charging clause’ usually grants the lender the right to secure their interest against the personal assets of the guarantor, including over real property owned by the guarantor in their name. The guarantor must also carefully review and receive legal advice on any guarantee documents accordingly.
Registered security
The lender may also decide to register their security against the borrower on the Personal Properties Securities Register (PPSR) if the terms of the loan provide for this. Depending on the purpose of the loan, the security interest may be registered against specific assets of a business or over all assets of a business (which is commonly the case where a major bank is a financier for the acquisition of hotel businesses).
By registering their interest, the lender has assured priority for payment over unsecured creditors of the borrower in the event the borrower is unable to pay its debts and is wound up.
Release of Securities for Sale
In the event of a sale, it is a requirement that the hotel business (and the land, where applicable) is transferred to a purchaser unencumbered. If a business has borrowed money and granted any of the above forms of security to a lender, it must be able to provide evidence that releases the security in so far as it relates to the business and the assets being sold.
In hotel and pub transactions, this will often require pre-emptive communication with secured lenders to ensure that the lender releases their secured interest in time for settlement in so far as it relates to the business and assets being sold.
If you are considering selling your hotel business and require assistance on steps to finalise any secured interests, please contact me.
