Hotel Management magazine recently noted that at the end of the day, it is the hotel management company that is really playing host to the guests as it executes the requirements of the brand and the desires of the owner. But how does the hotel management company do this for the owner from the lawyer’s view? The relationship of hotel owner and hotel manager is governed and memorialized in the hotel management agreement. Hotel management agreements terms vary greatly depending on the circumstances of the project, who or what the owner is, the owner’s investment horizon and the size and sophistication of owner’s personnel. There are management agreements with large international hotel management companies, third party managers that do not have their own brand, boutique and lifestyle managers, and regional and local hotel managers that often manage franchised hotels. Even with the variations among hotel management agreements, there are common themes that should always be the focus of attention in the hotel owner and hotel manager conversation.
Managers, of every type, style and kind will begin the process and produce the initial forms of all operative documents. The manager will deliver to the owner the form of management agreement that the manager has developed and refined over time based upon the manager’s cumulative experiences with many owners and any relevant judicial decisions and laws. It is from this point that the owner will be negotiating. It is a simple fact of hotel legal practice today that a mature, well-developed and robust hotel management company will begin the process with its documents and the preparation of the definitive agreements will proceed from there. The hotel owner will be reacting to what the manager has drafted into its standard form documents, and not the other way around. While we believe it is a best practice to involve the legal team in the negotiation of the owner’s letter of intent with the manager, because many points are won or lost at this early stage, the management agreement is the vehicle to clarify and revisit points an owner may have overlooked.
Owners and managers share a need to address all aspects of their relationship. Here are some key elements to address, but each can be a minefield for the unknowing and require careful assessment as part of the conversation.
- Management Fees.
- Base Fees
- Incentive Fee
- Centralized Services Fee
- Reservation Fee
- Accounting Fee
- Technology Fee
- Owner’s Preferred Return based on the Owner’s Total Investment.
- Termination-on-Sale or conversion to Franchise.
- Performance Test Termination Rights.
- Subordination, Non-Disturbance and Attornment with Lenders.
- Labor and Employment.
- Radius Restriction or Area of Protection Restriction.
- Cash Management.
By the very nature of the management agreement, the hotel owner puts its trust in the manager to provide a meaningful guest experience while preserving the value of the owner’s investment. The challenge is in creating the appropriate legal framework for that to occur.