Hoteliery managements agreements are complex agreements intended to settle the interest of the hotel owner with those of the management company which provides comprehensive management services. In the following article we shall briefly review the primary mechanisms specified in standard management agreements, as well as summarize the distinctions between hotel management agreements and hotel lease agreements, and the guiding considerations prior to signing each agreement.
Background
The area of hoteliery incorporates many and diverse legal aspects: real estate laws, planning and construction laws, corporate funding, administrative law, labor law, business licensing, contract laws in the form of continuous work with suppliers and clients, consumer laws and many more.
One of the most significant agreements in the area of hoteliery is the hoteliery management agreement, in which a professional managerial body provides management services to the property’s owner. Primarily, it should be noted that there is a difference between a management agreement and a passive lease agreement of the property, in which the property’s owner is in fact “detached” from the hotel, hands it over to an hoteliery body and in exchange receives rent fees which in most cases are fixed rates (and occasionally contain a varying component). Thus, in a lease agreement, the property owner is not exposed at all of the hotel’s ongoing management, and does not pretend to contain operational and/or financial risks involved therein.
On the other hand, as part of an hoteliery management agreement, the management company in fact manages and operates the hotel for the owner. In other words: the management company serves as the owner’s professional management branch, as such it gains access to the owner’s bank accounts. The owner receives all of the intakes received for managing the hotel and is debited with the expenses, while the management company receives management fees as specified below.
Primary mechanisms in a management agreement[1]
As part of an hoteliery management agreement there is a balance between the management company’s ability to manage the hotel professionally according to its discretion and the owner’s desire to supervise the management company’s actions. Thus, the management company requests full independence in managing the hotel both in the operational level and the financial level, and on the other hand the owner raises demands concerning adhering to a pre-agreed budget, as well as meeting income and profitability goals as a condition for said independence of the management company.
Following are several standard mechanisms specified in management agreements:
A business plan and an agreed budget – the hotel owner requests to receive a professional evaluation from the management company regarding the hotel’s commercial activity, including estimating intakes and expenses. Accordingly, the owner approves a business plan and an agreed budget, according to which the hotel shall be managed.
Financial management – the management company gains full access and authority to act in the hotel’s bank accounts owned by the owner. All of the hoteliery activity is managed in these accounts, including receiving all of the hotel’s incomes, and paying all expenses required for the hotel’s operation including paying suppliers, personnel, taxes etc. It is needless to emphasize the importance to drafting a mechanism that on the one hand shall guarantee the freedom of action required by the management company, and on the other hand shall enable the owner to effectively supervise the hotel’s financial operation.
The duration of the agreement versus meeting goals – the hotel’s owner shall wish to connect the management company’s right to continue to manage the hotel, with profitability goals which shall be agreed upon in advance between the parties. On the other hand, there are macro variables which are out of the management company’s control, which the management company shall wish to restrict while setting the hotel’s goals and its activity. In addition, occasionally the management company shall ask for some sort of compensation in case of an early termination of the agreement, due to a large investment on its behalf during the beginning of the management period.
Hoteliery accompanying and supervision over the planning process – inasmuch as the hotel is new and is yet to be built, there is great importance to the management company’s professional accompanying of the hotel’s planning process. Hotel owners tend to put little emphasis on communal public areas in the hotel, instead of maximizing the number of hotel rooms out of a notion that the number of hotel rooms is the most important variable in planning the hotel. An experienced hoteliery management company shall know to examine the plans professionally and to give communal and public facilities and areas the appropriate significance while planning the hotel.
Ownership over reputation – in most agreements the question arises who remains the owner of the hotel’s reputation and the hotel’s name including the related trademarks (collectively “IP”)upon the termination of the agreement. Inasmuch as the hotel’s name is already well known, obviously the name shall remain in the owner’s ownership, and on the other hand if the name is related to a hotel chain managed by the management company, then of course the name shall remain in the management company’s ownership. The difficulty lies with new names, which have not been used prior to signing the management agreement. The more successful the hotel becomes and gains reputation and a loyal clientele, each party shall want to retain the intellectual property (reputation, trademarks etc.) related to the hotel’s name, which emphasizes the importance of agreeing on this subject in advance.
Equipment Renewal Fund – due to the high wear and tear in hotels, experienced management companies request that the owner deposit money each year into a fund intended to perform ongoing maintenance as well as occasional upgrades to the hotel systems and the hoteliery equipment. In most instances, the fund’s scope is a function of the hotel’s incomes, however the very existence of the fund does not detract from the owner’s responsibility to perform maintenance and upgrade operations to a larger extent as may be required.
Management fees versus rent fees – risks versus possibilities
If we ignore for a moment the status and ability of each party in the negotiation to design the transaction as they desire, the main difference between a hoteliery management transaction and a mere lease transaction is the question regarding who most of the operational risks involved in operating the hotel apply to.
Inasmuch as the transaction is a lease one, the hotel’s owner receives rent fees (usually set fees), and even if a varying component exists therein it is minor. Thus, all of the operational risks apply to the hotel’s lessee solely.
On the other hand, as part of an hoteliery management agreement, the consideration to the management company in most instances is divided into two parts: the first part is a function of the hotel’s incomes, and the second part is a function of its profit. Namely, theoretically, even if the hotel incurs losses and the hotel’s owner makes a loss in a certain year, the management company shall receive payment for managing the hotel. The incentive for the hotel’s owner to bind in a management agreement rather than a lease agreement lies in his chances of receiving a yearly payment which is higher than the rent fees, as a function of the hotel’s commercial success and its profits.
Summary and conclusions
As part of an hoteliery management transaction the hotel’s owner engages with a management company which he trusts to manage the hotel for him professionally and efficiently.
As part of the management agreement there is a delicate balance between the hotel owner’s desire to effectively supervise the management company’s activity, and the management company’s desire to manage the hotel as it deems appropriate and based on its exclusive discretion.
By signing an hoteliery management transaction a long-term relationship is created between the owner and the management company, thus it is important to create credible and clear mechanisms which shall maintain each party’s significant interests and grant them effective tools in order to maximize their benefits from the agreement.