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Maintenance for a Rainy Day

Andrew Morgan - Monday, September 25, 2017

Written by Andrew Morgan, Queensland Tourism & Hospitality Brokers

This discussion has come up several times over the years, but for a number of reasons even more so over the last month or two.  One reason it has been raised is due to a number of new leases being discussed and put into place.  The discussion is regarding maintenance of a motel that is to be leased.  Who pays what and how can the current system be improved?  What happens when a major refurbishment is required?

Any issues Lessees and Lessors have had over the years largely comes down to neither party investing back into the property, both parties expecting each other to cover the cost.  Then when a major refurbishment is due, either a lack of provision within the lease dealing with that is a problem or a lack of enforcement of the terms of the lease, means the refurbishment never gets done.  To go a step further it may be dealt with in the lease however in practical terms it does not happen because neither party has the funds (or claims not to have the funds) available to do so.  As a result, the property gets older, more tired and the eventual cost to refurbish continues to climb.

There has historically been a “maintain the AAA rating” clause and a “redecoration” clause within motel leases that in summary says that the Lessee is to do anything required to maintain the rating and paint the interior, exterior or both every five or seven years.  Even though this is included within leases and is often not clear as to exactly what is required and by who, it is often not carried out for various reasons.  One of these reasons is cashflow.  This is often an issue for major works.  It is easy to see how finding a large sum to cover a major refurbishment or even just exterior painting is going to be taxing on any business owner or investor.  Motels are generally large properties and exterior painting as an example is often a substantial cost item.  Therefore, forward planning and budgeting is required considering everyday expenses still need to be paid.

One possible solution to solving the problem of accommodation properties falling behind in the quality and standard expected by guests today should be a collaboration.  A partnership if you will between the two parties who have a vested interest in the property.  The use of the body corporate industry model of a “sinking fund” type of situation within the motel industry, to go one step further.

Such a system would involve both Lessee and Lessor contributing either a fixed amount or percentage of turnover each month into a specific account (forced saving for a rainy day in a sense).  Both parties with a financial interest in the property’s presentation are contributing to the future prosperity of the property and business.  It takes away the issue of any owner taking and taking and then moving on thereby passing a growing issue onto the next owner and the next and so on.  With any system there will be issues and collective decisions between both parties that need to be made, however no system is perfect.  Perhaps very specific stipulations for how and when the “sinking fund” money is to be spent will avoid some of those potential issues.

Another benefit is that the cashflow issue is resolved, especially if it is done on an income percentage basis rather than a fixed amount.  The big expense when the time comes will not create a cashflow issue either as the sinking fund can either be spent or used to borrow the funds required.

The only reason the discussion of maintenance continually comes up is because one or both parties act unreasonably.  The past situations of Lessee’s and/or Lessor’s in the motel and accommodation industry being not interested in spending a cent on their properties, as hard to believe as that is, has only served to stifle the capacity of those individual properties to produce as high an income as it possibly can.  Therefore, its ability to continue to pay an increasing rental to the property owner and provide a good profit for the business owner/operator.