The hotelier industry integrates many and varied legal aspects, and thus, legal arrangements with regards to the management and operation of a hotel are accompanied by a system of complex legal agreements. The parties engaging in hotelier agreements are the owners of the hotel (the owner of the land and the structure) and another company which is supposed to operate the hotel. The desires of each of the engaging parties, and naturally the type of hotel, require different mechanisms of legal engagements.
There are three main types of engagements: management agreement, lease agreement and hotelier franchise agreement. While the engagements within the state of Israel (namely, when the owners and the company engage in order to operate the hotel are local Israeli bodies) are usually done by way of a management agreement or lease agreement, engagements with an international party are usually done via a franchise agreement. In the article herein we will briefly review the main mechanisms specified in international franchise agreements.
Main mechanisms in international franchise agreements
Standard undertakings of the management company – generally, and as a condition for granting the franchise during the franchise term is the franchisee meeting the standards of the franchise provider, as they were set in the agreement, including with regards to the hotel’s physical characteristics and the hotel management and operation at a level which shall be no less than the standards determined by the franchise provider. Following are a number of the franchisee’s undertakings:
1. Meeting the standards of the franchise provider – one of the most prominent and material undertakings of the franchisee is meeting the standards of the franchise provider, including (but not limited to) physical data of the hotel, the hotel design, the manner of operating the hotel, meeting technological standards, meeting internal procedures of the franchise provider and more. In this regard, it shall be clarified that failure to meet the standards set by the franchise provided might result in breaching the franchise agreement, with all that it entails.
2. Renovating and Improvements – whether it is an existing hotel or a hotel under construction, the franchise provider will require that the franchisee renovate the hotel at a level matching the type of hotel and the chain engaged with. The franchise provider will request to receive and approve the hotel plans (including architectural plans) and the works which will be performed, shall request the franchisee to meet certain conditions such as insurances, meeting rigid schedules (when failure to meet the schedules might impose fines on the franchisee) and more.
3. Employee training program – the franchisee will undertake to meet the requirements of the franchise provider with regards to training hotel employees, all in accordance with the requirements of the franchise provider.
4. Marketing – one of the franchisee’s most material undertakings is to participate in the marketing array of the franchise provider. And since it is an international hotel chain, the franchise provider will require the franchisee to undertake participating as stated in the marketing activities, at the discretion of the franchise provider, including participating in marketing plans and activities which will be selected by the franchise provider. In some cases, it is mandatory that the franchisee participate, such as in case of online marketing plans or activities, and in some cases it is at the franchisee’s discretion whether to participate in the marketing plan or not. From the franchisee’s point of view, participating in the marketing array of the franchise provider is additional payments (beyond the franchise fees) which the franchisee must pay the franchise provider for the marketing activities as stated.
5. Supervision – in most cases, the franchise provider will request a rigid undertaking from the franchisee to enable the franchise provider to supervise the hotel activity, all in accordance with the instructions and procedures of the franchise provider’s supervision plan. This undertaking by the franchisee as stated is a rigid and material undertaking and breaching it might impose fines on the franchisee and even lead to the termination of the franchise agreement.
6. The agreement term – in most cases the agreement term will be for many years (more than 10 years) when there will be an initial term of a number of years with an option to extend the agreement for additional years. In most cases, the option to extend the agreement will be granted to the franchisee subject to meeting the franchisee’s undertakings in accordance with the agreement.
7. Additional undertakings – in the framework of the franchise agreement, there are additional undertakings of the franchisee, such as an undertaking to meet the authorities’ requirements, financial undertakings (bookkeeping by law) and more.
Standard undertakings of the franchise provider – in the framework of the agreement, the franchise provider undertakes to provide the franchisee with varied operational and managerial services. Naturally, each agreement is prepared in accordance with the needs of each and every hotel and in accordance with the specific terms which will be set in the agreement. Following are a number of standard undertakings of the franchise provider in a franchise agreement:
1. One of the most prominent advantages of an international franchise agreement is naturally granting a license to use the name of an international hotel chain, such as: Hilton, Four Seasons and more. Thus, in the framework of the franchise agreement, the franchise provider grants the hotel a license to use the hotel name and certain intellectual property rights during the franchise term, the territory and terms set in the framework of the agreement.
2. An employee training array, including senior employees. These are professional training sessions given by the franchise provider throughout the franchise term.
3. The franchise provider gives the franchisee the option to use and connect to a computerized order array of the franchise provider. The meaning is, that a customer/ guest can in fact purchase hotel lodging via the central order center of the franchise provider. This is an additional marketing route for the hotel, without it detracting from the franchisee’s right to establish an independent order array.
4. The franchise provider has the option of performing a marketing campaign for the hotel chain, whether it is a global, regional and even a local campaign. It is important to clarity that in the framework of a marketing campaign as stated, the franchisee undertakes to bear some of the campaign costs (in addition to the franchise fees).
In exchange for the license granted to the franchisee in the framework of the franchise agreement, the franchisee undertakes to pay the franchise provider various payments. The consideration is divided into 2 main types of payments: initial payment and sales-based payment (Royalties Fee).
Upon signing the franchise agreement, the franchisee must pay the franchise provider an initial, one-time and fixed payment (which is independent of additional parameters). It shall be clarified that the initial payment is a payment which is not returned to the franchise provider (non-refundable).
In addition to the initial payment, the franchisee will undertake to pay the franchise provider franchise fees which constitute a certain percentage of the hotel’s sales turnover. This payment is paid on a monthly, quarterly or annual basis, as shall be agreed in the framework of the franchise agreement.
In addition to the franchise fees and as mentioned above, in the agreement framework, the franchisee undertakes to pay the franchise provider additional payments beyond the franchise fees, such as payments pertaining to participating in the franchise provider’s marketing plans, returns and commissions for payments for employee training and such.
Engagement in a franchise agreement creates a prolonged and long-term relationship which includes very significant undertakings by the franchisee. It should be remembered that in most cases, the franchisee is not the hotel owner but rather a company which manages the hotel, and thus, not only is the franchisee subject to significant undertakings in the framework of the franchise agreement, there are also additional undertakings for the franchisee in the framework of the management agreement/ lease agreement with the owners. This situation might cause discrepancies and a dispute between the franchisee and the other two sides, whereas each party has their own interest, therefore it is important to create reliable and clear mechanisms which will keep the significant interests of each party and provide them with effective tools to maximize the benefits they receive from the agreement.