Forward Purchasing Hotels in Europe: Managing Risk in a Rebounding Market

Capital is flowing back into the European hotel sector at pace. Across the UK and Europe, transaction volumes rose sharply in 2024 (as we await full 2025 data), reaching levels not seen since before the pandemic. Investor appetite has returned, driven by resilient trading performance, record room rates, and availability of more favourable debt terms.

Alongside this resurgence, there is an increased use of forward purchase and forward funding structures for hotels still under development. For investors, these structures offer early access to high-quality stock in supply-constrained markets. For developers, they provide certainty for capital recycling and reduced risk.

In this article, we review some of the key commercial considerations investors should consider when entering into forward purchase hotel transactions.

“Hotel Opening”: A Critical Completion Trigger

For most hotel forward purchase agreements, completion is conditional upon the hotel “opening” (as opposed to practical completion of the development, as would be the case in many other asset classes). While this sounds straightforward, in practice it is not and can be heavily negotiated.

For an investor, completion should occur only once the hotel is genuinely operational — not merely physically complete. The hotel must be capable of trading in line with underwriting assumptions, with systems, staff, and the operator fully mobilised and all aspects of the hotel trading. Aligning completion of the purchase with conditions under the hotel management agreement (“HMA”) ensures that the operator is contractually required to open and operate the hotel at agreed minimum standards. This reduces the risk of acquiring a hotel that is technically open but commercially underprepared, which could impact income. If there will be any delay to opening any food and beverage offerings or other key guest facilities, such as spas and gyms, these should be factored in so that the investor acquires the fully operational hotel.

However, developers face a different risk profile. If “hotel opening” is defined too tightly, particularly where brands impose detailed brand standards, even relatively minor operational issues could delay the hotel's opening, postponing the release of capital or, worse, pushing the transaction beyond the agreed long stop date.

The commercial balance typically therefore turns on the balance between:

• Room availability: public can book and pay for all or a significant majority of rooms; and
• Soft opening: limited guest operations to test systems and staff readiness; or
• Full launch: fully operational hotel meeting all brand standards and trading criteria and a certain period of time thereafter to address snagging.

Developers must avoid conditions that create unnecessary completion risk, while investors only want to hand over payment for a fully functioning hotel. Achieving clarity at the drafting stage avoids any disputes as to what determines completion and who pays for any unforeseen bills.

Operational Complexity: Acquiring a Business, Not Just Real Estate

Hotels differ from most other real estate assets in one fundamental respect: They are an operating business and the most complex of the operational real estate classes.

Upon completion of the purchase, the buyer inherits not only a building but a complex operating business that may include commitments to capital funding obligations, employees and staffing structures, management, service and supplier contracts, brand standard, and franchise obligations.

This transfer is more straightforward on a share acquisition as generally, all the benefits and liabilities of the operating business transfer immediately and seamlessly. Share transfers are therefore more common than asset deals where the need to separately transfer benefits and liabilities can cause additional complication and timing issues. The parties require individual agreements governing the assignment and novation of various business assets and obligations, including employees, intellectual property, customer contracts, and licences. The developer may need consent for these processes from other parties, and this can create a delay and create many hurdles to completion. This can jeopardise the long stop date.

Buyers frequently seek consent rights over material pre-completion actions taken by the developer. From an investor perspective, this is understandable — operational commitments entered into ahead of completion can materially affect value and future operations. However, excessive oversight can impede the developer’s ability to achieve defined hotel opening efficiently. Overly restrictive investor consent mechanisms risk delay and friction, which are not in either party’s interest; aligning with owner consent rights under any hotel management agreement can be an effective compromise.

Alignment of interests between the developer, investor, and operator is essential, and there should be clearly defined materiality thresholds for buyer consents, regular reporting, and inspection meetings so the buyer is fully informed.

Construction Risk: Development Exposure Does Not Disappear

A forward-funded structure inherently involves development risk for both parties, although investors look to minimise it. All the usual development risks in achieving practical completion of the construction are combined with the additional steps in achieving hotel opening. If both practical completion and hotel opening are not achieved by the agreed deadline, then the investor will typically have the ability to walk away from the transaction, which is not a palatable end result for either party. With that in mind, the parties may negotiate step-in rights for the investor if the long stop date is at risk, but this can lead to additional worries. If the investor steps in, it may be exposed to increased and unforeseen costs, or it may wish to make changes to the specifications which will affect the investor’s original underwriting. The developer will also be hesitant to pay for any costs after the investor has stepped in, given it is no longer in control of the development.

Importantly, while hotels generally open shortly after practical completion of the construction work, ongoing snagging issues, incomplete finishes, or defects are not simply legal and construction matters; they directly impact the guest experience in the crucial opening and stabilisation phase of the hotel.

Such issues need to be handled carefully, and key risk questions include:

• Who bears the cost of unresolved construction disputes at practical completion, and who solves them?
• How long is the gap between hotel opening and completion to allow the developer time to handle sensitive snagging issues while the hotel is occupied, and what obligations are placed on the developer to diligently carry this out?
• Will the investor (or its operating partner) be able to confidently step into the relationship with the hotel operator to manage the snagging items?

These questions may become more pertinent depending on what triggers “hotel opening” as aforementioned.

Contractor Insolvency and Defects Protection

The insolvency of a main contractor late in the development cycle is one of the most significant risks in a forward purchase transaction. It affects timing, funding, and certainty of delivery.

A replacement contractor is unlikely to assume liability for defects in the original contractor’s work, which likely includes all of the design, unless commercially incentivised by way of a large, off-market fee increase. Developers will typically seek a clean exit at completion and do not want to give longstanding indemnities to cover warranty gaps. Buyers, on the other hand, will be reluctant to inherit a structure with gaps in warranty/defects protection and, even if willing to take that risk, may struggle to persuade its lender to do so. The developer may therefore be called upon to stand behind defects, with any cap amount and duration being key points for negotiation. The benefit of the guarantee will be impacted by the creditworthiness of the guarantor and the ability of the investor to offer protection to its lender or a future purchaser.

Construction law frameworks vary significantly, and investors should avoid assuming that protections common in one jurisdiction will automatically apply elsewhere. In the UK, contractors typically remain liable during a 12-month defects rectification period, with latent defects potentially covered for up to 12 years depending on contract structure. In other jurisdictions, the structure may rely more heavily on insurance-backed guarantees rather than ongoing contractor liability (or both) and may offer more of a clean break for the developer even if the contractor does become insolvent.

These structural differences materially affect how risk is assessed, priced, and negotiated. Cross-border transactions should ensure local counsel is engaged for the construction elements as well as the other local legal issues.

Conclusion: Structuring for Certainty in a Recovering Market

Forward purchase hotel transactions are an increasingly important feature of the European investment landscape. They provide developers with capital efficiency and investors with early access to prime hospitality product, but they come with risks that sit at the intersection of construction delivery, contractor covenant strength, jurisdiction-specific legal frameworks, and hotel opening.

As the European hotel market continues to strengthen, well-structured forward purchase arrangements will remain popular, but many commercial issues need to be carefully balanced for the agreements to sufficiently benefit and protect all parties.