Glossary

Brand Approval Rights (Loan Covenant)

Also known as: Franchise Approval Covenant, Flag Change Consent Right

A hotel loan covenant requiring the borrower to obtain the lender's prior written consent before changing the hotel's franchise affiliation, terminating or materially amending the management agreement, or allowing the existing flag to lapse.

Because brand affiliation is a primary driver of a hotel's cash flow and collateral value, lenders treat flag changes as a fundamental credit event on par with a change of ownership, and the covenant typically requires the lender's affirmative approval of any replacement brand, new franchise terms, or new operator, commonly conditioned on the lender re-underwriting the proposed flag's expected RevPAR and comp-set positioning relative to the existing one. Violating brand approval covenants — an owner unilaterally re-flagging or de-flagging without consent — is typically an immediate event of default independent of payment performance, and sophisticated borrowers negotiate carve-outs at origination, such as a pre-approved list of acceptable replacement brands or an automatic consent right for a like-for-like flag change, to preserve some operating flexibility without case-by-case lender approval for routine repositioning.