AAI, Leela spar over land lease terms

Serious differences have cropped up between Hotel Leelaventure and the Airports Authority of India over the terms for renewal of the lease agreement of the land where the company's marquee Hotel Leela is situated, near the Mumbai international airport.

Part of the hotel is built on land on a long-term lease from the airport authority.

Nearly 65 per cent land on which the hotel is built is leased out by AAI.

The lease agreement expires in July 2012.

Negotiations are on for a renewed term of 30 years, extendable by another 30 years subject to satisfactory performance.

Under the terms fixed by AAI, the airport authority has demanded the listed company Hotel Leelaventure fork out 7.5 per cent of the gross turnover of the hotel as royalty in the form of revenue share.

Leela has contested this, saying the revenue share should be brought down to 5.33 per cent.

The hotel company argues the royalty payment of 7.5 per cent should be reduced to the extent of the percentage of land contributed by AAI to the hotel area.

Second, AAI has said the company must pay an escalation cost while the current lease rental is Rs 1,630, the price of the land would escalate by 7.5 per cent when the contract is renewed.

That means Leela would have to shell out a total rental of Rs 1,752 a sq metre i.e. pay Rs 4.15 crore (Rs 41.5 million) every year.

That again is not acceptable to the company.

Third, AAI has contended the company must fork out the rental fixed at Rs 1,630 a sq metre on the entire built-up area, not the land area (which is lower).

Leela contends the rental should be paid on the land area and not the actual built-up area.

Collectively, the three measures proposed by AAI -- increase in royalty rate, lease rental on entire buildup area and upwards revision in lease rental -- will mean an outgo of around Rs 17.5 crore (Rs 175 million)

to AAI per year.

AAI's view means the company must fork out more rent as the total built-up area under lease from AAI is 23,690 sq metre against the 18,000 sq metres of land area.

A email questionnaire to Leelaventure elicited a simple response: "We can confirm that the Leela group has applied to the Airports Authority of India for the renewal of leases, which are expiring in July 2012.

"Since the terms are yet to be settled, we do not think it proper to share the details at this stage."

"The 30-year lease period for the land being utilised by Leela will expire and we are negotiating with the company on the new rates to be charged," said a senior AAI official, who did not want to be named.

The company, which recently opened the doors to the country's most expensive hotel property, the Rs 1,700 crore (Rs 17 billion) New Delhi-based Hotel Leela Palace, is in the midst of reducing its Rs 3,800 crore (Rs 38 billion) debt by sale of non-core assets and adopting an asset-light model of only going for management contracts and no capital expenditure on new properties.

According to analysts, Leelaventure's Mumbai hotel contributes 32 per cent of the company's Rs 553 crore (Rs 5.53 billion) annual revenue.

The Leela group made a name by becoming one of the first five-star hotels to be set up near the Mumbai international airport when no one else was willing.

The company has had various collaborations for the hotel earlier, including with Penta and currently with Kempenski.

The group also has luxury properties in Delhi, Goa, Bangalore and Gurgaon, amongst others. Cigarette-to-hotel major ITC, which competes through its own ITC Hotels in the market, has 12.9 per cent stake in Hotel Leelaventure.

Currently, the promoter share is around 54.6 per cent.