Hotel leases, supreme court guidance and operating risk: why defects must be negotiated before signing, not challenged afterwards

In the hotel market, the real issue is not discovering that a property has defects.
The real issue is signing after those defects have been identified, without turning them into price adjustments, warranties, conditions or exit rights.

A recent ruling by the Italian supreme court — ordinance no. 11700/2026 — addresses a highly relevant issue for hotel owners, investors and operators: a tenant or operator who is aware of the condition of a hotel business and signs a contract accepting it in its factual and legal condition may lose the ability to claim compensation later for those same defects.

The principle is clear, but its economic consequences are significant.

In hospitality, a technical defect is never just a technical issue.
It can affect revenue, costs, reputation, saleable rooms, operational continuity and the value of the business.

An unknown defect may give rise to litigation.
A known defect that is not negotiated becomes an assumed risk.

The case: a hotel already operated, a new contract signed, a damages claim rejected

The case involved an operator who, after managing a hotel for several months, signed a new hotel lease agreement. The operator later claimed damages of more than one million euros for alleged defects in the hotel, particularly relating to the systems and the overall condition of the property.

The claim was rejected.

The decisive point was that the operator had already had possession of the business, had been able to assess how it functioned and, despite this, signed a new contract declaring that it knew the business and accepted it in its factual and legal condition.

This is the key point for the hotel sector.

A clause that may appear standard can have a substantial effect: it can transfer to the operator the risk of defects that were already known or reasonably knowable.

In other words, what is not negotiated before signing may become very difficult to challenge afterwards.

The real lesson for anyone investing in or taking over a hotel

Anyone entering a hotel transaction often focuses on a limited number of variables: rent, duration, guarantees, security deposit, commercial potential, positioning and growth prospects.

These elements matter, but they are not enough.

A hotel is not a simple real estate asset. It is an operating business made up of rooms, systems, licences, staff, reputation, contracts, equipment, service standards and business continuity.

Every defect must therefore be assessed on three levels.

The first is technical: what does not work? Systems, rooms, bathrooms, air conditioning, lifts, fire safety, kitchens, roofs or common areas?

The second is economic: how does the defect affect revenue, costs, margins, required investment, saleable inventory and pricing capacity?

The third is contractual: who bears the risk? The owner, the operator or both, according to a precise allocation?

The third level is the decisive one.

If a defect is identified but does not enter the contract, due diligence remains descriptive. It does not become economic protection.

Unpriced technical risk becomes economic risk

In a hotel, every technical issue can have an immediate operating consequence.

An inefficient heating system can generate complaints, higher energy costs, unsellable rooms and negative reviews.

A problematic plumbing system can compromise the guest experience, increase maintenance requirements and reduce operating capacity.

An out-of-service room is not just a maintenance problem. It is lost revenue.

A missing certificate is not just a documentary irregularity. It can restrict the operation of the business.

A non-compliant kitchen is not just a technical issue. It can affect restaurant operations, banqueting, events and the overall value of the hotel business.

Before signing, every material issue must therefore be turned into a negotiated position.

It is not enough to know that a problem exists.
The contract must state who pays, by when, with what guarantees and with what consequences if the works are not carried out.

The as-is clause is not harmless

Hotel lease agreements often contain clauses under which the operator declares that it has inspected the business, knows its condition and accepts it as it stands.

In negotiation language, this may look like an ordinary clause.

In hotel risk language, it is a clause with real economic weight.

For the owner, it helps limit future disputes.
For the operator, if signed without reservations, it may become an implicit acceptance of defects that were already known.

This does not mean that all owner liability is automatically excluded. But it does mean that the operator’s position becomes much weaker if the defect was known, knowable or already experienced during a previous period of management.

The wording should therefore never be generic.

A balanced clause should distinguish between:

  • known and accepted defects;

  • known defects already reflected in the commercial terms;

  • defects to be remedied at the owner’s expense;

  • hidden defects;

  • undisclosed non-compliances;

  • licensing or authorisation issues;

  • system defects not detectable through ordinary diligence;

  • issues emerging after handover;

  • rooms or departments that are not fully usable.

