The hotel sector is facing a big shake-up.

Following our recent article which looked at the devastating impact the coronavirus pandemic has had on the UK hospitality sector, it is evident that one of those segments within the industry, the hotel sector, is on the verge of facing one of its biggest shake-ups in recent years.

An example of this is the ongoing dispute between budget hotel chain Travelodge and its landlords which have a history of disagreements ever since Travelodge was saved from administration back in 2012. However, it appears that with all the apparent strides Travelodge has made since those troubled times eight years ago, the coronavirus pandemic has almost sent the company back to square one, with its debt burden swiftly pushing the business to the brink. Landlords in the meantime have always felt that they have had the short end of the stick and this time it is no different as affected landlords were asked to take an 80 percent reduction in 2020 rent and a 50 percent reduction in 2021, later reduced to 38 percent rent cut across 2020 and 2021. This certainly appears to have been a case of “the straw which broke the camel’s back”, with the complex rules of a Company Voluntary Arrangement (CVA) meaning that in effect – landlords can be forced into accepting a deal that they do not want. At the same time, other creditors can also outvote them because the banks are owed more than the total of unpaid rent.

Will landlords look to take alternative action on this occasion?

Rather than just sitting and taking whatever a CVA throws at them, landlords on this occasion considered taking alternative action. With Travelodge’s landlords voting to approve a CVA which will essentially help the business restructure its leases, it is important to take into account that the CVA was only voted through after Travelodge made significant concessions, allowing some landlords the freedom to break lease contracts with the hotel operator when they choose to do so, in effect giving them the upper hand in future negotiations. The break clause means that Travelodge landlords can now cancel their agreements with the chain during the period when reduced rent is paid, with the notion that most are rushing to do so. Travelodge shareholders had also agreed not to take any money out of the company before it returns to paying full rents in 2021. These negotiations were far from straightforward and the head of Travelodge’s largest single landlord, Secure Income Reit, had stated that these talks were “torturous” yet were fairly satisfied with the outcome overall. Furthermore, a representative of a group of landlords, Viv Watts, had said that “As landlords, big and small, we remain concerned by the precedent the CVA sets for the wider real estate industry. It is clear that CVAs are being used by overseas shareholders to extract and repatriate domestic capital from the commercial property sector”.

Nonetheless, landlords representing over 400 of Travelodge’s 580 hotels refused to support the CVA, and the group who are working together as the Travelodge Owners Action Group are now talking to the UK’s major hotel brands about switching to give them the longer stability that they require, aided by the ability to break the lease contracts. One of the most conspicuous and irritating factors in the eyes of landlords which has led to this is that they perceive Travelodge’s conduct over the years as a blatant willingness to exploit landlords and ignore contractual lease obligations. This has resulted in landlords seeking a more equitable structure deemed more beneficial and fairer to them. The purpose of this is to present a range of alternative options to Travelodge landlords, enabling them to decide which structure best works for them.

Should landlords be looking to sever all ties with Travelodge, there is no doubt that an element of risk also presents itself with the ditching of an established brand which is being seen by many as a precarious move, albeit with its covenant slightly tarnished by the CVA. Some landlords may also be willing to take revenue risks and become operators themselves, using an alternative established brand, whilst others will prefer to sign a new lease with a prestigious branded hotel operator. At the same time, there is a real opportunity that presents itself on the market for a hotel brand to pick up a critical mass of properties in one swoop. To date, it appears that approximately 80 hotels have concluded that they will desert Travelodge and sign new leases with a start-up company called Goodnight which is expected to launch in conjunction with management partner Village Hotels in January 2021. Not surprisingly, this move has been lambasted by Travelodge itself which claims that sticking with it “remains the best choice for landlords”, citing that the company had delivered for the five years prior to the Covid-19 crisis and that it was confident of returning to strong performances in the future.

Lights out for Travelodge?

Despite reassurances by Travelodge that it is confident of picking up in the future, such optimism is not shared amongst all the landlords. Analysing it from the landlord’s perspective, it appears that this move is an escape route for many of the rebelling landlords hoping to return to near pre-Covid terms on their leases. Time will tell whether it was a risk worth taking.