Franchise Agreement Comfort Letter

Comfort letters are documents that allow lenders to access franchise rights when the original franchisee is not using the loan. These letters contain provisions guaranteeing that lenders can continue to operate the hotel in the event of default or forced execution of franchised hotel loans. Each hotel brand has its own LCL shape, but, for the most part, all LCLs contain similar provisions that each hotel lender must check carefully. A lender should, for example, determine whether the proposed LCL provides for the franchisor to notify the lender of a potential default by the franchisee under the franchise agreement and rights, but not the obligation for the lender to correct the franchisee`s default prior to the termination of the franchise agreement. In addition, the probably most important provision that a lender wishes to see in an LCL is the right to (a) follow in the franchise`s footsteps and resume the franchise agreement in the event of enforcement, accompanied by a waiver of new franchise or application fees, or (b) to terminate the franchise agreement without liability for liquidated damages from the franchisor that may be liability to the franchisor. In addition, the lender will see procedural provisions for a party who purchases the hotel from the lender after a enforcement execution in order to obtain a new franchise agreement with the franchisor. A choice of a lender wishing to keep the brand under LCL would require payment of the sums due and due to the hotel franchisor. Comfort letters are more important than ever, as franchising remains a dominant form of branded hotels. As many of our last articles have seen, there has been a change in the hospitality world. Franchise agreements have become the dominant way to stigmatize most hotels in the United States, with the exception of some of the most prestigious and luxurious brands.

LCLs are unique documents in the franchise industry, especially in the hotel arena. In essence, they give a lender the current confirmation that in the event of a borrower/franchise default, it may rely on the continuation of the right to use the mark and participation in the hotel brand system, or be able to terminate that relationship and include another trademark.

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