The difference between accepting everything and accepting only what has been verified, documented and priced can be worth hundreds of thousands of euros.

Rent must reflect the real condition of the hotel

The rent under a hotel lease should never be the result of an abstract negotiation.
It should be the outcome of an operating and financial assessment.

A fully efficient hotel does not have the same operating value as a property with obsolete systems, unsellable rooms, deferred maintenance or authorisation issues.

If the rent is set as though the business were fully productive, while the property has material defects, the operator assumes an uncompensated economic risk.

Rent should be assessed against:

  • the actual number of saleable rooms;

  • sustainable ADR;

  • expected occupancy;

  • realistic RevPAR;

  • normalised GOP;

  • energy costs;

  • maintenance costs;

  • required investment;

  • authorisation risk;

  • ramp-up period;

  • seasonality;

  • online reputation;

  • competitive pressure;

  • contract duration;

  • maintenance obligations;

  • initial investment by the operator.

If this analysis shows that the hotel is not in a condition consistent with the requested rent, there are only three rational options:

  1. reduce the rent;

  2. shift part of the required works to the owner;

  3. walk away.

The fourth option — signing first and disputing later — is the most dangerous.

Due diligence must produce clauses, not just reports

Many hotel transactions become weak because due diligence remains separate from the contract.

Inspections are carried out, systems are analysed, documents are collected, works are estimated and issues are identified. Then the contract is signed using standard clauses.

This is a mistake.

Due diligence has value only when it produces negotiating consequences.

Every material issue should generate at least one of the following:

  • rent reduction;

  • initial rent-free period;

  • pre-opening period;

  • works at the owner’s expense;

  • attached capex plan;

  • binding works schedule;

  • escrow account;

  • technical warranties;

  • specific representations from the owner;

  • conditions precedent;

  • termination right;

  • indemnity;

  • automatic rent reduction;

  • right to carry out works at the owner’s expense;

  • partial suspension of payments;

  • exclusion of the operator’s liability for pre-existing defects.

The contract should not merely state that the business is being handed over.
It must state in what condition it is being handed over, what problems exist, who will solve them and what happens if they are not solved.

Ordinary and extraordinary maintenance: the grey area that can shift value

One of the most delicate issues in hotel leases is maintenance.

The traditional formula is familiar: ordinary maintenance is borne by the operator, extraordinary maintenance by the owner.

But in hotels, that distinction is rarely enough.

Works on boilers, air conditioning, lifts, plumbing, electrical systems, kitchens or fire-safety systems may be ordinary or extraordinary depending on the cause, scale and initial condition of the asset.

Replacing a component worn out through daily use is one thing.
Restoring a system that was already inadequate at handover is another.
Bringing a property into compliance with pre-existing regulatory requirements is another matter entirely.

The contract must therefore contain precise provisions.

It is not enough to state who pays for ordinary maintenance and who pays for extraordinary maintenance. The contract should specify, as far as possible, which works fall into each category, particularly in relation to:

  • heating systems;

  • plumbing and sanitary systems;

  • electrical systems;

  • air conditioning;

  • lifts;

  • fire-safety systems;

  • kitchens;

  • rooms;

  • bathrooms;

  • roofs;

  • façades;

  • common areas;

  • meeting rooms;

  • spas, pools and wellness areas;

  • certifications;

  • fire-prevention certificates;

  • occupancy permits;

  • administrative authorisations;

  • public authority requirements.

When maintenance is described in generic terms, the contract does not reduce risk. It merely postpones the dispute.

The five questions to ask before signing

Before signing a hotel lease, the investor or operator should answer five questions.

Is the hotel actually usable to the extent stated in the contract?
The theoretical number of rooms is not enough. It is necessary to know how many rooms are actually saleable and at what standard.

Is the rent consistent with the real productive capacity of the business?
Sustainable rent must be based on realistic revenue, normalised costs and required investment.

Have technical issues been converted into contractual clauses?
If a defect has been identified but not regulated, the risk remains with the party signing the contract.

Are the maintenance obligations clear?
The distinction between ordinary and extraordinary maintenance must be practical, not merely formal.

