German & European Managed Hotel Financing:
The Direct Agreement — Why the Most Important Document Is Often the Last One Negotiated 🏨📋

In my earlier post on operator and brand controls in German/European managed hotel financings, I covered the Direct Agreement as part of a broader discussion on how lenders document their rights against the operator. In my most recent post, I looked at FF&E reserves and CapEx controls. This post takes a closer look at the Direct Agreement itself — not the legal mechanics (which I covered earlier), but the practical reality of getting one done.

The Direct Agreement is often the most important document in a managed hotel financing. It is also, in my experience, the one most likely to be left to the last minute.

1) A quick recap: what the Direct Agreement does 🔑

For readers who have not seen the earlier post: a Direct Agreement (also called a Tripartite Agreement or Consent and Acknowledgement) is a contract between the lender, the borrower/owner, and the hotel operator. It gives the lender rights it does not otherwise have — because the HMA is a contract between owner and operator, not lender and operator.

The core protections are: notification of owner defaults under the HMA, a separate (and typically longer) cure period for the lender, step-in rights allowing the lender to cure defaults and prevent HMA termination, and non-disturbance — the agreement that enforcement of security will not itself trigger the operator’s right to terminate.

Without these, a lender enforcing its security may trigger the very HMA termination it was trying to prevent.

2) The negotiation reality: standard forms meet bespoke requirements ⚖️

International hotel operators — the major brands — typically have their own standard-form Direct Agreements. These are often short, limited in scope, and drafted from the operator’s perspective. They may acknowledge the lender’s existence and agree to notify the lender of defaults. They rarely grant meaningful step-in rights or full non-disturbance.

Lenders, on the other hand, need protections that reflect the specific financing structure: cure periods that align with the loan’s default mechanics, step-in rights that are practically exercisable (not just theoretically available), and non-disturbance language that covers the realistic enforcement scenarios — share pledge enforcement, receivership, asset sale.

The gap between what the operator offers and what the lender needs is where most of the negotiation time goes. A few dynamics that regularly come up:

Step-in resistance. Operators resist granting step-in rights that allow a lender (or its nominee) to direct hotel operations — even temporarily. From the operator’s perspective, they have a relationship with the owner, not the lender, and they want to control who runs “their” hotel.
Non-disturbance is the hardest point. The operator’s concern is that a new owner — imposed through enforcement — may not have the financial capacity or operational commitment to maintain the hotel to brand standard. The lender’s concern is that without non-disturbance, enforcement is commercially unworkable.
Cure period sequencing. The lender typically wants its cure period to start after the owner’s cure period expires. The operator wants a single, defined period. Getting the mechanic right — so that the lender has enough time to act without giving the operator an indefinite period of uncertainty — takes careful drafting.
Fee protection unlocks the deal. Many operators agree to broader lender protections if the Direct Agreement confirms that management fees will continue to be paid during any step-in or enforcement period. This is a reasonable ask and often the key to unlocking the negotiation.

3) The timing problem: why it’s always the last document 🕙

In a typical managed hotel financing, the Direct Agreement is negotiated between three parties (lender, borrower, operator) while the loan documents are negotiated between two (lender, borrower). The HMA may already be in place or may be negotiated in parallel.

The practical result: the Direct Agreement involves a third party — the operator — who is not a party to the financing and has no commercial incentive to move quickly. The operator’s lawyers are often in a different jurisdiction, working to different timelines, and reporting to a team that views the Direct Agreement as a favour to the owner, not a priority.

This means the Direct Agreement is regularly the last document to be agreed. And because it is the last document, it comes under the most time pressure — which is exactly when important points get missed or compromised unnecessarily.

I have seen deals where the Direct Agreement was negotiated in the final 48 hours before signing. At that stage, the leverage dynamic shifts entirely: the lender has committed to the deal, the borrower needs to close, and the operator knows it. Points that could have been negotiated calmly over weeks are traded away under deadline pressure.

4) What a well-run process looks like ✅

The solution is not complicated, but it requires discipline:

Start early. Engage the operator’s legal team at the same time as the loan documentation process begins — not after it is substantially complete. Share a draft Direct Agreement with the operator’s counsel within the first two weeks of the transaction.
Use the HMA negotiation as leverage. If the HMA is being negotiated in parallel (as is common in acquisition financings), the borrower has commercial leverage with the operator. The Direct Agreement is easier to negotiate when the operator still wants something from the owner — not after the HMA is signed and the operator has no reason to engage.
Align the loan documents and the Direct Agreement. Cure periods, default definitions, and enforcement mechanics in the Facilities Agreement need to match the Direct Agreement. If they are drafted in isolation — which happens when different teams handle them — inconsistencies emerge that are difficult to fix later.
Treat it as a condition precedent, not an afterthought. If the Direct Agreement is listed as a CP to first drawdown but not actively tracked, it will drift. Assign it to a specific workstream with its own timeline.

5) The Comfort Letter: when a full Direct Agreement is not achievable 📄

Sometimes, a full Direct Agreement is not available. The operator refuses. The brand entity is in a different group company. The timelines do not allow it.

In these cases, lenders may accept a Comfort Letter — a more limited instrument where the operator commits to notify the lender before exercising termination rights and to engage in good faith on transition arrangements. A Comfort Letter does not typically grant step-in rights or full non-disturbance.

Whether a Comfort Letter is acceptable depends on the deal: the credit quality, the lender’s risk appetite, the operator’s market position, and the practical alternatives. For a trophy asset with an in-demand international brand, the operator knows it is hard to replace — and prices its cooperation accordingly.

A Comfort Letter is better than nothing. It is not a substitute for a properly negotiated Direct Agreement.

Takeaway

The Direct Agreement is the document that determines whether a lender’s security package actually works in a managed hotel financing. Getting the legal mechanics right matters — but getting the process right matters just as much. Start early, negotiate in parallel, and treat it as a priority from day one. Leaving it to the final days of closing is how important protections get lost.

www.djm.legal

Disclaimer: This article is for general information purposes only and does not constitute legal advice.

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