Management Agreement Hotels

This year`s HVS Guide to Hotel Management Contracts by Daniel J Voellm and Eunice Wong provides an overview of the terms and conditions and the evolution of the contracts over the past six years. This guide provides a global reference for owners to understand the language of hotel management contracts and demonstrates our extensive practical experience. The authors provide an overview of the five main sections of a management contract: duration and renewals, operator management fees, performance testing, budget and expenses, and termination of the contract by the owner. Key money and compensation are also discussed. Of all the many peculiarities of the hotel industry, the hotel management contract is probably the most unique. A binding contract between owners and operators that has developed over nearly six decades. In fact, the first hotel management contract was signed for the Hong Kong Hilton, which opened in 1963. Owners may fall into the trap of making assumptions about the extent of the operator`s liability. The Operator shall endeavour to minimise its liability and to charge additional fees for ancillary services which the Owner may have wrongly assumed to be part of the overall package offered by the Operator.

The administrative arrangement may allow the operator to charge the owner additional fees for these “chain services”, but this should only be limited to services that can be provided more efficiently for the entire group of hotels managed by the management company and not on a hotel-by-hotel basis. The owner must ensure that all hotels that benefit from these services pay fairly for them. The administrative arrangement should allow the owner to limit the operator`s ability to make certain types of expenditure which may result in an increase in revenue and therefore a higher basic fee, but which may not correspond to higher profits, to . B promotion. Best practices tend to agree on an operating budget with projected profits that the owner may review from time to time. Some brand management and HMA agreements include as force majeure “outbreaks, quarantines or other public health restrictions or public health advisories … ” and allow the manager, in consultation with the owner, to close the hotel and possibly terminate the contract. It should be noted that the relationship between owner and operator is increasingly regulated not only by the traditional management contract, but also by parallel agreements such as licensing, licensing or service agreements. In order to be able to fully assess the value of payments due to the operator, it is necessary to assess the obligation to pay for such parallel contracts.

The owner should limit the operator`s ability to participate in other hotels competing for the same business as the owner`s hotel. If this restriction is included, the operator will attempt to limit it to hotels located in a defined area. Often, the financial incentive comes in the form of “key money” – where the operator pays money to the hotel owner in exchange for a long-term management contract. Cash is usually paid at or within a short period of time before or after the hotel opens. Some operators are willing to make equity contributions to obtain a management agreement. Often, capital investment takes the form of “split capital”, in which the operator acquires a small stake (usually 10% or less) in the owner, although some operators are willing to work with a developer or buyer of a hotel and make a larger investment. If management decides to postpone a required repair, it will not eliminate or save expenses, but will simply postpone payment to a later date. If a hotel has worked on a lower than normal maintenance budget, it is likely that it has accumulated a significant amount of deferred maintenance.

An inadequate FF&E reservation ultimately negatively affects a property`s standard or rating and can also lead to a decline in the hotel`s performance and value. In the absence of revenue and a clear way to predict when hotels will return to profitable levels, incentive management fees may not be relevant for some time. During such a period, a minimum commission may be more attractive to the management company, third party or brand to cover their overhead costs. .