Is there an exit route if the promised conditions do not materialise?
Without termination rights, rent reduction, indemnities or conditions precedent, the operator may remain locked into an unbalanced transaction.

These questions are not designed to slow down the negotiation.
They are designed to prevent a hotel opportunity from becoming a programmed loss.

To explore further topics relating to hotel management, contracts, financial control and value creation, consult our hotel guides at www.robertonecci.it.

What the hotel owner should do

The ruling is also important for owners granting a hotel lease.

The owner should not rely only on generic protective clauses. The stronger approach is to build a transparent, documented contract that reflects the real condition of the asset.

A sound hotel lease transaction requires:

  • inventory of assets;

  • handover report;

  • state of repair;

  • list of known issues;

  • system documentation;

  • authorisations;

  • occupancy permits;

  • certifications;

  • maintenance history;

  • list of operational rooms;

  • existing contracts;

  • any public authority requirements or disputes;

  • clear regulation of future works.

Transparency does not weaken the owner.
It protects the owner.

A clear contract reduces the risk of future disputes and makes the transaction stronger for banks, investors, advisors and potential operating partners.

What the operator should do

The operator must avoid a very common mistake: falling in love with the potential of the hotel while underestimating the cost of restoring it.

A hotel may have location, rooms, potential demand and commercial appeal. But if it requires significant investment, has critical systems, suffers from deferred maintenance or shifts all risk onto the operator, the transaction may become fragile.

The operator must enter the negotiation with an operating mindset:

  • what can actually be sold?

  • at what ADR?

  • with what cost structure?

  • with what initial investment?

  • with what margin?

  • with what technical risks?

  • with what contractual protections?

  • with what exit route?

The objective is not to sign the contract.
The objective is to sign a contract that allows the hotel to generate value.

The hotel contract is a risk-allocation instrument

A hotel lease is not merely an operating contract. It is an instrument that allocates value and risk between the parties.

It determines who benefits from the hotel’s potential, but also who bears the cost of its defects.

The contract must therefore be built as an operating and financial document, not as a standard template adapted to a hotel.

It must state:

  • what is being handed over;

  • in what condition;

  • with what warranties;

  • with what limitations;

  • with what obligations;

  • with what investment requirements;

  • with what responsibilities;

  • with what remedies;

  • with what economic consequences.

Without this architecture, the operator risks assuming the technical risk, paying full rent and losing bargaining strength in any later dispute over issues that were already known.

Hotel defects should be priced, not absorbed

The lesson from the Italian supreme court is clear: anyone who knows the defects of a hotel business and signs without reservations may not be able to rely on those defects later as the basis for a damages claim.

But the most important lesson is not procedural.
It is strategic.

In a hotel transaction, every defect must become a negotiating decision.

If the problem is technical, a technical report is required.
If the problem affects revenue, the rent must be adjusted.
If it requires investment, a capex plan is needed.
If it depends on the owner, a warranty is required.
If it may compromise operations, an exit route is essential.

Unmanaged technical risk becomes economic risk.
Economic risk that is not negotiated becomes loss of value.
And once the contract has been signed, that loss of value may become very difficult to recover.

In a mature hotel market, the winner is not the party that signs fastest.
The winner is the party that signs with better information, stronger clauses and a more precise allocation of risk.

To read further technical insights on hotel transactions, contracts, investments and value management, visit the Investimenti Alberghieri blog:
https://www.hotelinvestments.it/blog

Before signing a hotel lease, measure the real risk of the transaction

A hotel contract should not be assessed only by rent and duration.
It must be analysed to determine whether the condition of the hotel, maintenance obligations, warranties, required investment and exit rights are consistent with the real income-generating capacity of the business.

Hotel Management Group supports owners, investors and operators in the technical, economic and contractual assessment of hotel transactions, leases, turnaround projects and value-enhancement plans.

Before assuming a risk, measure it.
Before signing a contract, convert due diligence into economic protection.

Request a professional assessment at:
https://www.hotelmanagementgroup.it

Roberto Necci - r.necci@robertonecci.it 


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